Views on improving the integrity of global capital markets
15 February 2013

Private Company Financial Reporting: FASB Marches on Without Defining Private Companies or Deciding How They Are Different

On 12 February, the Financial Accounting Standards Board’s (FASB) Private Company Council (PCC) voted to add three projects to its formal agenda to consider how accounting in three topical areas should be differentiated for private companies. In other words the PCC voted to consider having potentially different U.S. generally accepted accounting principles (GAAP) for private companies rather than public companies.

The problem is that the FASB has yet to finalize the definition of a private company. Without a definition it is unclear to which entities separate private company guidance might apply. Indeed there may be entities to whom such guidance may apply that are currently unaware of these possible new standards being applicable to them.

And the FASB is still working on finalizing a decision-making framework that articulates the unique needs of private company financial statement users and includes criteria to determine whether, and in what circumstances, it is appropriate to adjust U.S. GAAP requirements for private companies.

Yet, the PCC is moving forward without either a definition of a private company or a final decision-making framework, both of which seem essential to determining when and how the financial reporting for these entities should be differentiated. In fact, far from being finalized, the decision-making framework — which was first issued as an invitation to comment in July 2012 — will be reopened for comment next month for a further 90-day period. It is also unclear how the FASB staff has determined the “unique needs of private company users,” as articulated in the invitation to comment, without first providing a definition of a private company.

How We Got Here

In May 2012, the PCC was established with the principal responsibility to determine whether modifications or exceptions to existing U.S. GAAP are required for private companies. Such determination is meant to be based on criteria mutually agreed to by the PCC and the FASB.

A couple of months later, the FASB sought comment on a staff paper titled Private Company Decision-Making Framework: A Framework for Evaluating Financial Accounting and Reporting Guidance for Private Companies.

The PCC held its inaugural meeting in December 2012. At that meeting, the PCC directed FASB staff to develop agenda research memoranda to determine whether differential accounting should be considered for private companies in four topical areas, including consolidating variable interest entities, accounting for plain vanilla interest rate swaps, accounting for intangible assets acquired in business combinations, and accounting for uncertain tax positions.

At the second meeting of the PCC on 12 February, the PCC added the first three of the four aforementioned topics to its formal agenda. The PCC also directed the FASB staff to develop agenda research memoranda on two additional topics. Finally, it voted, along with the FASB, to seek further public comment on the FASB’s staff paper on a proposed private company decision-making framework.

Putting the Cart before the Horse

The chronology of events appears backwards. First the PCC was established, after which the FASB issued an invitation to comment laying out a private company decision-making framework, followed by two meetings of the PCC. Neither the definition of a private company nor a decision-making framework has been finalized.

In our view the cart has been placed before the horse. At the meeting on 12 February, FASB member and FASB liaison to the PCC, Daryl Buck, said, “Even if we were getting to a final (decision-making framework), it probably technically wouldn’t prohibit the PCC or the board from finalizing something even if the framework wasn’t finished, but it wouldn’t feel quite right. Any tool that we use to come to a decision should probably be finalized before we finish the decision.”

We agree.

About the Author(s)
Mohini Singh, ACA

Mohini Singh is director of financial reporting policy at CFA Institute. She represents membership interests regarding financial reporting and disclosure proposals issued by the FASB, the IASB, and others. Singh holds the Associate Chartered Accountant (ACA) designation.

2 thoughts on “Private Company Financial Reporting: FASB Marches on Without Defining Private Companies or Deciding How They Are Different”

  1. Haha, at the end i guess it boils down to Transparency for shareholders or general public and conflicts with right to privacy being a private company?.

    I am not sure if the priority should be to increase transparency or ask for disclosures from existing publicly listed companies where bulk of the trust lies for financial systems or ask for disclosures from private companies.

    Ideally, i would simplify the definition of private company or atleast relevant private company as done which takes has any contractual arrangement with a listed public company as a supplier, vendor, creditor or debtor or what ever name called.

  2. Mohini says:

    Thank you, Biharilal.

    It is CFA Institute’s mission to increase transparency for investors.

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