By Anne Rosivach
In advance of a formal decision by the Financial Accounting Foundation (FAF) on a differential framework for making exceptions and modifications to Generally Accepted Accounting Principles (GAAP) for private companies, the Financial Accounting Standards Board (FASB) has taken steps to identify and make decisions/tentative decisions regarding current accounting standards.
The FASB has issued an Accounting Standards Update on Goodwill Impairment, adding a standard-setting project and a separate research project on fair value measurement for private companies. In a December 20 webcast, IN FOCUS: FASB Update for Nonpublic Entities, speakers, including board members, said the needs of private companies had been considered during the re-deliberation of the proposed IASB/FASB revenue recognition standard.
Through these and other activities, including outreach, the FASB has been making an effort to convince private companies and their auditors, bankers, and investors that it has paid attention to the conclusions of the Blue Ribbon Panel on Private Company Financial Reporting. In January 2011, after a year of study, the panel, a broad-based group representing private company constituents, reported to the FAF that recent accounting standards were not relevant to private companies, were too complex, and too costly to implement. The panel recommended establishing an independent private company standards board under FAF.
The FAF rejected that recommendation in October 2011 and, instead, proposed a new Private Company Standards Improvement Council (PCSIC). The PCSIC would identify, propose, and formally vote on specific exceptions or modifications to GAAP for private companies. The comment period for this proposal ends on January 14.
On December 6, at the American Institute of Certified Public Accountants National Conference on Current SEC and PCAOB Developments, Leslie Seidman, the FASB chairman, spoke on major issues facing the standards board.
"We have heard significant concerns expressed by private companies in recent years that some standards are not providing relevant information, and that some standards are too complex and costly to apply. Clearly, we have heard similar concerns from public companies, and of course, the SEC's Committee on Improvements to Financial Reporting from a few years ago recommended reducing unnecessary complexity in standards."
Through various outreach efforts, Seidman said, the FASB has "learned that there are six factors that private companies seem to agree distinguish them from public companies. The two I'll highlight are:
- The primary users of private company reports are lenders, not external equity investors.
- Management can provide any information it wishes to a current or potential lender or investor (that is, they are not subject to Reg FD7)."
Seidman then briefly described the process the FASB is using to evaluate recent standards as they apply to nonpublic entities: "Our staff is taking all of the feedback we have heard and developing modules that explore how the distinguishing factors should affect the key types of accounting issues that we deal with, including recognition, measurement, disclosure, transition, and even effective date."
The FASB had separately published preliminary staff findings in its July 11 issue of In Focus, Private Companies: The Path to a Differential Standard-Setting Framework. According to board members who spoke during the IN FOCUS: FASB Update for Nonpublic Entities webcast, the FASB staff has been using this draft framework to help board members identify and make decisions/tentative decisions about various recent standards.
Seidman emphasized that the views she expressed were her own. She stated that after a thorough analysis of an accounting standard, she believes "it is crucial to sort out the issues that relate to what information is relevant from the issues that relate to complexity or excessive cost. Relevance is the number one qualitative characteristic of financial reporting. Therefore, if we identify differences in what is relevant to users of private company financial statements, I think a difference in accounting is justified. But if the issue primarily relates to complexity or cost, it is not obvious to me that the solution is an exception for private companies."
Recent Statements Evaluated by FASB Using a Differential Framework
Update on goodwill impairment
Accounting Standards Update No. 2011-08, Intangibles – Goodwill and Other (Topic 350): Testing Goodwill for Impairment, issued in August, was one of the first changes to accounting standards taken in by the FASB to show its commitment to private companies. In a September 15 press release, the FASBA stated: "The amendments contained in the update are intended to address concerns expressed by private companies about the cost and complexity of the goodwill impairment test. The amendments allow both public and nonpublic entities an option to first assess qualitative factors to determine whether it is necessary to perform the two-step quantitative goodwill impairment test. . . . The amendments will be effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011. Early adoption is permitted."
Financial statement presentation for not-for-profit entities
The research project to reexamine financial statement presentation for not-for profit entities announced on November 9, will consider:
- Improving net asset classification
- Addressing financial performance
- Improving information about liquidity
Fair value measurement disclosure
In a November 9 press release, the FASB announced it had added a project to its agenda that will assess the feasibility of reducing or eliminating certain fair value measurement disclosure requirements for private companies and not-for-profit organizations. The decision by Seidman to add the agenda project was based on comments received during private company roundtable discussions held in October.
"FASB selected this project because of pervasive concerns expressed by nonpublic entity stakeholders regarding existing fair value disclosures, particularly that many of the requirements are irrelevant to their financial statement users and are very costly to prepare", Seidman stated in the press release.
During the December 20 webcast, IN FOCUS: FASB Update for Nonpublic Entities, board member Larry Smith discussed the re-deliberation of the proposed converged revenue recognition standard by the FASB and the International Accounting Standards Board (IASB).
Smith said differences in the proposals for nonpublic entities included:
- Simplified disclosure requirements (disaggregation by goods versus services, option to not provide reconciliations of contract, asset and liability balances, and option to not provide explanations of judgments and changes in judgments related to determining transaction price and allocation to, and satisfaction of, performance obligations).
- Exception to onerous test if the purpose of a contract is to provide a social or charitable benefit.
- At least one additional year for transition to a new standard.
Seidman commented on the re-deliberation of revenue recognition by the two boards in her remarks at the AICPA conference: "For example, the concerns we heard about the complexity of the first exposure draft on revenue recognition were shared by public and private companies. The revised ED hopefully reduces complexity for everyone."
The FASB expects to issue an exposure draft of the private company framework for public comment in the first half of 2012, and then it will work with the new private company body set up by the FAF to finalize the framework.
The FASB staff is also revisiting the multiple definitions of "private entity"/"nonpublic entity" in the codification.
The American Institute of Certified Public Accountants (AICPA) remains skeptical about the long-term commitment of the FASB to the needs of private companies. In a statement on its website, the AICPA states",The FAF's proposal on private company financial reporting (issued October 4) falls substantially short of what is necessary to make GAAP relevant for private companies by not including establishment of a separate authoritative board." The AICPA has called on members to write a comment letter to the FAF supporting an independent standard setting board for private companies.