SEC Chief Accountant: Private Company Financial Reporting Needs a Rethink
In this space, we have frequently expressed concerns about efforts on the part of the Financial Accounting Standards Board (FASB) to create separate reporting requirements for private companies. Now, Securities and Exchange Commission Chief Accountant Paul Beswick has asserted his unease with seeking simplifications in reporting requirements for entities based upon the nature, or ownership structure, of the entity.
Speaking during a recent Q&A session at a Financial Executives International conference, Beswick said his preferred solution would be to simplify based on the need to reduce complexity in a particular topical area of financial reporting rather than the company’s public or private status, according to Bloomberg BNA:
“I think the discussion can be better informed if we just say, ‘Hey, this is an area that needs to be simplified. Let’s look at both groups [private and public companies] together and figure out whether there needs to be simplification.’”
Need to Define “Private Company”
In his remarks, Beswick expressed concern that we are “carving it out for one group in situations where we don’t even have a crisp definition of what a nonpublic company is and say, ‘This is applicable only to non-publics.’”
Likewise, CFA Institute has articulated similar views, particularly our misgivings about the FASB’s Private Company Council (PCC) moving forward with its work determining how accounting should be differentiated for private companies when the FASB has yet to finalize the definition of a private company. (The PCC was formed to reduce the cost and complexity of preparing private company financial statements by identifying areas within existing U.S. generally accepted accounting principles, or U.S. GAAP, to adjust reporting requirements for private companies.) To whom would such differentiated reporting apply?
Is Dividing Line between Private and Public Companies Appropriate?
Referring to the perceived complexity of reporting requirements as they relate to private companies, Beswick said:
“So, I actually thought, ‘Well, why aren’t we focusing on that [complexity] as opposed to trying to come up with this dividing line between public and nonpublic?’” Beswick continued. “Because there are some awfully small public companies and there are some awfully large nonpublic companies.” — Bloomberg BNA
In one of our blog posts on this topic, we note that private companies differ greatly in size, complexity of activities that they undertake, and the resources available to them. There are many large, private companies to whom issues of cost and limited resources do not pertain. Accordingly, we advise that if the PCC provides relief for private companies, such relief should only apply to private companies that are truly small with limited resources.
Changes to U.S. GAAP for Public Companies
We understand that the FASB may, in the future, evaluate whether to extend a particular private company accounting or reporting alternative to a public company. As Beswick notes, it is interesting “that we’re going down paths where we say, ‘We’re going to make changes for nonpublic entities and then explore whether we need to make changes for public entities.’”
CFA Institute is concerned that changes to private company accounting could subsequently be used to alter the accounting and disclosure requirements for public companies — especially when the basis for changing private company accounting is not grounded in the need to effectively reflect the underlying economics of transactions in the financial statements and to provide information useful to investment decision making. If standards are modified, they should be based upon the need for relevant, “decision-useful” information for investors.
CFA Institute in the recent past has stated its concerns over the private company initiative. Beswick, in his recent comments, underlines many of the same issues. We hope that the standard setters will take heed.
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