Healthcare organizations are increasingly involved in merger and acquisition deals with goals including improving quality of care, controlling costs, streamlining processes, and increasing revenues. Given the consolidation landscape, healthcare finance executives will benefit from learning about the latest issued accounting guidance before engaging in healthcare deals. The Financial Accounting Standards Board (FASB) has recently issued guidance, as consensuses of the Private Company Council (PCC), that may reduce both the cost and complexity of accounting and financial reporting requirements under existing guidance.
In December 2013, the FASB and the PCC issued “Private Company Decision-Making Framework: A Guide for Evaluating Financial Accounting and Reporting for Private Companies” to assist the FASB and the PCC in determining whether and in what circumstances to provide alternative recognition, measurement, disclosure, display, effective date, and transition guidance for private companies reporting under U.S. generally accepted accounting principles (GAAP). Public business entities, not-for-profit entities, and employee benefit plans are excluded from the scope of the guide.
The framework was issued in response to the FASB’s and the PCC’s recognition of the different needs of private company financial statement users as well as the complexity and cost burdens of recent accounting guidance, particularly as the guidance relates to business combinations, in light of private companies’ sometimes-limited accounting resources. The framework permits a private company to apply the alternatives within U.S. GAAP for recognition or measurement guidance that it deems appropriate.
Healthcare finance executives should be aware of certain recent accounting alternatives issued by the FASB in accordance with the December 2013 framework that may simplify business acquisition and combination accounting. Also, they should recognize whether or not their organization falls within the scope of the private company accounting alternatives.
Recent FASB Guidance
ASU 2013-12, “Definition of a Public Business Entity.” In December 2013, the FASB issued Accounting Standards Update (ASU) No. 2013-12 to define the term “public business entity.”
- The ASU amends the Master Glossary of the Accounting Standards Codification to include one definition of public business entity in U.S. GAAP.
- It defines the types of entities that would not be eligible to apply the private-company exceptions and alternatives to U.S. GAAP.
Aside from determining the scope for purposes of applying private-company accounting alternatives, the distinction between public and private also is important as often the FASB provides delayed effective dates for private companies in its other guidance.
In the most general sense, ASU 2013-12 provides a new definition of public business entities, which is different from pre-existing definitions of public entities in U.S. GAAP, for purposes of identifying certain entities that are precluded from adopting private-company accounting alternatives. A healthcare finance executive considering adopting certain PCC alternative accounting guidance should carefully review the ASU’s definition of a public business entity, as well as the scope guidance within each issued private-company accounting alternative, to verify eligibility.
ASU 2014-02, “Intangibles – Goodwill and Other: Accounting for Goodwill.” In January 2014, the FASB issued ASU 2014-02 to provide an alternative expected to reduce the cost and complexity of the subsequent accounting for goodwill. It permits the following:
- A qualified entity may amortize all goodwill on a straight-line basis over a period of 10 years or less, if a shorter life is deemed more appropriate.
- A simplified goodwill impairment model may be applied. The impairment model must be applied if goodwill is amortized, and the ASU provides for a simplified trigger-based impairment model that allows an accounting policy election of assessing impairment at either the entity level or the reporting-unit level only when there are indicators of impairment.
- The impairment assessment involves a simplified one-step approach instead of the two-step approach that was required previously.
The accounting alternative was effective prospectively for goodwill existing as of the beginning of the adoption period and new goodwill recognized in annual periods beginning after Dec. 15, 2014, and interim periods within annual periods beginning after Dec. 15, 2015, including application to any period for which the entity’s annual or interim financial statements have not yet been made available for issuance. Early adoption is permitted.
For private companies, the new standard represents a fundamental overhaul of the existing accounting model for goodwill. A private company that elects to adopt the alternative will be able to both amortize goodwill and apply a simplified goodwill impairment test.
ASU 2014-18, “Accounting for Identifiable Intangible Assets in a Business Combination.” In December 2014, the FASB issued ASU 2014-18. Similar to ASU 2014-02, this ASU is expected to reduce the cost and complexity of accounting for a business combination by permitting certain acquired identifiable intangible assets to be subsumed into goodwill as opposed to being separately valued. The ASU permits the following:
- A qualified entity has the option to not separately recognize and measure noncompete agreements and certain customer-related intangible assets in a business combination.
- Customer relationship intangible assets still may be required to be valued and recognized if it is determined that they are capable of being sold or licensed independently from other assets of a business.
An entity that elects this accounting alternative must adopt the provisions of ASU 2014-02. The decision to adopt the accounting alternative must be made upon the occurrence of the first transaction within the scope of this accounting alternative in fiscal years beginning after Dec. 15, 2105. Early adoption is permitted for any interim or annual period for which the entity’s financial statements have not yet been made available to be issued. The effective date is the first date of the period in which the alternative is adopted.
The alternative allows private companies to avoid what sometimes can be a complex calculation that requires the assistance of outside valuation specialists. These companies no longer would have to recognize these intangible assets separately from goodwill in a business combination.
It is clear that the FASB has recognized the different needs of the various financial statement users for privately held entities. Through the PCC, the FASB has provided alternative accounting and reporting guidance that, in many cases, simplifies accounting and reporting requirements under previous guidance. Many of the accounting alternatives issued by the FASB to date could have an impact on how healthcare entities account for business acquisitions and combinations. Healthcare finance executives should make themselves familiar with the private-company accounting alternatives so that they may be able to take advantage of certain opportunities to reduce the cost and complexity of financial reporting.