By Dwight Cass
After years of wrangling, the FAF establishes an arbiter of reporting standards.
Public companies often bemoan the complexities of the financial reporting standards they must meet. Private companies, especially smaller ones with no tradable public securities, have been left to sort out their accounting practices on their own. That is about to change. The Financial Accounting Foundation (FAF) in late May established the Private Company Council (PCC), a new body to improve the process for establishing private company accounting standards, and to assist the FAF in setting those standards.
Standardized accounting for private companies will be a relief to many of their investors and lenders, which in the past have been forced to normalize the information they receive from private companies to make it comprehensible, comparable and actionable.
The private companies themselves should benefit also, and not only from better relationships with investors and lenders. When they mature and the possibility of going public or issuing other types of listed securities begins to look attractive, private companies must re-jigger their accounting and put an end to any unorthodox corporate strategies it has allowed them to engage in. Having to meet private company standards will reduce the number of revisions necessary. This should make the treasurer’s job easier for the firm’s first public capital raisings.
10,000 MANIACS
Small companies have complained that FASB’s US GAAP standards are too complex and expensive to apply, and that the information disclosed under those standards is not of much use to investors or other parties. This “Big FASB” versus “Little FASB” debate has gone on for years, and prompted the FAF to establish an advisory body, the Private Company Financial Reporting Committee (PCFRC) in 2006.
This half measure did not solve the problem, however, and so the FAF teamed up with the American Institute of CPAs (AICPA) and the National Association of State Boards of Accountancy (NASBA) to form a “blue ribbon” panel to research the issue and talk with stakeholders and users of their financial reports to determine the best way forward.
The blue ribbon panel submitted its recommendation to the FAF in 2011, arguing for establishing an informed body to modify US GAAP for use with private companies. When the FAF circulated for public comment its proposal to set up the PCC last fall, it received over 10,000 comment letters, the second highest number ever, according to Barry Melancon, CEO of the AICPA. Many voiced concerns that establishing a second standards-setter would further complicate an already complicated situation, but most were in favor of the FAF’s plan.
THE NEW NEW THING
The plan that emerged from this process in May involves phasing out the PCFRC in favor of the PCC. The new body will have two main responsibilities, according to FAF officials:
“First, the PCC will determine whether exceptions or modifications to existing non-governmental U.S. Generally Accepted Accounting Principles (U.S. GAAP) are required to address the needs of users of private company financial statements. Second, the PCC will serve as the primary advisory body to the Financial Accounting Standards Board (FASB) on the appropriate treatment for private companies for items under active consideration on the FASB’s technical agenda.”
The PCC will develop criteria for making exceptions or modifications to GAAP for private companies. It will then develop and vote on proposed changes and pass them on to FASB. If FASB signs off on them, the changes will be exposed for public comment, and based on the response to that process, the PCC will redeliberate the changes and pass them back to FASB for final endorsement. Once it does so, they will be incorporated into GAAP.
Some comments raised concerns that the FASB could defang the PCC by simply tabling its proposals. To avoid this, the FAF structured the process so the FASB has to respond in a “reasonable” period of time, usually 60 days, and if it decides not to endorse a change, it has to explain why and give some suggestions for modifying the PCC’s proposal so that FASB would find it acceptable.
A PC PCC
The FAF launched a search for a PCC chairman and members in early June. It is eager to ensure the PCC board has a strong background in private company affairs. “They should be committed to the mission of the FAF and FASB, demonstrate a concern for the public interest, and have an appreciation for the varying interests and perspectives of investors, lenders, and other users of private company financial statements, and the preparers and auditors of private company financial reports,” according to the job description.
Another Alternative
As the FAF announced its new private company accounting entity in late May, the AICPA, which said it supports the FAF initiative, launched its own alternative for small companies.
The trade group said it would develop an “other comprehensive basis of accounting” (OCBOA) for small- and medium-sized entities. The OCBOA system it plans to develop is meant to be less expensive and complex than GAAP.
“The enhanced and simplified financial reporting framework will be a cost beneficial solution for smaller privately held entities that do not need to comply with US GAAP,” said AICPA boss Melancon.
AICPA said it would be “fully engaged” with the FAF and PCC, but will also develop the OCBOA framework, saying it would be “objective, relevant and responsive to the concerns of preparers and users of small and medium private company financial statements where GAAP financial statements are not required.”