insight magazine

Reconsidering Private Company GAAP

Adopting private company GAAP alternatives could yield significant time and cost savings. By MARK RILEY, PH.D., AND PAMELA A. SMITH, PH.D. | Summer 2018


Back in 2014, the Private Company Council (PCC) issued four Accounting Standards Updates (ASU) that offered relief to private entities with respect to accounting for goodwill, certain intangible assets acquired in a business combination, certain interest rate swaps, and variable interest entities. However, the PCC found the costs associated with applying the financial reporting requirements often outweighed the benefits of applying them. Thanks to revised transition guidance and amended effective dates in ASU 2016-03, this is no longer the case.

Today, the alternatives to private company GAAP are more accessible — and attractive. The 2016 transition guidance alleviated the need to assess preferability as well as, in certain instances, the requirement for retroactive application. This significant relief provides private entities more time to learn, adopt, and implement the simplified alternatives to private company GAAP — but it has gone overlooked by many.

If you are an auditor or accountant for a private entity that has not adopted one or more of the PCC’s alternatives to private company GAAP, it is time to reconsider whether the alternatives make sense. The PCC has made adoption easier, and significant time and cost savings could be uncovered by looking at these alternatives before year-end reporting and auditing.

Here is when and why choosing to adopt an alternative might be in your private entity’s best interest.


GAAP generally treats goodwill as an asset with an indefinite life that undergoes costly impairment testing at least annually. The exceptions under the PCC’s alternative, ASU 2014-02, “Intangibles — Goodwill and Other (Topic 350): Accounting for Goodwill,” relieve privately held entities from performing annual impairment tests on goodwill.

Instead, private entities choosing the alternative must amortize goodwill over a period of not more than 10 years. In addition, ASU 2014-02 states any goodwill existing when the company adopts the alternative is to be “amortized prospectively on a straight-line basis over 10 years, or less than 10 years if an entity demonstrates that another useful life is more appropriate.”

While this does not completely relieve private entities from goodwill impairment testing, it is generally agreed the alternative under ASU 2014-02 reduces costs associated with goodwill accounting. Our interviews with auditors of privately held companies indicated that family-owned and closely held businesses tend to take advantage of this alternative.


Reducing artificial inflation of goodwill is one reason acquisition method accounting requires the identification of all identifiable intangible assets associated with a business combination. The rationale is that if all intangibles related to marketing, customers, artistic rights, contracts, and technology are separately identified and valued, then goodwill is not harboring assets that should be separately valued and reported and, therefore, the cost of these assets is not obscured.

That said, separate identification of, and accounting for, certain intangibles in a business combination fails a cost-benefit test for private entities. From the preparer’s perspective, the identification and valuation of certain intangibles is costly and requires valuation expertise. From the user’s perspective, many of these intangibles do not provide value-relevant information because the users of the closely held financial statements are focused on hard assets and cash flows.

The PCC alternative, ASU 2014-18, “Business Combinations (Topic 805): Accounting for Identifiable Intangible Assets in a Business Combination,” allows the private entity to avoid separately valuing and accounting for non-competition agreements and customer-related intangibles that are not capable of being sold or licensed separately from the business. So, if a private entity purchases another entity, these intangibles explicitly associated with the acquired company can be combined with goodwill. One caveat is if the private entity elects the alternative to not separately identify the non-compete agreements and customer-related intangibles, then the private entity also must adopt the alternative for accounting for goodwill.


A common risk, is the uncertainty associated with variable-rate debt or borrowing. While private entities can hedge variable interest rate risk without applying hedge accounting, doing so means their financial statements will not reflect the economics of the hedge. Hedge accounting permits the financial statements to reflect interest expense as if the entity had fixed-rate debt.

The simplification in ASU 2014-03, “Derivatives and Hedging (Topic 815): Accounting for Certain Receive-Variable, Pay-Fixed Interest Rate Swaps — Simplified Hedge Accounting Approach,” alleviated the complexities of accounting for interest rate swaps by providing private entities relief from GAAP requirements of assessing effectiveness of interest rate swaps. It also allows a private entity to price a swap at settlement value rather than fair value. Certain documentation is required, but the entity can complete the documentation by the date on which the first annual financial statements are available to be issued rather than at hedge inception.

Our conversations with audit partners revealed that many private companies are not using this simplification. One reason is because the recent interest rate environment did not incentivize hedging against rising interest rates. However, many experts now expect further interest rate increases. Between rising interest rates and the change in guidance on when and how this alternative is adopted, private entities should reevaluate the use of swaps on current and prospective hedges of variable interest rate risk and keep the interest rate swap/hedge accounting alternative in mind.


Until the PCC issued its alternative, ASU 2014-07, “Consolidation (Topic 810): Applying Variable Interest Entities Guidance to Common Control Leasing Arrangements,” private entities were required, like public companies, to consolidate variable interest entities (VIE) for which they were the primary beneficiary. However, in situations where a private entity leased property from a VIE under common control of the private entity, the resulting consolidated financial statements were not decision-useful. In its summary of the private company alternative, the PCC noted that many users of private company financial statements request schedules that allow them to “deconsolidate” VIEs consolidated in private company financial statements. The PCC also noted that private entities have differing motives for establishing VIEs and their lease arrangements.

In general, private company VIE leasing arrangements are for tax, estate planning, or legal-liability purposes. In contrast, public entity VIE leasing arrangements are often used to structure off-balance-sheet financing (ASU 2014-07, p. 1).

Because of the costs and distortions involved with consolidation of certain VIEs, the PCC alternative requires disclosures but not consolidation. The PCC made the alternative available if the primary activities between the private entity and the lessor entity under common control (the VIE) relate to leasing. In addition, the PCC requires that the amounts of any guarantees the private entity made or collateral it provided to the lessor (VIE) are less than the value of the asset leased (ASU 2014-07, p. 2).


The PCC accounting alternatives are most helpful to family-owned or closely held private companies (versus private equity-owned) because they not only simplify the application of the accounting standards, but also fit the needs of their financial statement users. Further, family-owned private companies often have relatively small accounting staffs that need more time to learn and implement new standards. The reprieve for transition to the PCC alternatives is good news for family-owned and closely held private entities, and now is as good as ever to reconsider putting them into practice.

The authors are professors in Northern Illinois University’s Department of Accountancy and are CPAs licensed in Texas and registered in Illinois. Mark Riley, Ph.D., Dean and Brenda DuCray Associate Professor, can be reached at [email protected]. Pamela A. Smith, Ph.D., KPMG Endowed Professor and Illinois CPA Society honorary member, can be reached at [email protected].

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