Separate Private Company Financial Reporting: A Word of Caution
The Financial Accounting Standards Board (FASB) recently initiated a project to create separate private company accounting standards. Meanwhile the Private Company Council (PCC) — formed to advise FASB on private company standards — is charged with identifying areas within existing U.S. generally accepted accounting principles (GAAP) to adjust reporting requirements for private companies. The goal, according to FASB, is to “reduce the complexity and cost of preparing private company financial statements.”
Separate private company reporting would reduce comparability between the financial statements of U.S. public and private companies. Comparability is essential to those who invest across both private and public companies. Creating differences in the financial reporting requirements of private and public companies hinders investors’ financial analysis and investment decision-making process. Therefore, we urge the PCC to consider any relief from U.S. GAAP both cautiously and in limited circumstances.
Modifications Shouldn’t Create Differences in Recognition, Measurement, and Presentation
In July 2012 the FASB issued an invitation to comment (Private Company Decision-Making Framework) to determine whether, and in what circumstances, exceptions or modifications should be made to U.S. GAAP for private companies. The invitation to comment suggests that there may be occasions when an item included (i.e., recognized) in public company financial statements may not be recognized in private company financial statements. It further suggests that similar items may be measured differently in public and private company financial statements.
An asset is an asset and a liability is a liability. The underlying assets and liabilities of an entity do not change based upon the type of entity or its legal structure. Therefore, similar items should be accounted for — recognized and measured — similarly across all entities. There is no basis for any change in recognition and measurement that would make financial information less useful for investors.
The invitation to comment suggests that in order to simplify private company financial statements, private companies should not have to provide all the information provided by public companies. The argument is that private company investors have greater access to management and can simply ask management for any additional information they want. But if an item does not appear in the financial statements, investors may not know to ask for information because they’re not aware of its existence.
The invitation to comment then turns to the presentation of the financial statements. It appears to suggest that the presentation of an item in the main financial statements could be substituted by its disclosure in the footnotes. The invitation to comment does not explain what the basis for this could be or clarify who would benefit. In reality, it would benefit no one. There is no cost savings for preparers as they need to generate the information whether it is presented on the face of the financial statements or in the disclosures. And placing information in the disclosures only makes the information harder for investors to see.
Modifications in the aforementioned areas would raise some interesting questions, such as what happens when a company goes from being private to public, or vice versa, as in the case of Dell. Would the company change its accounting?
Possible Areas for Relief: Disclosures and Effective Dates
Private companies differ greatly in size, complexity of activities that they undertake, and the accounting personnel they retain. If the PCC were to consider providing some relief for private companies, such relief should only be considered for private companies that are truly small with limited resources, and only in the areas of disclosure requirements and effective dates of new accounting requirements. With respect to disclosures, the PCC could provide some relief to private companies by not the requiring the narrative that accompanies tables, charts, reconciliations, and roll forwards. Secondly, the PCC could consider allowing private companies extra time to adopt new accounting requirements.