The PCC (Private Company Council) is a sub-organization created by and of the FASB. The PCC’s primary function is to evaluate current financial reporting standards set forth by GAAP and identify opportunities to streamline implementation and general reporting standards for private companies. The FASB and PCC recognize that certain standards are not as impactful for stakeholders of private companies and that they should only apply to public entities. In an effort to lower the reporting costs for private companies, they created the PCC to identify opportune standards to modify for private companies. In addition, the PPC advises the FASB when considering any accounting standards updates. In general, these accounting alternatives are applicable to non-filing entities (those not submitting financials to the SEC). Below are a few of the larger accounting alternatives within GAAP that the PCC has made possible for private companies.
As a response to the high costs of testing goodwill for impairment, the PCC modified reporting standards of goodwill for private companies. Under the alternative accounting treatment, nonpublic entities are allowed to amortize goodwill over the shorter of its useful life or 10 years, testing it for impairment only upon occurrence of a triggering event (adverse economic conditions, competition, or any event resulting in a more likely than not probability of goodwill being impaired).
Interest rate swaps
The PCC allows alternative accounting treatment on “plain vanilla” interest rate swaps, which is commonly referred to as the simplified hedge accounting approach. If the interest rate swap agreement meets certain criteria, which basically state that the interest rate swap agreement is nearly identical in all aspects to the entity’s obligation in a separate agreement to pay interest at a variable rate, then private companies can elect the alternative accounting treatment. This allows them to do the following:
- Assume the swap (derivate) is a perfectly effective hedge
- The interest rate swap can be reported at its settlement amount as opposed to FMV
- The difference between payments made/received and the reported amounts is run through other comprehensive income
Common Control Arrangements
Initially, the alternative accounting treatment allowed for variable interest entities (VIEs) was only applicable to potential VIEs in the context of lease accounting, in which the lessee and lessor are under common control. In effect, the initial guidance applicable to lessees/lessors under common control was to enable these entities to apply lease accounting reporting standards and to not perform analyses to determine if VIE criteria are met. However, this alternative treatment was expanded in ASU 2018-17 to apply to all common control arrangements. Under the new accounting standards, all private companies may elect to not apply VIE guidance if both the parent and potential entity being considered for consolidation are private entities. This standard is effective for private companies for the 2021 calendar year ends but can be early adopted.
How can you implement the alternative accounting treatment?
To do this, you must elect to the alternative accounting treatment and disclose this accounting policy in the footnote to your financial statements. For the first period in which you adopt the alternative, you must disclose the change and outline differences between your prior year reporting and the new method of reporting for the impacted items. In subsequent periods, the accounting policy is merely disclosed in your financial statements.
The PCC has several topics that the group is advising FASB on. To keep up with the PCC’s current and future projects, visit the PPC’s website here.