- By Joseph C. Hassan, CFA, ASA
- September 15, 2025
Background on the Private Company Council:
The Private Company Council (PCC) was established in 2012 by the Financial Accounting Foundation¹ in response to recommendations from a “blue-ribbon panel” on standard setting for private companies. The PCC was tasked with identifying areas where GAAP could be modified specifically for private companies. Unlike public companies, private entities typically operate with fewer resources, face different investor demands, and are subject to less stringent regulatory scrutiny, making the full complexity of public company GAAP often disproportionate to their needs.
The PCC developed four major accounting alternatives between 2014 and 2016, all of which were endorsed by FASB and integrated into the Accounting Standards Codification. These alternatives are elective, meaning private companies can choose whether to adopt them, but once elected, they must be consistently applied and properly disclosed.
The PCC alternatives represent a significant evolution in U.S. accounting standards, addressing long-standing concerns that traditional GAAP was overly complex and burdensome for private companies. These alternatives provide private companies with simplified accounting options that better align with their operational realities and stakeholder needs, while maintaining the integrity of financial reporting standards.
¹ The Financial Accounting Foundation is an independent, private-sector, not-for-profit organization responsible for the oversight, administration, financing, and appointment of the Financial Accounting Standards Board (FASB) and the Governmental Accounting Standards Board (GASB).
The Four PCC Alternatives:
- Goodwill Accounting Alternative (ASC 350-20): This alternative permits private companies to amortize goodwill on a straight-line basis over ten years or less, replacing the annual impairment testing requirements with simplified, trigger-based impairment assessments. This change significantly reduces the ongoing costs associated with goodwill valuation and testing.
- Intangible Assets in Business Combinations (ASC 805): Under this alternative, private companies may elect not to separately recognize certain intangible assets, namely customer-related intangible assets and non-competition agreements, in business combinations. Rather, the values of these assets are subsumed into goodwill.
- Variable Interest Entities – Common Control Leasing (ASC 810): This provision exempts private companies from consolidating Variable Interest Entities (VIEs) in common control leasing arrangements, particularly beneficial for family-owned and closely held businesses with complex ownership structures.
- Interest Rate Swaps – Simplified Hedge Accounting (ASC 815): This alternative provides a streamlined approach to hedge accounting for interest rate swaps commonly used to hedge variable-rate debt, eliminating the need for complex hedge effectiveness testing procedures.
Valuation Implications and Other Considerations:
The PCC alternatives have substantial implications for business valuation professionals and their clients. From a valuation perspective, these alternatives can affect both the preparation of financial statements used as inputs in valuation analyses and the overall cost structure of maintaining compliant financial reporting, though in our view there are cases where “cost savings” may largely, if not entirely, be offset by a hidden price.
The goodwill amortization alternative is perhaps the provision that manifests in the greatest cost savings. Allowing private companies to amortize goodwill over 10 years may provide greater predictability in earnings patterns. In addition, rather than facing potential large, non-cash impairment charges that can distort financial performance metrics, companies following this alternative show consistent goodwill amortization that better reflects the economic reality of goodwill’s finite useful life. On the other hand, a triggering event may still necessitate the impairment of goodwill and it is possible that the resulting impairment charge may be larger relative to an otherwise equivalent situation under public company GAAP. This set of circumstances is possible due to the inclusion of previously identifiable (and reportable) intangible assets, such as customer relationships, into goodwill. Further, although a private company may evade the annual valuation previously required for impairment testing purposes, if and when a one- time valuation is required due to a triggering event, the cost of such valuation is likely to be significantly higher as compared to preparing valuations at a regular interval (often referred to as revaluations, which are more cost effective than one-time valuations).
Regarding the intangible asset alternative, some argue that the provision reduces transaction costs in M&A scenarios by eliminating the need for complex purchase price allocation exercises involving customer relationships and non-compete agreements. However, as a practical matter, we have observed that in order to properly prepare and respond to common audit questions these assets, in particular the customer asset, still need to be valued; hence, the suggested reduction in costs applicable to this provision is debatable at best.
Perhaps the most significant considerations for private companies and electing the accounting alternatives reside around their investors and future exit planning. For example, certain external stakeholders such as institutional investors, private equity firms, and the like may require full GAAP for consistency, comparability, and due diligence purposes. As it relates to exit planning, companies contemplating a sale or IPO may be advised to adopt (or maintain) public company GAAP to best align with the marketplace and/or avoid subsequent restatements. These considerations render any cost savings associated with PCC alternatives as moot.
Summary:
The PCC alternatives represent a thoughtful response to the unique needs of private companies, providing practical relief from unnecessarily complex accounting requirements while preserving the quality and reliability of financial reporting. Since their introduction, the PCC alternatives have been adopted by numerous family-owned businesses and other closely held companies. In many cases, the alternatives have achieved their intended goal of reducing compliance costs while maintaining decision-useful financial information for key stakeholders such as lenders, management, and investors.
At the same time, the adoption of PCC alternatives does not always result in meaningful cost savings. Further, as discussed, there are a myriad of circumstances where companies decide against the adoption of PCC alternatives.
Understanding the alternatives and their implications is essential for valuation professionals working with private companies, as the election of these options can meaningfully impact financial statement analysis, comparability assessments, and valuation conclusions.
MPI has extensive experience working with private companies and our valuation analyses properly account for any accounting policy elected by corporate accounting teams. Please contact us if we may be of assistance with your private company valuation needs.
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For Information, Please Contact:
| Joseph C. Hassan, CFA, ASA
Managing Director (609) 955-5725 (908) 415-8012 (cell) jhassan@mpival.com |
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