john henne - private company alternatives

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Private Company AlternativesDecember 11, 2014John Henne, CPA, CFE, CISA, MPA

2014 KSM Business Services, Inc.

ASU 2014-07: Applying Variable Interest Entities Guidance to Common Control Leasing Arrangements

ASU 2014-02: Accounting for Goodwill

ASU 2014-03: Accounting for Certain Receive-Variable, Pay-Fixed Interest Rate Swaps (Simplified Hedge Accounting Approach)Accounting Standard Updates Covered

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Annual periods beginning after December 15, 2014; early application permitted

These updates apply to private company financial statements

Private companies must elect to use the alternatives

Effective Date for Accounting Standard Updates

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Why You Should Care

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Most popular ASU issued impacting privately held businessesImpact is significant for private companiesAllows private companies to deconsolidate certain variable interest entitiesAccomplishes what the user needs through disclosure of leasing arrangements versus consolidationASU 2014-07

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Entities Impacted by ASU 2014-07Real EstateLeasing

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Four Criteria

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Common Control - Not defined by guidance; intuitive in nature; target is exact same ownershipLeasing Arrangement Leasing an asset (real estate and equipment); employees are excludedLeasing Activity Substantially all the activity between the private company/lessee and the VIE/lessor are related to leasing activitiesExplicit Guarantee or Collateral - Provide a guarantee or collateral for the VIE/lessor related to the asset leased by the private company - Principal amount of the debt cannot exceed the value of the asset leased by the private company from the VIE/lessor

Four Criteria

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Removal of VIE from the consolidated financial statementsPrepare comparative financial statements and footnote disclosuresA note would be added to the notes of the financial statements discussing the change in accounting principleThe notes to the financial statements would also need to be updated for related party rent or lease expense, future minimum rentals and any guaranteesIf an audit, emphasis of a matter added in the auditors reportImpact on Financial Statements and Disclosures

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Allows private companies to amortize goodwill over a 10 year periodSaves time and money by eliminating the two-step impairment testSatisfies the users of the financial statements needs as it removes an asset that a bank would not allow a company to borrow againstASU 2014-02

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Number that was agreed upon by the PCCTax law requires goodwill be amortized over a 15 year period

10 Year Amortization Period

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Still would apply but is not requiredRequired only in instances where there are indicators of impairment (trigger-based impairment test)Some indicators of impairment would include the following: - Significant downturn in the economy - Internal issues such as the loss of key personnel or customersIf indicators identified, apply one-step testNeed to test goodwill impairment at the reporting unit level or entity levelImpairment Test

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A disclosure would be added to the notes of the financial statements discussing the change in accounting principleNo need to adjust prior year financial statements If an audit, emphasis of a matter added in the auditors reportImpact on Financial Statements and Disclosures

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Applies to plain vanilla interest rate swaps that are receive-variable, pay-fixed swaps.This type of hedging arrangement allows the private company to swap a variable interest rate loan for a fixed interest rate loan to hedge the risk of rising interest rates.Typically swap arrangements are embedded within the loan agreement with the bank.ASU 2014-03

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Parties Involved In An Interest Rate Swap Arrangement

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Debt and the swap have to be based on the same interest rate index and same reset periodThere is no floor or cap on the variable rate amountThe repricing and settlement dates on the swap and debt are the same date or do not differ by more than a couple daysThe fair value of the swap should be at or near zero at inceptionThe notional amount of the swap should match the principal being hedgedAll interest payments occurring on the borrowings during the term of the swap are designated as hedged whether in total or in proportion to the principal amount of the borrowings being hedged

Six Conditions for Application

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The borrower has until the date the financial statements are issued to document the hedge relationshipHedge effectiveness is assumedPrivate company can assume that settlement value equals fair valuePrivate company can value the derivative without taking into account non-performance risk on the part of the counterpartyPrivate company still books the derivative with the offset to other comprehensive income as an unrealized gain or loss

Simplified Hedging Approach

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Entity will still have all the disclosures it would normally have with any derivativeNotes to the financial statements will still include the tabular format with Level 1, Level 2 and Level 3Only difference is that settlement value can be assumed to be fair valueEssentially there is no disclosure reliefChange in accounting policy would be added to the notes to the financial statementsIf an audit, emphasis of matter added in the auditors reportImpact on Financial Statements and Disclosures

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Accounting for Identifiable Intangible Assets in a Business Combination - Only recognize and measure assets capable of being sold or licensed independently - Two assets not meeting the principle include non-compete agreements and customer related intangibles - Final ASU has not been issued yet PCC Issue No. 13-01A

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