Private vs. Public Company Accounting: Concerns About Back-Door Agenda Setting Are Valid
CFA Institute has long supported and advocated for one set of high-quality financial reporting standards for both public and private companies. We believe there should not be a distinction in accounting based on the size or public float of a company. High-quality financial reporting should serve the needs of all investors who provide capital to a company and bear risk as a result, including the various classes of creditors as well as public and private equity owners. As part of the 2014 Private Company Survey, we asked CFA Institute members how they believe US private company standards will affect their financial analysis. Respondents believed that differential standards would decrease comparability (82%), create greater complexity (73%), and result in the loss of decision-useful information (65%).
Our [MOD1] report (based on the survey) notes the impact private company accounting had already had on impairment testing and that it could be used to further reduce the reporting quality of public companies.
The [MOD2] private company standard permits a private company to amortize goodwill on a straight-line basis over a period of 10 years or less if the company demonstrates that another useful life is more appropriate. It also permits a private company to apply a simplified impairment model to goodwill, including testing for impairment only when there is a triggering event instead of every year.
This approach fails to consider the loss of information for investors. Goodwill write-offs, if done in a timely manner, are of interest to investors. These write-offs signal the value of the company’s intangible assets, the company’s future earnings prospects, and an assessment of the amounts paid for acquisitions.
In a 2015 comment letter to the Financial Accounting Standards Board (FASB) Trustees at the Financial Accounting Foundation (FAF), we noted that private company standards could be used to further reduce the quality of reporting by public companies: “Impact on Public Company GAAP — We highlighted our concern that private company alternatives would be used as a back-door agenda setting mechanism to alter the reporting requirements for public companies. We note this has occurred in the context of impairment of intangible assets.”
Private Company Agenda Setting: ITC Highlights Why It Should Not Be Separate
In its 2019 Invitation to Comment (ITC) on Identifiable Intangible Assets and Subsequent Accounting for Goodwill, the FASB considers whether to change the subsequent accounting for goodwill — that is, for cost-benefit reasons — with amortization over 10 years. As noted, during the creation of the private company initiative, we highlighted our concern that private company accounting would be a back door to the weakening of public company accounting. We underscore this concern again because this Goodwill ITC extensively references the private company accounting for goodwill. We believe the Goodwill ITC is the back-door change we referenced in 2015. The ability of the Private Company Council to set its own agenda and make decisions that set precedents for the FASB is troublesome. The extensive anchoring of this ITC to private company standards highlights exactly this dilemma.
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