Regulatory Updates: New FASB Private Company Accounting Alternatives, IRS Regulations

2014 has already seen a number of regulatory changes and updates that could affect your company’s accounting and financial statements this year. The Financial Accounting Standards Board (FASB) recently issued final standards for two changes that impact privately-held companies preparing financial statements in accordance with U.S. Generally Accepted Accounting Principles (GAAP). These new standards were issued in an attempt to simplify reporting requirements for privately-held businesses.

Additionally, last year, the IRS finalized comprehensive repair/capitalization regulations that go into effect for this year’s taxes. Here are the important details for all of these regulations:

FASB Private Company Accounting Alternatives for Goodwill and Certain Interest Rate Swaps

Accounting for Goodwill. Goodwill is defined as “the residual asset recognized in a business combination after recognizing all other identifiable assets acquired and liabilities assumed.” With the release of this new alternative, if applicable, your company can amortize goodwill on a straight-line basis over a ten-year period, or less, if it is demonstrated that another useful life is more appropriate.

Annual impairment tests are no longer required – impairment is only tested in the case of a triggering event, such as a significant decline in operating results or the loss of a key employee. Simplified impairment testing is now also allowed; companies can perform testing at the entity level, rather than a reporting-unit level.

In order to take advantage of this new standard, your company must specifically elect to follow this treatment of goodwill in the financial statements. This is effective for annual periods beginning after December 15, 2014, but the good news is that early adoption is permitted.

What Does It Mean? If your company carries goodwill on your balance sheet, these changes should result in both a time and cost savings thanks to the simplification of the accounting process. The amortization of goodwill may help to reduce the likelihood of impairments, and impairment tests will be conducted less frequently. Since early adoption is permitted, you can still elect to implement this for 2013 if you haven’t already issued your financial statements for the year.

Accounting for Certain Interest Rate Swaps. A simplified hedge accounting approach is now available for private companies (other than financial institutions) to account for interest rate swaps that are entered into for the purpose of economically converting variable-rate interest payments to fixed-rate payments.

This simplified approach can be applied to receive-variable, pay-fixed interest rate swaps as long as the terms of the swap and the loan/related debt are based on the same rates. Your company would still be required to document the hedging relationship, as well as the risk management objective and strategy for undertaking the hedge, but will have until the issuance of the financial statements to complete the necessary documentation.

FASB’s interest rate swap alternative expedites the process of measuring the fair value of swaps and will allow your company to recognize the swap at settlement value, as opposed to fair value.

What Does It Mean? When it comes to recording interest expense, this new standard will result in interest expense that would be similar to the amount that would result if the company had entered into a fixed rate loan agreement. With respect to valuation of the swap, this means that most companies will not need to record an asset or liability for the estimated fair value of the interest rate swap.

IRS Final Comprehensive Repair/Capitalization Regulations

Released last fall, these regulations are in effect for your 2014 taxes. This subject is covered in-depth in our It’s Taxing blog, but for convenience, here are a few of the high-level points:

  • De Minimis Expense Rule. There is now a de minimis exception to capitalized amounts paid to acquire or produce tangible property. If you have an applicable financial statement (meaning a financial statement filed with the SEC or a federal or state government agency, or an audited financial statement), you can deduct items as long as the amount per invoice (or item) does not exceed $5,000. If you do not have applicable financial statements, the limit is $500 or less. You must have a written capitalization policy in order to take advantage of this exception.
  • Materials and Supplies. The final regulations have modified the definition of “materials and supplies.” You can now deduct units of property with an acquisition cost of $200 or less. It is important to note that the IRS can change this threshold without a formal amendment to the regulations.
  • Repairs and Maintenance. The safe harbor to allow certain routine maintenance to be a current deduction has been expanded to allow expenses for routine maintenance activities on your building and its structure. You must expect to perform the maintenance within 10 years from when the building/structure is placed in service.
  • Improvements. You must continue to capitalize costs incurred to improve a unity of property. This includes betterment, restoration, or adaptation.

Again, full details are available at http://www.bbcpa.com/Federal-Tax/irs-repair-regulations.html. These new regulations are quite nuanced and will require thorough review and coordination with your accountant.

For additional information or resources surrounding these changes, you can learn more at FASB’s website, and you can view the final IRS regulations by clicking here. We will continue to provide updates on the changing regulatory environment, as well as insights on how they apply to your company and your accounting.

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