A blue-ribbon panel set up to examine accounting standards for private companies last week recommended modifying U.S. generally accepted accounting standards (GAAP) to meet the needs of smaller businesses and establishing a separate standards-setting body to oversee the changes, rather than assigning the task to the Financial Accounting Standards Board.
The Financial Accounting Foundation, FASB's parent and one of the sponsors of the blue-ribbon panel, will now consider whether to enact the proposals.
"It's not a fait accompli," says Terry Warfield, the Beyer professor of accounting at Wisconsin School of Business. "The FAF has already done some things at the FASB to respond to the needs of some of the people who think we need a private company GAAP. I think we have to wait and see whether the procedures that changed at FASB recently will be effective in meeting those needs."
Since 2009, FASB has named an assistant director to oversee issues related to private companies and not-for-profits and assigned staff members to monitor such issues in the board's projects. And when the board was expanded from five to seven members, one of the new members appointed last month was an executive from a private company, Daryl Buck, the CFO of Reasor's Holdings, who had been a member of the blue-ribbon panel.
The issue of convergence is another factor. The private panel's recommendations come as the Securities and Exchange Commission considers converging U.S. GAAP with international financial reporting standards (IFRS), which already have a version designed for small and medium-sized entities, known as IFRS for SMEs.
"Why start creating a document that will be useless if we choose to fully converge or adopt IASB standards?" asks Salome Tinker, director of accounting policy and financial reporting at the Association for Financial Professionals. "If they already have [standards for private companies], why recreate the wheel?"
"I don't see why you wouldn't at least be looking at [IFRS for SMEs] as a starting point, especially if we're thinking that might be the ending point," says John Hepp, a partner in the professional standards group at Grant Thornton. (The blue-ribbon panel says it rejected IFRS for SMEs as a solution because it didn't want to front-run the SEC's decision on convergence.)
In its report, the blue-ribbon panel argues that U.S. standard setters have failed to take into account what information is useful for organizations that rely on private companies' financial reports, as well as the cost that GAAP entails for smaller companies. "Many panel members believe that within the U.S. marketplace, significant, unnecessary cost is being incurred for GAAP financial statement preparation and audit, review, or compilation services," the report says.
Private companies have had complaints about GAAP for decades, Hepp says, but their unhappiness mounted in recent years with new FASB standards on impairment of goodwill, fair-value measurement and the use of consolidation for variable interest entities.
While FASB's emphasis on fair-value measurement is appropriate for public companies whose securities change hands constantly in very liquid markets, Hepp says, it has less value for private companies. Big public companies "are phenomenally liquid and their financial instruments change hands so many times, if users could get an updated fair value every day, twice a day, they'd love it," Hepp says. "Private companies are interested in much more pragmatic measurements," such as cash flow from operations.
"Maybe those numbers aren't quite as good but they're much cheaper to measure," he adds.
The panel on private company accounting was established in December 2009 by the American Institute of Certified Public Accountants, the Financial Accounting Foundation and the National Association of State Boards of Accountancy. Its voting members included representatives of private companies, their investors and lenders, as well as accountants.
For more background on accounting standards for private companies, see Rightsizing Accounting.