A blue-ribbon panel set up to examine accounting standards forprivate companies last week recommended modifying U.S. generallyaccepted accounting standards (GAAP) to meet the needs of smallerbusinesses and establishing a separate standards-setting body tooversee the changes, rather than assigning the task to theFinancial Accounting Standards Board.

The Financial Accounting Foundation, FASB's parent and one ofthe sponsors of the blue-ribbon panel, will now consider whether toenact the proposals.

“It's not a fait accompli,” says Terry Warfield, the Beyerprofessor of accounting at Wisconsin School of Business. “The FAFhas already done some things at the FASB to respond to the needs ofsome of the people who think we need a private company GAAP. Ithink we have to wait and see whether the procedures that changedat FASB recently will be effective in meeting those needs.”

Since 2009, FASB has named an assistant director to overseeissues related to private companies and not-for-profits andassigned staff members to monitor such issues in the board'sprojects. And when the board was expanded from five to sevenmembers, one of the new members appointed last month was anexecutive from a private company, Daryl Buck, the CFO of Reasor'sHoldings, who had been a member of the blue-ribbon panel.

The issue of convergence is another factor. The private panel'srecommendations come as the Securities and Exchange Commissionconsiders converging U.S. GAAP with international financialreporting standards (IFRS), which already have a version designedfor small and medium-sized entities, known as IFRS for SMEs.

“Why start creating a document that will be useless if we chooseto fully converge or adopt IASB standards?” asks Salome Tinker,director of accounting policy and financial reporting at theAssociation 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 forSMEs] as a starting point, especially if we're thinking that mightbe the ending point,” says John Hepp, a partner in the professionalstandards group at Grant Thornton. (The blue-ribbon panel says itrejected IFRS for SMEs as a solution because it didn't want tofront-run the SEC's decision on convergence.)

In its report, the blue-ribbon panel argues that U.S. standardsetters have failed to take into account what information is usefulfor organizations that rely on private companies' financialreports, as well as the cost that GAAP entails for smallercompanies. “Many panel members believe that within the U.S.marketplace, significant, unnecessary cost is being incurred forGAAP financial statement preparation and audit, review, orcompilation services,” the report says.

Private companies have had complaints about GAAP for decades,Hepp says, but their unhappiness mounted in recent years with newFASB standards on impairment of goodwill, fair-value measurementand the use of consolidation for variable interest entities.

While FASB's emphasis on fair-value measurement is appropriatefor public companies whose securities change hands constantly invery liquid markets, Hepp says, it has less value for privatecompanies. Big public companies “are phenomenally liquid and theirfinancial instruments change hands so many times, if users couldget an updated fair value every day, twice a day, they'd love it,”Hepp says. “Private companies are interested in much more pragmaticmeasurements,” such as cash flow from operations.

“Maybe those numbers aren't quite as good but they're muchcheaper to measure,” he adds.

The panel on private company accounting was established inDecember 2009 by the American Institute of Certified PublicAccountants, the Financial Accounting Foundation and the NationalAssociation of State Boards of Accountancy. Its voting membersincluded representatives of private companies, their investors andlenders, as well as accountants.

For more background on accounting standards for privatecompanies, see RightsizingAccounting.