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Coming soon: private company accounting standards.

After a long and complicated development period, the Financial Accounting Foundation has announced the creation of the Private Company Council (PCC), which, once up and running, should provide non-public companies with some relief from the current burden of public company accounting standards.

For decades, business owners, investors and public accountants have been pointing out that financial reports prepared under generally accepted accounting principles are tailored to the needs of those who analyze or invest in publicly held and typically large companies. They provide a pile of hard-wrought information, but much of it is irrelevant to the needs of privately held companies, which often as not are just trying to get a loan from the bank. But GAAP standards are the only standards around, so GAAP is what banks and others use.

The solution hasn't been simple. A separate set of standards for private companies would seem an obvious (but arduous) solution, but would inevitably result in financial statements that couldn't be readily compared with those of public companies. It would also mean a clunky and expensive shift in accounting for private companies going public. They would inevitably be seen as inferior, second-tier statements.

Another option, a mess of exceptions to GAAP, could result in a mish-mash of financial data of dubious value.

The problem grew even more complicated as the United States began the convergence to International Financial Reporting Standards (IFRS). International standards have a distinct tier of rules for small and medium-sized enterprises. Adopting this so-called SME tier would be a move even more radical than the adoption of the international large-company standards, which are increasingly similar to U.S. standards.

Though the Financial Accounting Standards Board--which promulgates U.S. GAAP--has recognized the problem, it has been reluctant to lower its standards, as it were, to lessen the burden on private companies. In 2006 it established the Private Company Financial Reporting Committee to provide advice to the board on issues related to private companies. The committee provided some, but not much that FASB could live with.

Little happened, and proponents of new standards started to shift from annoyed toward angry.

Last year, a Blue-Ribbon Panel on Standard Setting for Private Companies, set up by some of the accounting profession's leading organizations, recommended that a new body be established to write rules that would be incorporated into existing FASB standards. (Financial Executives International was represented on the blue ribbon panel as well as PCFRC.) FASB negated the suggestion to share power and balked at the consequent confusion of such a move. FAF, which oversees FASB, hammered out a compromise in May--the Private Company Council.

The new council, composed of nine to 12 members, will be charged with writing standards unique to the needs of private companies and the users of their financial statements. The council will then ask FASB to write these into its standards. FASB will have to give the suggested standards or modifications all due consideration.

They will be exposed for comment and modified by the board and the council. If agreements are reached, the proposals would be endorsed by FASB and incorporated into GAAP.

The 7,367 comment letters received attest to the concern of the foundation's constituency. George Beckwith, chief financial officer of National Gypsum Co., a multi-billion-dollar privately held company, and chair of FEI's Committee on Private Company Standards, says the PCC doesn't necessarily solve the problem, but at least brings it into the public forum.

"I believe the PCC is a step to help resolve the problems of the last 10 to 15 years," Beckwith says. "Forming the PCC alone will not solve the problems, but having a group that has credibility in Norwalk, Conn., [FASB headquarters] that can work with FASB to solve the problems is the path to progress."

FAF will appoint the members of the council, who will be selected from a spectrum of interest groups: preparers, investors, lenders, auditors and others. The chair will not be associated with FASB and will come to the council with extensive experience with private companies. Members will serve three-year terms without remuneration, possibly followed by a single two-year term.

FAF expects to appoint the chair and perhaps the members at its August meeting, and the first meeting of the council may be held by year's end. Thereafter, it should meet at least five times a year--more if deemed necessary by the chair.

The final form of the PCC is significantly different from that which was proposed late last year. FAF had wanted a FASB member to chair the council. The power of setting the council's agenda was not mentioned in the original proposal, but after hearing concerns from constituents, the foundation decided to stipulate that the council would hold exclusive control over its agenda in consultation with FASB and private company stakeholders.

The FAF's final report on the issue carefully specifies the relationship between FASB and PCC: "Working jointly, the PCC and the FASB will mutually agree on criteria for determining whether and when exceptions or modification to U.S. GAAP are warranted for private companies. Using the criteria, the PCC will develop, deliberate and formally vote on proposed exceptions or modifications to U.S. GAAP. If endorsed by the FASB, the proposed exceptions or modifications will be exposed for public comment."

"At the conclusion of the public comment process," the report continues, "the PCC will publicly redeliberate the proposed exceptions or modifications and provide them to the FASB for final decision or endorsement. If the FASB makes a final decision to endorse, the exceptions or modifications will be incorporated into U.S. GAAP."

Getting Started

The council's first objective will be a tricky one: a set of criteria to decide whether and when exceptions or modifications to GAAP are warranted. It will then conduct a review of existing standards to determine which to consider. Proposed exceptions or modifications must be approved by two-thirds of the members. A simple majority at FASB will suffice for approval to expose for comment.

PCC will also offer advice on ongoing FASB projects, and FASB will be expected to explain in writing any decision to decline the advice.


Teresa Polley, president and chief executive officer of FAF, believes PCC and FASB together can bring about a solution that's been sought for decades.

"The plan to establish the PCC balances the varying needs of public and private company financial statement users, preparers and auditors, while avoiding the creation of a 'two-GAAP system,'" Polley said as the report was issued. "The system in place will ensure comparability of financial reporting and recognize differences between public and private companies."


Bill Balhoff, chief executive officer and managing director of Postlethwaite & Netterville and a proponent of private company standards for more than 20 years, advises the PCC and FASB to quickly identify some easy targets and then move fast to demonstrate that attitudes and approaches have changed.

"FASB needs to give private companies and their market and the users of their financial information some sense that there is going to be a difference, that this new process is different from FASB just continuing to justify the lack of different standards by saying that that there are no differences in liabilities and assets and therefore one size is going to fit all," Balhoff says.

"I think they should come out with something that shows that measurements can really be different while still meeting the needs of the users," he says. "My advice is to try and address something pretty quickly where they are open to differences."

One easy target he'd like to see PCC take a shot at: Financial Interpretation 48, on the recognition and measurement of uncertain income tax positions, which has been a thorn in the small-company side since 2007.


Balhoff says the two organizations need to ask not only where private companies are being asked to meet unnecessary standards but why the differences exist. They also need to assess the cost/benefits of required financial information, he adds.

And Beckwith warns that PCC must take care not to dilute the usefulness of financial statements by trying to reduce their complexity while expanding their relevancy.

"The same conflicts will exist as they make decisions about the cost/benefit of a disclosure or standard that FASB makes for all users, but PCC should be able to make those decisions based on a smaller user base, one that has different access to management and different information needs," Beckwith says.

Beckwith also warns that PCC isn't going to reverse the history of accounting standards, nor will it be able to make wholesale differences in recognition and fair value measurement. Going forward, however, PCC's discussions may have a positive impact on new standards as FASB writes them, bringing the private company perspective into the process at an earlier stage.

PCC will also encourage more participation among small and medium-sized company. Historically, public companies and the larger accounting firms have contributed the heaviest comments on FASB projects. Private companies and smaller accounting and CPA firms have been less involved and not as widely heard.

Regardless of how well PCC and FASB get along, the activities of the former will most certainly engage the interest of more private companies, and FASB will most certainty be paying more attention to them. It is now incumbent on those who have been complaining to reinforce the solution by getting involved.


Glenn Alan Cheney ( is a freelance writer in Hanover, Conn., who specializes in writing on business, financial reporting and accounting.
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Author:Cheney, Glenn Alan
Publication:Financial Executive
Geographic Code:1USA
Date:Jul 1, 2012
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