Private Company Reporting in the U.S.

On December 10, the Blue Ribbon Panel on Private Company Financial Reporting met to work on its recommendations for private company financial reporting in the U.S. The panel is expected to develop a recommendation for a new standard setting model for private company reporting based on U.S. Generally Accepted Accounting Principles (U.S. GAAP) with exceptions and modifications for private companies. 

A majority of panel members support this model and also believe that the standards should be set not by the Financial Accounting Standards Board (FASB), but by a separate board under the Financial Accounting Foundation (FAF).  The FAF is the oversight body of the FASB and the U.S. Governmental Accounting Standards Board (GASB), and their advisory councils.

The Blue Ribbon Panel was established by the American Institute of Certified Public Accountants (AICPA), FAF and the National Association of State Boards of Accountancy (NASBA) in 2009.  The panel’s mission has been to examine standard setting for private companies and issue a report to the FAF.  The report is expected to be finalized in December and issued to the FAF in January 2011.  At its meeting in February 2011, the FAF will discuss the panel’s report.  Afterward, it is likely that the FAF would expose for public comment any changes it might be considering for private company standard setting.

The events that will unfold in 2011 are significant.  The SEC is expected to make a decision on IFRS for public companies, FASB and the International Accounting Standards Board (IASB) are expected to complete major accounting convergence projects and the FAF may introduce a proposal for a new reporting model for private entities. 

What is your opinion about the possibility of differences in U.S. GAAP for private entities?  If the SEC decides to require or allow IFRS for public companies, do you think IFRS or IFRS for Small and Medium-sized Entities (“IFRS for SMEs”) will gain traction with private companies in the U.S.?  Let us know what you think.

- Paul Parks | www.IFRS.com

Comments

[Cliff Beacham CPA]

Since the subject has already been addressed by the IASB as IFRS for SMEs should we not try to get more involved with development of the International Standards. By delaying US involvement we are losing (or have lost) the oportunity and, maybe, the point position. You cannot lead from the back. If we delay until the International Standards are 'perfected' we will wait a long time and the IASB has expressed their willingness to listen to us. Since we are the largest we should be leading the charge - not getting left in the dust. Sir David Tweedie said has commented that the US cannot influence the standards if they are not getting involved.
An International Accounting Qualification cannot be far ahead. Please let us be involved.
IFRS for SMEs are ready for adoption - while we are still thinking about it. We may be the largest but we are not the majority. Should we not try to speak a common language? We have already expressed that IFRS for SMEs is in our future - we need to acknowledge that the future starts today!

[Bill Strain]

I think the recommendations are spot-on. Long overdue for these future changes in Private Co. GAAP.

[Danny DeMichele Entrepreneur]

A majority of panel members support this model and also believe that the standards should be set not by the FASB.

[jerry McGuire]

The theoretical has overtaken practically applied good business judgement. Try explaining to an investor why a company's value (as determined by Option accounting requirements using Black Scholes) is less than he/she just paid for it. Try explaining monster adjustments to equity based on the conversion of debt instruments with warrants. Try explaining revenue recognition rules. Try explaining "mark to market" accounting to my wife (i've tried...) Since all of my clients are private, I am willing to take what I can get, but all of GAAP needs to be fixed.

[David Lemoine]

"Generally accepted" sadly no longer means "generally understood." The largely theoretical, difficult-to-understand rules that companies are required to follow today often have lost any practical meaning. When the brightest accountants at the SEC, major accounting firms and their clients cannot agree on the application or interpretation of a standard, shouldn't that tell us that GAAP is broken? It is a given that the largest assets of most companies are unrecorded on their balance sheets today, those being uncapitalized intellectual capital and property and written down noncurrent assets. Users of financial statements, that is, creditors, lenders, investors, owners and employees, rightly focus on cash flows, plainly and simply. Overly complex, often unintelligible standards and rules, by way of example, addressing such topics as VIEs, financial instruments and multiple element agreements (such as absurd interpretations for revenue recognition) have rendered financial statements less meaningful. I am strongly in favor of private company GAAP and hope that, at the same time, some common sense finds its way back into our standards.

[UGG Sale]

US GAAP lost position with too many rules. IFRS should have conformed to US as we are the leading capital market.The AICPA should be ashamed for loosing position. Sincerely, John L. Baerg CPA Fresno, CA.

[Nicholas E. Pecora]

o separate not seperate

and agree bring back the "Genarally Accepted" in GAPP
in fact there really is no GAAP,
the Term GAPP needs to be replaced with
the term "FASB Ruels" or "FASB Standards".

