Dec 13th 2010
The Blue Ribbon Panel last week continued its discussion on how to modify existing standards-setting process for private companies during its meeting at the Financial Accounting Foundation (FAF) in Norwalk, Connecticut.
At its October meeting the majority of the panel supported the formation of a separate private-company standards board and considered models for generally accepted accounting principles (GAAP) for private companies.
The panel, comprised of lenders, investors, and owners, as well as preparers, auditors, and regulators, was formed at the end of 2009 to define the problems faced by private companies with accounting standards, and to make draft recommendations to the FAF within one year.
In earlier discussions, the panel found that the relevance and complexity of recent accounting standards had become a major problem for the 29 million private companies in the United States.
Panel members discussed at last week's meeting the new board’s mission and role, how the new board might be structured, and how FASB and the new board would operate in establishing GAAP for private companies. The panel will present its final report and recommendations to FAF in January. The FAF is expected to respond at its February meeting.
Mission and role
A straw man document prepared by the panel staff formed the basis for the panel’s discussion. The document proposed that the mission of new board would be, “to establish exceptions and modifications to U.S. GAAP for private companies, while ensuring that such exceptions and modifications provide decision-useful information to lenders and other users of private company financial reports.” Its role would not be to issue new standards.
Panel members questioned whether the Financial Accounting Standards Board (FASB) will continue to issue carve outs for private companies as it does now, and how FASB and the new board will work together.
In the case of new standards, Barry Melancon, CEO of the American Institute of Certified Public Accountants (AICPA), said that a joint exposure draft would be the best approach. The two boards would be expected to work together in the spirit of collegiality and transparency.
In previous meetings, the panel had discussed the need for a framework that distinguishes requirements of private companies from public companies in standard setting.The document calls for the FASB to do “significant work on the creation of a differential framework that articulates “what differentiates private companies from public companies” whether a separate standards board becomes a reality.
Judy O’Dell, chairperson of the Private Company Financial Reporting Committee (PCFRC), a committee of the FASB, said that the Blue Ribbon Panel staff had begun a discussion of a differential framework. Private companies are not required to report in the same way as public companies by the U.S. Securities and Exchange Commission, and investors, lenders, and others have personal access to private companies and opportunities to ask for more information. As chair of the PCFRC, O’Dell is a participating observer of the Blue Ribbon Panel.
Other recommendations of the straw man were that the new standard-setting board could have between five and seven members with private company financial reporting experience who would serve either full or part time. Panel members asked if new board members could be considered independent if they served on a part time basis and were employed elsewhere.
Panel members also discussed possible ways to pay for the new board. Some money is now available from the FAF budget to pay for the cost of the new board, estimated at $4 million, because the Government Accounting Standards Board will now be funded by Congress. A panel member suggested a one-time payment that would establish an endowment.
Transition to the new board will take time. The FAF review and final decision will take approximately one year and the new board would not be in place before 2012. During that time FASB will continue to issue new standards. Panel members asked that the draft report recommend specific, positive actions to be taken by FASB during the interim period that would include private company roundtables and filling open FASB board positions with one or more individuals who primarily have private company background
Other matters discussed during the public session were the possibility of mandating a five-year sunset for the new board, and FAF oversight post-implementation.
“As part of our trustees’ strategic initiative, the FAF looks forward to further exploration of the ideas and issues surfaced by the panel as we carefully deliberate improvements in standard setting," said Teresa S. Polley, FAF president and CEO.
"We thank the panel for its work over these many months, and its forthcoming proposal to the FAF will be an important viewpoint on private company reporting issues the FAF will thoroughly consider, along with an appropriate degree of public due process,” Polley said.
The Blue Ribbon Panel was formed by the FAF, the AICPA, and the National Association of State Boards of Accountancy (NASBA). The panel is chaired by Rick Anderson, chairman of Moss Adams LLP.