Financial Accounting Standards Board (FASB) Releases Critical GAAP Updates

Complying with generally accepting accounting principles (GAAP) is becoming increasingly challenging for private entities. But this year, the Financial Accounting Standards Board (FASB) has released two updates that allow alternative reporting methods in cases involving goodwill following a merger and interest rate swaps. GAAP

Mergers and Acquisitions: How to Account for Goodwill

During the acquisition of a business, an intangible asset often emerges known as “goodwill.” Here is how it generally works; a business owner wants to sell his/her company. The buyer and seller agree on a price that is based on the fair market value of the company’s physical assets and liabilities (such as equipment and property). However, the seller often has intangible assets aside from their physical assets. These may include a brand name, book of business, or a prime retail location. This often occurs during the acquisition of professional firms such as insurance agencies or medical practices.

Up until now, the GAAP method of accounting for goodwill has been to test for impairment, meaning to periodically examine the goodwill assets to find out if their value has dropped (or been impaired) and adjust your accounting accordingly. However, FASB is now allowing a GAAP exception for businesses that wish to negatively amortize the assets over 10 years (or a shorter period if it can be justified). This gives smaller businesses a simpler and more predictable method to account for goodwill assets.

Accounting for Interest Rate Swaps

Interest rate swaps are essentially exchanges between two organizations in order to obtain more desirable financing terms and conditions. Borrowers that can only qualify for variable rate financing but prefer the predictability of a fixed rate loan often use these. Up until now, interest rate swaps have had to be accounted for at fair market value. Under the new guidelines, businesses can choose to account for these swaps using settlement value. This method will be much simpler and allow the swap to show up on the balance sheet essentially the same way as if the company had taken out the financing directly.

These FASB changes are positive steps for many small to medium sized businesses that want to simplify their accounting processes. Be sure to speak with your small business accountant to find out if either of these changes can help your business.

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