[Nicholas E. Pecora]

Matching and Conservatism,
tried and true principals,
like a valuation allowance for A/R,
Fair Value only when it makes sense -
as in Markable Securites traded on a open maket
(NASD / NYSE),
and FIFO or Specific ID for Inventory.
Will new rules for a VIE that provides a benefit
with totally unrelated parties, really provide usefull information, if consolidated?
As they say on ESPN "ComOn Mann".

Tier 3 is "Hocus Pocus" and is ripe for companies to manage earnings.

Yes seperate ruels are needed,
Private companies are being forced into OCBOA,
That banks would rather accept
a Tax Basis Financial Statement
tells you right away that private standards are needed.

Nicholas E. Pecora , CPA

[Shawn Cardwell]

There needs to be a separate private company (PC) standard-setting board. The complexity, general lack of relevance and cost of implementation of recent pronouncements have all had a detrimental effect on the usefulness and reliability of PC financials. The fact that PCs are opting for GAAP departures and are choosing to have reviewed as opposed to audited financial statements to off-set the increased costs of assurance engagements is a good indication that the needs of PC financial users is not being recognized. Not to mention the negative impact it has had on reputable CPA firms who have to compete with those in our profession that disregard the requirements of these pronouncements when performing assurance engagements. The looser in the end is the user, who our fiduciary responsibility is to.

[Jim Bennett]

If the long-term goal is convergence with international standards, then why not just use IFRS for SMEs?

I would avoid the need to converge US little GAAP and IFRS for SME's in the future.

[DM]

Little GAAP would confuse people? And the current fair value rules don't?? Let's not forget that statement users were ON the panel and helped forge this idea. Also, the users of public and private financials are not the same. The free market has spoken, it's time to dump GAAP.

[Scott Green]

There should be just one GAAP. It is difficult to understand how the economics of most business transactions differ based on whether the transacting entities' ownership shares are exchange traded or not. Also, compliance with GAAP is a particular challenge for SMALL companies, regardless of whether they are public or private. And furthermore, having separate public and private company GAAPs would make the process of IPO preparation even more challenging than it already is.

[Nick Porter]

I recommend one GAAP; and simplification, and reduction of current GAAP.

I recommend against adopting IFRS.

I recommend present value be changed so that changes in value are based on longer time periods.

[Gerard J. Brinkman CPA]

I don't see the minor leagues of baseball or the NBA playing by different rules so I recommend no "little GAAP"

[Gerald C. Johnson]

I believe there should be only one set of GAAP.
Departures from GAAP should be described in a footnote.

[Bert T. Edwards, CPA]

If we go to separate GAAP for private entities, we will do nothing but confuse those who rely on financial statemwents - bankers, insurers, venture capitalists, regualtors, taxing authorities, and educators, not to mention the executives who manage the entities themsdelves. We already have five GAAPs - FASB, GASB, FASAB, IFRS, and IFRS-SME. Adding another GAAP is a foolish mistake.Many of FASB's recent issuances deal with the largest companies, and have little or no application to private entities. The current five GAAPs - FASB, GASB, FASAB, IFRS, and IFRS-SME are already too many!

[Russ Carlson]

I do not support another standard setting body for private companies. Two sets of reporting rules will be too confusing to statement users and private companies deciding to go public will face yet another hurdle in making that change.

[Chris Henderson, CPA]

Sorry, I failed to proof. s/b "be", not "eb". s/b "international", not "internation". s/b "of", not "as".

[Chris Henderson, CPA]

I agree with Dave Iaconis above. GAAP should eb meaningful to the users and the companies. "Big GAAP" and "Baby GAAP", as they are often called, make sense.

John, we did lose our position, but shame is not the proper response; more internation accounting and reporting convergence should be viewed as a natural consequence as our expanding international reach, even at the "Baby GAAP" level.

[David R Lloyd, CPA]

We need one "GAAP" with separate disclosures for public companies and private companies.

[John baerg]

I do not support another standard setting panel. While certain standards are not relevant to private companies the FASB should just make them optional for private companies. There should be one GAAP. It should be principle based. US GAAP lost position with too many rules. IFRS should have conformed to US as we are the leading capital market.The AICPA should be ashamed for loosing position. Sincerely, John L. Baerg CPA Fresno, CA.

[Dave Iaconis]

It's about time. When our clients and the users of the financial statements can't see any benefit in implementing certain new standards (goodwill impairment, VIE consolidations, uncertain tax positions, etc.), then accounting principles are no longer generally accepted. They become irrelevant and we end up having more and more OCBOA statements and GAAP departures, which detracts from the financial reporting model. This movement should bring back the "generally accepted" in GAAP.