As expected, on November 25, 2013, FASB endorsed the PCC’s recommended accounting alternatives for goodwill and “vanilla” interest-rates swaps. The final ASUs have yet to be released. One they are, we will provide more details. The ASUs will be effective for fiscal years beginning after December 15, 2014. Early adoption is permitted for financial statement periods ending December 31, 2013.
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In May 2012, the Financial Accounting Foundation formed a Private Company Council (“PCC”) to advise FASB on issues relating to private companies. The Council identifies, deliberates and votes on proposed alternatives within GAAP for private companies. While the rules as to whether a company is private or not are in flux, we believe credit unions and privately held banks would be considered “private companies”. The Council has five proposals out now including:
- 13-01 A – Accounting for Identifiable Intangible Assets in a Business Combination
- 13-01 B – Accounting for Goodwill Subsequent to a Business Combination
- 13-02 – Applying Variable Interest Entity Guidance to Common Control Leasing Arrangements
- 13-03 A – Accounting for Certain Receive-Variable, Pay-Fixed Interest Rate Swaps – Simplified Hedge Approach
- 13-03 B – Accounting for Certain Receive-Variable, Pay-Fixed Interest Rate Swaps – Combined Instruments Approach
Proposals 13-01 A and B, if adopted, will affect financial institutions. Proposal 13-01 A has not yet been approved by the PCC, while 13-01 B has been approved by the PCC and is awaiting endorsement from FASB, which is expected to be forthcoming. Proposals 13-03 A and B do not apply to financial institutions.
The key issue in 13-01 A – Accounting for Intangible Assets in a Business Combination is that an intangible must be based on a contractual right with non-cancelable terms or, on a legal benefit, in order to be recognized. The current rules also require an intangible to be recognized if it is separable. The proposal abolishes the separable requirement. Wilary Winn believes the primary effect of this proposal is that financial institutions will no longer be required to calculate a core deposit intangible in connection with a merger or acquisition.
Proposal 13-01 B – Accounting for Goodwill Subsequent to a Business Combination simplifies the ongoing accounting for goodwill. Under the current rules, goodwill is not amortized and companies are required to test for impairment, at least annually, using either a two-step quantitative or a qualitative test. Under the proposal, an election can be made to amortize current and future goodwill on a straight-line basis over a period not to exceed 10 years. Impairment testing is required only after a triggering event.
Wilary Winn believes the intangible assets and goodwill proposals will simplify the accounting for many of our clients. We note that the proposals are alternatives within GAAP and are not required, which will permit our clients that prefer to remain under the current rules to do so. We note that once an institution elects the alternative, it cannot revert back to the original accounting. We recommend that institutions consider their future projected goodwill prior to making the election.