GAAP for private companies: debating alternatives for small and medium-sized entities.
Creation of the PCC
"We have been involved in private company issues for some time and probably have gotten more involved in the past five years or so, following some of the Blue Ribbon Panel recommendations that the FAF [Financial Accounting Foundation] had organized," said FASB Technical Director Susan Cosper. FASB's efforts included a private company financial reporting advisory group and the creation of staff positions devoted to monitoring private company issues and performing private company outreach. "We have some initiatives on educating private companies, which would include talking to the CPE providers, doing webcasts, and things like that," Casper continued.
Daniel Noll, a director of accounting standards at the AICPA, noted that the organization had been performing outreach on this topic since the mid-1970s, but that these issues had now reached "the tipping point."
KPMG partner Mark Bielstein, a member of the EITF, agreed that concerns about complexity in the standards were significant for private companies, as well as for public companies and nonprofits. "Hopefully this focus on private companies will potentially reduce complexity across the board," he said. "Complexity needs to be considered in a broader context than just making accounting standards easier for private companies."
PCC member Thomas Groskopf said that one factor influencing the PCC's creation was the use of different standards in various parts of the world, such as IFRS for small and medium-sized entities (SME). "There was a lot of attention to what do we do with these non-listed entities globally and here in the United States," Groskopf said. "I think the [FAY] trustees, when they went on their listening tour, heard a lot of those concerns, and that gave rise to the PCC."
Cosper described the FCC's duties in greater detail: "The council actually has two roles. One of them is what most people are probably familiar with: look-back projects. Are there existing standards in place that would benefit from some improvement for private companies because of user relevance, cost, complexity, or other factors? The other role, which is very important to FASB, is the ongoing advisory role. We have a lot of significant projects on our agenda, and we need that advisory group to help us understand what some of these private company issues are, with respect to the standards." Bielstein noted that FASB retains the authority to set standards for both public and private companies.
Groskopf discussed the decision-making framework that FASB and the PCC would rely on: "The Blue Ribbon Panel and others looked at it and said that there needed to be some common framework or some common understanding upon which differences or alternatives should be based when decisions are going to be made for unique private company alternatives, whether it's recognition and measurement, financial statement presentation, disclosure, transition, or effective date. Without that common understanding, each standards setter would be creating standards based on their own individual framework."
"The discussions in the public sessions with FASB and the PCC around the decision-making framework were pretty robust," Cosper added. "The board has been very committed to the framework, even in discussions about active projects."
"I don't think the decision-making framework is needed for the board and the PCC to decide what might be reasonable differences for GAAP," Noll responded. "Having said that, if that framework is viewed as helping PCC and FASB board members make decisions, I say go for it."
Although Bielstein agreed that the framework might not be helpful in evaluating whether differences should or should not exist in standards for private and public companies, he did think it could be important in identifying which specific differences would benefit financial statement users.
Private and Public Differences
Bielstein next discussed some distinguishing characteristics of private and public companies. For example, private companies may have more control over whom they give their financial statements to; thus, they may have fewer users. In addition, those users may be limited to a select number of owners or lenders in certain situations. As compared to public companies, users of private company financial statements might have more access to additional information from management. Bielstein suggested that other differences might include investment strategies and accounting resources.
"What's difficult is to translate that into actual different information needs," Bielstein said. "One of those that I have a particular concern about is access to management. As far as setting accounting standards for general-purpose financial statements, 1 question whether the ability to pick up the phone and call management is an appropriate distinguishing characteristic. ... I think that it does not, in and of itself, address whether the information is actually useful to the user of the financial statements. Also, that presumption of access doesn't ensure that the users could get the information if they wanted it."
Groskopf delved further into the issue: "I think you do have to have some user in mind when you design any accounting framework, and if all of your decisions are based on one particular set of users--say, a public company analyst--then you see things in the footnotes to the financial statements, such as roll forwards, that are not all that relevant for private companies. In my view, that is part of the reason why this framework is important to have: so that we make those distinctions."
A final concern was whether industry-specific guidance was presumed to apply to both private and public companies. "The initial document did have a rebuttable presumption in there, and them was a lot of commentary from certain sectors of the economy about that," Bielstein explained. "The exposure draft, after consideration of those views, has recognized that, on some noncore items, there might be a need for a difference, but they will be addressed on a case-by-case basis, without any type of rebuttable presumption."
Cosper said that FASB hopes to get feedback on industry-specific guidance during the comment period. She also stressed the importance of the framework to the legacy of the project that FASB and the PCC have initiated: "It helps for people who come later ... to understand how this inaugural panel made some of its decisions.
During the PCC decision-making process, Groskopf noted, the council focused on user relevance and asked basic questions about setting standards on recognition, measurement, disclosure, effective dates, transitions, and financial statement presentation. For example, according to Groskopf, some recognition and measurement questions might include the following: "Does it affect cash? Is it a cote item? Does it affect collateral? If it's a fair value issue, is it something that reverses quickly? And if so, does the timeliness or lack of timeliness in the issuance of a private company statement render that not very useful'? How much does it cost? Does it require outside specialists? Is it difficult to audit?"
"The Blue Ribbon Panel actually found it very appealing to have the idea that when FASB sets GAAP, it does it on almost a baseline-type mentality, which means GAAP that makes sense for all," Noll added. "The reality is that there's going to be times when we're going to have to go into more of an exception-and-modification mode to see if an answer should be different, not just for private companies but also nonprofit organizations or employee benefit plans."
Next, Strauss asked panelists whether there should be any differences in the requirements of FASB standards, depending upon whether a company is public or nonpublic. The big question, he said, is whether income could be different just because one company is public and the other is private.
