Balancing The Needs of Private Businesses vs. Financial Statement Users

The formation of the Private Company Council (PCC) has created “cultural evolution” at the Financial Accounting Standards Board (FASB). The FASB has found that balancing the needs of private companies and their accountants against the needs of investors and lenders who read company financial statements requires careful consideration throughout the standard-setting process.

Critical differences

For many years, the Financial Accounting Standards Board (FASB) was criticized for writing overly complex standards that ignored the realities of small private companies. Critics argued that private companies typically had fewer resources than their public counterparts — and their lenders and investors had different concerns about financial reporting matters.

That frustration came to a head in 2011. The American Institute of Certified Public Accountants (AICPA) organized a lobbying campaign, calling on the FASB’s parent organization to create a standard-setter focused solely on writing simplified rules for privately held businesses.

The AICPA’s request was rejected, but it led to the formation of the Private Company Council (PCC) in 2012. The PCC is a panel of private company accountants, auditors, and analysts of private company financial statements. The panel discusses financial reporting issues and advises the FASB about the needs of private companies.

In December 2013, the FASB published Private Company Decision-Making Framework: A Guide for Evaluating Financial Accounting and Reporting for Private Companies. The framework helps the FASB decide when private companies may need extra time to adopt new accounting standards, if they should compile fewer footnote disclosures or if they should have different recognition and measurement requirements.

Thanks to recommendations from the PCC, the FASB has largely been receptive to private company demands to reduce the amount of information they should have to disclose in their footnotes. The FASB also is generally open to allowing privately held businesses extra time to comply with new accounting requirements. However, the FASB has been less willing to allow differences in fundamental requirements, such as the recognition and measurement of a transaction, asset, liability or instrument.

Case in point: Consolidation

“Prior to the creation of the PCC, the FASB approached our work with the inherent view that our stakeholders — public companies, private companies, and not-for-profits — are the same,” FASB Chairman Russell Golden said during a recent speech. “Now, we all know this is not the case. But our reluctance to accept differences made us reluctant to consider alternatives that would improve financial reporting for those who use private company financial statements. Predictably, our private company stakeholders were not happy — and you let us know it.”

An example of a concession the FASB has made for private companies is Accounting Standards Update (ASU) No. 2014-07, Consolidation (Topic 810): Applying Variable Interest Entities Guidance to Common Control Leasing Arrangements. Private companies have complained for years that the consolidated reporting guidance for variable interest entities (VIEs) is overly complex, especially for privately held businesses. Specifically, private companies had difficulty trying to assess whether to consolidate (or report on their balance sheets) affiliated entities with the same parent company. To play it safe, many businesses erred on the side of consolidation, frustrating lenders and creditors, who want to see cleaner balance sheets.

The updated standard lets private companies ignore the complex VIE guidance in Accounting Standards Codification (ASC) Topic 810, Consolidation, for certain leasing transactions. For example, under the updated guidance, a private company typically isn’t required to consolidate its financial statements with a separate entity that houses its real estate assets.

In June 2017, the FASB proposed going a step further. Proposed ASU No. 2017-240, Consolidation (Topic 810): Targeted Improvements to Related Party Guidance for Variable Interest Entities, would let private companies avoid the consolidated reporting requirements for a wider range of transactions.

More exceptions in the pipeline

The FASB doesn’t always agree to carve out exceptions. But it does plan to continue considering whether privately held businesses need simpler accounting requirements compared to public companies. Doing so will require a balancing act.

According to FASB Chair Golden, “We’ll support differences for nonpublic companies when the accounting is preferable, the disclosures are not necessary, and/or when the nonpublic company needs more time. We won’t support differences, however, if those changes are made at the expense of providing investors with relevant information.”

© 2017