Going Public? Accounting Standards for Private & Public

If your company is considering going public, it’s important to consult with an accounting professionals who can offer guidance on how these different standards may affect your situation. This article addresses (1) the required effective (adoption) dates of certain accounting standards, (2) certain accounting alternatives and elections that are only available to private companies, as well as (3) additional disclosures which are required only for public business entities and SEC registrants.

Effective Dates

For certain new standards and amendments to current standards, the required effective date for private companies is later than the required effective date for public business entities in order to allow private companies additional time to prepare and comply with the new standard.  Recent high profile standards with delayed effective dates for private companies include ASC 842, Leases, and ASC 326, Financial Instruments – Credit Losses.  In addition to the delayed effectiveness dates provided by the FASB in the original Accounting Standards Updates (ASU’s), due to the effects of COVID-19 and other challenges in companies complying with these standards, the effective date for these standards have been pushed back further for private companies.

Additional considerations:

• Careful review of effective dates is necessary as not all standards and amendments provide for delayed effectiveness for private entities.
• Public business entities that qualify as Emerging Growth Companies (EGCs) are generally allowed to use the private company effectiveness dates in determining when a new standard must be adopted.
• Certain accounting standards, including ASC 326, provide for delayed effective dates for public business entities qualifying as Smaller Reporting Companies (SRCs).

Private Company Alternatives

In addition to having different adoption dates, the efforts of the Private Company Council (PCC) advisory board of the FASB have provided certain accounting alternatives, which are only available to private companies. The goal of these alternatives is to reduce the burden and cost on private companies.  Common examples include:

Accounting for goodwill and business combinations

• ASU 2014-02, Intangibles – Goodwill and Other (Topic 350): Accounting for Goodwill allows private companies the ability to amortize goodwill over a period not to exceed ten years.
• ASU 2014-18, Business Combinations (Topic 805): Accounting for Identifiable Intangible Assets in a Business Combinations allows private companies the ability to not recognize separately from goodwill (1) customer-related intangible assets unless they are capable of being sold or licensed independently from the other assets of the business and (2) noncompetition agreements. Companies electing this alternative are also required to adopt ASU 2014-02 and amortize goodwill.
• Private companies are also afforded certain elections in regards to assessing for and measuring the impairment of goodwill as provided for by ASU 2017-04, Intangibles – Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment and ASU 2021-03, Intangibles – Goodwill and Other (Topic 350): Accounting Alternative for Evaluating Triggering Events.

Share Based Compensation

• ASC Topic 718: Stock Compensation includes certain alternatives for private companies in calculating the value of share-based awards granted to employees (ASC 718-10-30-20) and nonemployees (ASC 718-10-30-19A).  When it is not practicable for nonpublic entities to estimate the expected volatility of its share price, it may use the volatility of an appropriate industry sector index.

• Variable Interest Entities (VIEs): ASU 2018-17, Consolidation (Topic 810): Targeted Improvements to Related Party Guidance for Variable Interest Entities superseded ASU 2014-07, Consolidation (Topic 810): Applying Variable Interest Entities Guidance to Common Control Leasing Arrangements.  ASU 2018-17 provides an alternative for private companies to not apply VIE consolidation guidance when evaluating common control arrangements when certain criteria are met. This ASU broadened the scope of ASU 2014-07, which only applied to common control leasing arrangements.

Additional considerations:

• Careful consideration must be given when a company is determining whether or not to adopt private company alternatives. If a private company becomes a public business entity (for example, if a company is pursuing an initial public offering or being acquired by a public company), it will be required to unwind the effects of any private company alternatives it has previously applied.
• EGCs are public business entities. As such, although they may utilize deferred effective dates of standards, an ECG may not utilize private company accounting alternatives.

Additional Requirements for Public Companies

There are a number of other rules and disclosure requirements that apply only to public business entities.  While the SEC and applicable accounting standards often require additional information and detail to be disclosed for many topics (for example, the disclosure requirements under ASC Topic 606: Revenue from Contracts with Customers are often much more extensive for public companies), certain topics are only required for public companies.

For companies going public, some of the more challenging topics to adhere to include:

• ASC Topic 280: Segment Reporting, requires public business entities to report certain information about operating segments in quarterly and annual financial statements.  This reporting requirement includes information about a company’s products and services, the geographic areas in which a company operates, and a company’s major customers.
• ASC Topic 480: Distinguishing Liabilities from Equity. Public business entities are required to separately present on the balance sheet preferred stock that is redeemable upon the occurrence of an event that is outside the control of the company. These instruments shall be  presented after liabilities and before stockholders’ equity, in a section named mezzanine equity based on the guidance in ASC 480-10-S99.  This guidance is also recommended for, but is not required, private companies.
• ASC Topic 932: Extractive Activities – Oil and Gas requires publicly traded oil and gas companies to disclose supplementary information regarding various topics, including (a) proved oil and gas reserve quantities, (b) capitalized costs relating to oil and gas producing activities, (c)  costs incurred for property acquisition, exploration, and development activities, (d)  results of operations for oil and gas producing activities, (e) a standardized measure of discounted future net cash flows relating to proved oil and gas reserve quantities and (f) changes in the standardized measure of future net cash flows.
• ASC Topic 260: Earnings Per Share. While private companies may elect to disclose earnings per share (EPS), ASC 260 requires the presentation of EPS for all entities that have issued common stock or potential common stock in a public market either on a stock exchange, or in the over-the-counter market.  This topic also requires the presentation of EPS by an entity tha has made a filing or is in the process of filing with a regulatory agency in preparation for the sale of those securities in a public market.

If you have questions about your company’s situation, we can help. Contact us for information about how these and other accounting standards may apply to your situation.

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