"It just depends, based on how one thinks about user relevance and the cost of complexity, whether differences could result," Cosper said. "We're already seeing that on our active projects. Leasing is a particularly good example, where we have recognition and measurement differences. We have had disclosure differences and effective-date differences for some time. Those don't necessarily seem to be as troublesome as folks believe the recognition and measurement differences might be." She added, "While the PCC will be focusing on some of these issues--for example, VIEs [variable interest entities] and business combinations--FASB will also be looking at these same issues as they relate to public companies and as they relate to employee benefit plans and nonprofits."
With respect to whether there could be differences in recognition and measurement, and thus income, attributable to whether a company was public or private, Bielstein said, "If those differences are based on different needs of the financial statement users and there are masons to have the requirements different for public company users, as compared to private company users, I'm very open to hearing about that."
"You hear, from time to time, these dogmatic statements that income should be the same or ... private companies and public companies should account for the same transaction the same way," Groskopf countered. "There are already differences today in recognition and measurement, share-based compensation, liabilities and equity, push-down accounting. ... If we look at what's going on right now, it's not happening."
"To some extent, we usually focus on complexity by thinking about the difficulties in applying a particular standard," Bielstein added. It's also important to think about complexity from the overall financial reporting system and what those kinds of differences mean, particularly if they become pervasive across standards." He provided an example of the complexity that could result: "How do we disclose differences between public and private companies, and let the users of financial statements actually know which standards they're applying, particularly if there's widespread differences and a company has the ability to pick and choose whether to apply public or private standards in particular situations?" Although Bielstein expects that differences will not become such a dire concern, "once you start moving toward widespread differences, it creates complexity for the overall financial reporting system, even though it might make an individual standard easier to apply."
The PCC's Agenda
Some projects the ACC had agreed to consider included VIEs, plain-vanilla interest rate swaps, and identifiable intangible assets. "These topics are right on the money," Noll said. Groskopf agreed that concerns on these topics had been heard during private company roundtables and the Blue Ribbon Panel's recommendations. He also commented on the issue of interest rate swaps: "It really comes down to a disconnect in the current mixed-attribute model. If I have a straight fixed-rate piece of debt, I account for something one way. And if I have a synthetic fixed-rate piece of debt using a swap and variable underlying note, I account for it differently--at fair value, basically. ... Is there a way within the context of the PCC to try to provide some relief and perhaps an alternative?"
Cosper then provided an example of an intangible asset that a nonpublic company might not have to record, but that a public company would: "You could have customer relationship intangibles or customer lists, or similar things that could potentially be excluded from having to be separately identifiable. Some of these issues are not just issues for private companies. If you look at identifiable intangible assets, the first issue is identifiable intangibles: should they be separated in business combinations? The second issue is goodwill: should it be amortizable? Should it be a direct write-off? Those are things that we heard when we did what I call the 'step zero' goodwill impairment project. We heard it from both public and private companies."
Defining a Private Company
If differences exist for private and public companies, it is important to decide who would be eligible to use those differences, Strauss said.
"We do have a separate project on our agenda to identify the definition of a nonpublic entity," Cosper said. "The other objective is to ask, 'Whom should we be thinking about when we get to a private company decision-making framework? Whom should the PCC be making decisions for?' ... We're trying to make sure we have a fulsome definition of a public company in order to understand what is not a public company." Although it might be easy to assume that a public company is an entity that furnishes or files financial statements with a regulatory agency, shades of gray do exist. "You have, on one end of the spectrum, a very clear idea of what a public company is, and on the other end of the spectrum, you probably have a very clear understanding of what a private company is," Cosper noted. "It's that stuff in the middle that we're trying to make sure we've got sorted out."
In the scope of the private company decision-making framework, nonpublic financial institutions would be considered private. "If a decision were made on something that was core to a financial institution," Cosper said, citing the example of loans, "there would have to be a decision made as to whether financial institutions should be scoped in or scoped out."
The AIGPA's Proposed Framework
Strauss next brought up the AICPA's controversial proposed financial reporting framework for small and medium-sized entities (SME) that relies upon an other comprehensive basis of accounting (OCBOA), rather than on U.S. GAAP. Noll provided an update: "In early June, we are issuing another form of OCBOA ... that term is being replaced with the notion of a special-purpose framework. ... There appear to be many out there who would say that there's something missing with the current OCBOAs and with GAAP, even with the differences that the PCC and FASB might put into GAAP, and that there needs to be another basis to help private companies. ... So we're building the Financial Reporting Framework for SMEs."
The proposal contains a full model and accounting rules on different topics. Strauss explained; however, he noted that some have expressed concerns that companies following this new OCBOA will have to learn an entirely new set of rules. Noll said that the new framework is optional, and that it will probably be smaller companies, guided by their auditor, that choose to rely on it.
Bielstein expressed his support of the project: "Companies now have choices. They can use GAAP. They can use IFRS. They can use IFRS for SMEs, tax basis, cash basis. If there are some companies that find that those standards are not particularly useful, and there's a different OCBOA that would be useful for the company and its users, I don't see any harm."
Despite his overall agreement with the idea, he raised two issues: 1) that the framework, disclosures, and financial statements must clearly reflect that the new OCBOA is not GAAP, in order to avoid confusing users, and 2) that the framework must be based on the user's needs. "I think there are some inconsistencies in the framework as proposed," he added, "and there are probably a few too many elections that are too broad-based."
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|Title Annotation:||In Focus; generally accepted accounting principles|
|Publication:||The CPA Journal|
|Date:||Jul 1, 2013|
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