Separate Private vs. Public Company GAAP: Are We at a Tipping Point?

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CFO Studio Magazine, 1st Quarter 2012
By Tim Anglim, CPA, CMA, CEO of YesCFO

YesCFO – a provider of part-time and interim CFO services for organizations experiencing rapid change or an unstable environment – whether due to a financial crisis, paradigm shift or growth opportunity.

IN JANUARY 2011, the Blue-Ribbon Panel on Standard Setting for Private Companies issued its long-awaited report. The panel’s key recommendation — to establish a separate private company standards board alongside the existing Financial Accounting Standards Board, which would be tasked with providing “appropriate and sufficient exceptions and modifications”1 to existing GAAP for private companies — is just one more dynamic that today’s private company CFO needs to comprehend.

As background, in December 2009, the American Institute of Certified Public Accountants (AICPA), the Financial Accounting Foundation (FAF) and the National Association of State Boards of Accountancy (NASBA) established a “blue-ribbon” panel to address how accounting standards can best meet the needs of users of U.S. private company financial statements.  The panel was charged with providing recommendations on the future of standard setting for private companies to the FAF Board of

Trustees, the parent organization of the Financial Accounting Standards Board (FASB). Its January report is the result of that work.

Much has been written and discussed concerning the lack of relevance of a growing list of GAAP pronouncements as promulgated by the FASB from the private company perspective.

The FASB’s almost exclusively public company focus has led many in the profession, and in business, to clamor for some much needed relief. Even smaller public companies have strained under the onslaught of ever-increasing complex accounting rules. Consider also that there are approximately 14,000 public companies that have SEC reporting requirements while there are approximately 28 million private companies in the United States, many of which require audited, reviewed or compiled financial statements to satisfy their lenders, investors or other stakeholders, but not to the investing public or the SEC.

The apparent public company tilt to much of the FASB’s work has increased costs to all issuers of GAAP-based financial statements, public or private. With regard to private company issuers, the report noted that this “has led to more users of financial statements to accept qualified opinions – a development that calls into question whether those aspects of GAAP are truly ‘generally accepted.’”

Although the panel recommended that a new private company standards board be established, it did not recommend moving towards establishing completely separate GAAP for private companies, opting instead to recommend that exceptions and modifications be made to U.S. GAAP for private companies under the guidance of this separate board.

Also a factor in the panel’s recommendations was recognition of the proposed coming convergence between international and U.S. accounting standards (IFRS vs. GAAP). The panel felt that the FASB will be unduly distracted by its competing standard-setting pressures related to public companies and the push to adopt International Financial Reporting Standards as promulgated by the IASB, the FASB’s international counterpart, and will not prioritize private company needs.

Ultimately, the FAF rejected the panel’s recommendation concerning establishing a separate private company board, despite growing support for such a move, as evidenced by official statements by the AICPA4 and many state CPA societies that endorsed the panel’s key recommendations. The FAF has opted, instead, to form a Private Company Standards Improvement Council, to the disappointment of many in the profession. In fact, the AICPA went so far in its subsequent press release protesting the FAF’s lack of action to threaten that if the FAF does not move to adopt the panel’s recommendations for a separate board, the AICPA “will consider other options,” which “could include creating a separate standard setting body” to do the same.

Déjà vu all over again? Sorry Yogi, but we may be coming full circle on this one, circa 1973, when the FASB first began issuing pronouncements, placing the AICPA in a subordinate role ever since. Can the AICPA now reverse those positions as they relate to future private company GAAP? Time will tell, but this train may have left the station. “All aboard, anyone?”

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