By Anne Rosivach
A recent webcast presented by the Financial Accounting Standards Board (FASB) reviewed key areas of the Private Company Decision-Making Framework - A Framework for Evaluating Financial Accounting and Reporting Guidance for Private Companies staff paper. The discussion paper, an Invitation to Comment (ITC), can be viewed on the FASB's current Exposure Documents Open for Comment page. A significant percentage of webcast attendees were working in private companies.
The ITC is a part of a project to develop a decision-making framework for the FASB and the new Private Company Council (PCC) to use in determining whether and in what circumstances to adjust recognition, measurement, disclosure, display (presentation), effective date, or transition requirements for private companies reporting under US Generally Accepted Accounting Principles (GAAP).
The comment period ends October 31, 2012.
A discussion the FASB's tentative conclusions in a related project, the definition of a nonpublic entity, is included as an appendix to the ITC.
The webcast will be repeated on October 18.
The FASB has chosen not to deliberate the topics in the ITC until stakeholders have provided additional input. The Financial Accounting Foundation (FAF), which oversees both the FASB and the PCC, announced on September 19 the names of the chairman and members of the PCC, who will now review the staff recommendations. The PCC is scheduled to meet for the first time in December 2012. FASB will attend PCC meetings.
The focus of the framework is on relevance, speakers said. Recommendations are based on:
- How users typically use private company financial statements.
- No exceptions/ modifications if information is relevant to typical users.
FASB staff identified six factors that differentiate the financial reporting considerations of private companies. Webcast speakers referred to stakeholder input in their discussion of some of these:
- Types and number of financial statement; there are generally a smaller number of users for financial statements of private companies.
- Access to management.
- Investment strategies - investors are interested in cash flow, liquidity, and borrowing.
- Ownership and capital structures.
- Accounting resources.
- Learning about new financial reporting guidance. Stakeholders have said they learn about financial reporting in an intermittent way.
Staff recommended that the framework for adjusting reporting requirements for private companies be constructed using the following five modules:
- Recognition and measurement
- Display (presentation)
- Effective date
- Transition methods
Some recommendations within the modules that are of general interest include:
Recognition and measurement. The FASB and the PCC should require private companies to provide the same industry-specific disclosures as public companies on the presumption that, generally, industry-specific disclosures are relevant to financial statement users of both public companies and private companies operating in those industries.
Display. Generally, private and public companies should apply the same display requirements (on the face of statements).
Disclosures. The staff's focus for the disclosure module is to provide relevant information at reasonable cost.
Effective date. Generally, defer the effective date one year after the first annual period required for public companies
Transition methods. An alternative method could be considered if public companies are required to apply retrospective method. Alternative methods include (1) practical expedients, (2) modified/limited retrospective, and (3) prospective. A transition method could require qualitative disclosure about effect of change and some quantitative disclosure about effect of change on current period.
Detailed recommendations, with flowcharts where appropriate, can be found in the ITC review of the modules.
Tentative Decisions Reached to Date and Basis for Conclusions - Definition of Nonpublic Entity
Multiple definitions of a nonpublic company exist in the codification, and the FASB has undertaken a separate but concurrent project about the definition of a nonpublic entity. In this context, the board is deliberating which types of companies would be included in the scope of the private company decision-making framework.
Webcast speakers said the following are not considered private companies:
- Entities required to file or furnish financial statements for purposes of issuing securities to be traded in a public market.
- For-profit entities that are conduit bond obligors for conduit debt securities that are traded in a public market.
- Employee benefit plans.
The following is considered a private company if:
- It is a privately held financial institution.
- It is a consolidated subsidiary of an entity that is a public company.
- One of its controlled and consolidated subsidiaries is a public company.
The preliminary recommendations and the framework will be deliberated by the FASB and the PCC in the fourth quarter. When the PCC and FASB have agreed on a decision-making framework, the boards are expected to work collaboratively. Any modification or exception will require a super majority of PCC votes. A simple majority vote of the FASB will be required to endorse PCC recommendations. FASB is expected to act within sixty days and will then issue an Accounting Standard Update.
AICPA's OCBOA Financial Reporting Framework
FASB's framework differs from the Other Comprehensive Basis of Accounting (OCBOA) financial reporting framework that the AICPA is developing for privately held small and midsized entities that do not use GAAP for financial reporting purposes, webcast speakers said. The OCBOA framework will draw on a blend of accrual income tax methods and other traditional methods of accounting, the AICPA stated.
The AICPA expects to expose the OCBOA framework for comment this fall so it will be ready for use in 2013.