For several decades, the preparers and users of financial statements of private companies complained of the burden of complying with certain onerous provisions of U.S. Generally Accepted Accounting Principles (GAAP). The Financial Accounting Standards Board (FASB), the primary U.S. GAAP standard setter, develops U.S. accounting standards that apply to both public and private companies. It is the view of many stakeholders that standards for public companies are often complex with arduous disclosures. As such, private companies had to deal with these complexities and provide more information than thought necessary for the users of private company financial statements. Accordingly, financial reporting for private companies was often burdensome and costly.
The Financial Accounting Foundation (FAF), the governing body of the Financial Accounting Standards Board, responded to this dilemma and established the Private Company Council (PCC) in May 2012. The FAF created the PCC to improve the process of setting accounting standards for private companies by assisting in modifying or setting new standards that are more user-relevant and cost beneficial under the existing framework of GAAP.
The PCC Steps In
The PCC and FASB have formed a mutually beneficial relationship that has resulted in developing GAAP harmonization for private and public companies alike. The Private Company Council (PCC) continues to make brisk progress toward improving financial reporting for private companies. PCC members have demonstrated a distinct ability to effectively communicate private company positions and identify crucial issues. This is evidenced by the FASB’s recent endorsement of three PCC proposals:
- Accounting for goodwill, which gives private companies the option of amortizing goodwill and provides simplification in the timing of and calculation of impairment.
- Simplified hedge accounting model, which, upon meeting a specific set of criteria, would make it easier to apply hedge accounting, extend the time companies have to complete the necessary documentation and avoid income statement volatility.
- Variable interest guidance,which enables companies to conclude, under certain situations, that they no longer have to navigate VIE guidance to determine whether a common control lessor needs to be consolidated, but can elect not to consolidate such lessor.
The quick endorsement by the FASB of these proposals indicates the effectiveness and value of the PCC. It also indicates that the FASB is indeed lending an attentive ear to the voiced needs of private companies. This is just the beginning – the “low hanging fruit.” There are many projects on the agenda of the PCC that may result in further improvements in private company financial reporting.
Guidance that results from PCC initiatives are alternatives in U.S. GAAP and as such are not required to be applied by each private company. Unless otherwise stated, the private company alternatives are available to entities other than public business entities, not-for-profit entities and employee benefit plans.
Not only has the PCC addressed the pressing needs of private company stakeholders, but they have also indirectly shed light upon the need to evaluate issues that public companies may also face. Russell Golden, FASB Chair, commented on the relationship of the FASB with the PCC: “So far, we’re finding our relationship with the PCC helpful and productive for considering issues related to public companies as well as private companies.”
Such valuable progress in so little time affirms the beneficial relationship of the PCC and the FASB. Together, they are making impressive strides towards reducing complexity and costs and increasing efficiency and relevancy of GAAP standards for private companies as well as their public counterparts. The PCC strongly encourages preparers, users, investors and practitioners to follow PCC and FASB activities as they relate to private companies, as additional alternatives and beneficial impacts within GAAP are likely to arise.
Now that the PCC has established its value and stepped up as an advocate for private company financial reporting, it is increasingly important to further progress for interested parties to articulate their views on private company needs. Communicating direct and specific concerns or recommendations will help arm the PCC with the additional tools and input they need in order to continue making a difference for private companies financial reporting.