Private Company Financial Reporting – Will we finally see a change?
Since 1972, the need for a different set of standards for private companies has been an ongoing topic for debate. Hopefully, with the issuance of the Blue-ribbon Panel on Standard Setting for Private Companies Report (“BRP Report”) to the Financial Accounting Foundation (“FAF”) dated January 2011, resolution may be in sight.
By way of background, FAF oversees the Financial Accounting Standards Board (“FASB”), the setter of current U.S. accounting standards. Over the years, the standards have become more complex, time consuming and costly to implement. FASB’s main constituent has been the Securities and Exchange Commission (“SEC”). Thus, the standards have tended to address the perceived financial reporting needs of publically traded companies. By contrast, the number one users of private companies’ financial statements are banks (especially community banks). According to Barry Melancon (CEO and President of the American Institute of CPAs (“AICPA”)), there are 28.5 million private companies and only 15,000 public companies; however, it is public companies that drive accounting and financial reporting standards.
As many private company financial managers, bankers and CPAs serving private companies can attest (no pun intended), GAAP has lost relevance to many users (i.e. banks) and preparers (i.e. private companies). Due to the cost of compliance and the lack of GAAP relevancy private companies have been preparing their financial statements with GAAP exceptions or have been issuing tax basis financial statements. Some banks accept tax returns and altogether avoid the use of separate financial statements.
In December 2009, FAF, the National Association of State Boards of Accountancy and the AICPA appointed a Blue Ribbon committee, comprised of 18 experienced private company accounting professionals, to address private company financial accounting and reporting issues. Two key recommendations of the Panel in the BRP Report are:
1) The use of a standards system based on current U.S. GAAP with exceptions for private companies instead of self-contained GAAP for private companies or a complete reorganization of GAAP.
2) A separate standard-setting board, under FAF’s oversight, be created for the development and implementation of accounting and reporting regulations for privately held companies. Specifically this new board would work with FASB but the board would have final authority.
FAF is taking the recommendations under review and action is expected this fall. Also, FASB (think public company and International Accounting Standards) is taking note of these recommendations. FASB has not historically favored the development of separate standards for private companies and currently has veto power over standards setting.
FAF is taking input from interested parties as it contemplates the Panel’s recommendations. To be heard, visit the AICPA website below today for discussions, current updates and information on how to voice your opinion. Whether you are a private company a financial statement user or a public accounting firm there is a link within the AICPA link for you: