Private Company Accounting Alternative Flashcards
Private Company - Alternative method on VIEs for leases - how it’s handled?
Under US GAAP, a private company (an entity is not a public entity or not-for-profit entity) may ELECT to apply the following alternative method for consolidation of a Variable Interest Equity for common Control Lease arrangements:
This Accounting alternative method permits a Private Company Lease to not Consolidate a Lessor entity that would otherwise be consolidated under existing VIE guidance if the following 4 criteria are met:
(1) The Lessee (the reporting entity) and lessor are under COMMON control.
(2) The lessee has a leasing arrangement with lessor.
(3) Substantially all activities between the lessee and lessor are related to leasing activities
(4) If lessee Explicitly guarantees or collateralize lessor’s obligation, then Principal Amount of obligation at inception of such Guarantee or Collateral agreement does not exceed the value of the asset leased by the private company from the lessor.
Lessee Elects this Accounting Policy and applies it to all current and future leasing arrangements. It’s applied using a FULL RETROSPECTIVE approach to all periods presented. Disclosures are Required when circumstances of the lessor in the private company lessee providing financial support to the lessor.
Other Disclosures normally associated with leases and related parties still apply.
Private Company - Alternative method on Certain Interest Rate Swaps - how is this handled?
Under US GAAP, a private company (an entity is not a public entity or not-for-profit entity) may ELECT to apply the following alternative method to make it easier for certain interest rate swaps to qualify for hedge accounting. Certain conditions must be met, and this alternative is not available to financial institutions.
An eligible company would be able to apply hedge accounting to its receive-variable, pay-fixed interest rate swaps using the following Simplified steps:
(1) Assume Cash Flow hedge has no Ineffectiveness as long as certain conditions are MET.
(2) Recognize the Interest Rate Swap at its Settlement Value, which excludes non-performance risk, instead of its Fair Value. (This provision is OPTIONAL, and can be elected on a swap-by-swap basis).
(3) Complete hedge Documentation by the FIRST date on which the financial statements are available to be issued after hedge inception, rather than at hedge inception.
Under this simplified hedge accounting approach, the interest expense reported on the income statement would be SIMILAR to the amount that would result if the entity had entered into a Fixed-rate borrowing instead of a variable-rate borrowing and a receive-variable, pay-fixed interest rate swap.
Private Company - Goodwill - how it’s being handled?
Under US GAAP, a private company (an entity is not a public entity or not-for-profit entity) may ELECT to apply the following alternative method of goodwill accounting:
(1) Amortize Goodwill via Straight-line method over 10 YEARS or less than 10 years if company can show that another useful life (less than 10 years, like 9 years, 8 years, 7 years, etc.) is more appropriate
(2) Make an Accounting Policy Election, disclosed in Summary of Significant Accounting Policies (SSAP) in the Footnotes, to test Goodwill at either the entity level or the Reporting Unit Level when a triggering event occurs that the fair value of an entity (or reporting unit) may be below its carrying amount.
Because Goodwill is being Amortized, impairment is less likely to occur (not used impairment any longer).
This alternative method must be applied to all existing Goodwill generated in Future Business Combinations.
