At its most recent meeting, held in Chicago on July 19, the Financial Accounting Foundation's (FAF) Blue Ribbon Panel Chairman Rick Anderson asked the panel to define the problem that private companies faced with U.S. GAAP and the standard-setting system and to narrow the field for proposed alternative models.
Problems of relevance and consistency were cited over and over by panel members. Many emphasized the need for private companies to have access to capital and the kind of financial information banks needed. One banker on the panel said that banks are looking for consistency in financial presentation, year over year, and consistency with other companies. Qualified opinions do not meet the standard of consistency required by bankers.
Anderson concluded that the panel agreed that private companies were facing problems of relevance and consistency in presenting information in financial statements under current accounting standards.
A discussion of five models
for private company financial reporting based on U.S. GAAP, prepared by the Blue Ribbon Panel staff, ensued for the balance of the meeting. The panel determined that one overarching issue – the adoption of International Financial Reporting Standards (IFRS) by U.S. companies – should not have any impact on their recommendations. Anderson posited that at a minimum, it would probably be six years before public companies could fully adopt IFRS. Paul Beswick, deputy chief accountant for the Securities and Exchange Commission (SEC), an invited guest, supported that statement, but warned that this could change.
Anderson narrowed down the number of alternatives based on the panel discussion, concluding that since Model 1, U.S. GAAP with Exclusions for Private Companies, assumed no change, it could be eliminated. Panel members expressed doubt about Model 5, Separate Stand-Alone GAAP from the Ground Up Based on New Framework, for practical reasons.
The group views seemed to lean toward alternatives that fell within Models 3.5, Baseline GAAP with Public Company Add-on's to Model 4, Separate, Stand-Alone GAAP Based on Current U.S. GAAP, Anderson said.
He instructed the panel staff to prepare alternatives for the panel's October meeting that would encompass the space of Models 2.5, U.S GAAP with Exclusions for Private Companies, to Model 4.5 Stand-alone GAAP Based on Current U.S. GAAP. These models should have greater specificity, possibly greater diversity. There might be additional alternatives within this space.
Various possible structures for the standard-setting board or advisory boards will be discussed by the panel in the future. This could take the form of: the current FASB board, a restructured FASB board (with greater private company representation); a new, separate private company standards board, or there might be an IFRS-based model.
"In our discussions of the various models, the PCFRC members are in line with the Blue Ribbon Panel discussions to date," said Judy O'Dell in a discussion with AccountingWEB. O'Dell is chair of the FASB's Private Company Financial Reporting Committee (PCFRC) and a participating observer of the panel.
"Whatever is done in the near future will most likely not be a 'once and done' solution," O'Dell added. "Even the IFRS for Small and Medium-sized Entities document from the International Accounting Standards Board is not a finished document as it will be periodically updated. You can't freeze accounting. Future changes in standards for public companies may be incorporated into standards for private companies depending upon whether they provide useful information for user of those financial statements.
"The Blue Ribbon Panel will post a set of questions for comment on the FASB Web site in early August. We are asking private company constituents to weigh in on issues they might have with current standards. We want to know, 'What short-term or long-term action do you recommend to address these issues.' among other things. We especially want to hear from users of private company financial statements.
"It is also very important that professionals at small and mid-sized firms weigh in on these issues," O'Dell continued. "We know how busy they are but just a quick email comment would be terrific. The more input and feedback we get, the more robust the Blue Ribbon Panel's recommendations will be."
"The Blue Ribbon Panel has worked very hard to understand why changes in accounting standards for private companies need to be made," O'Dell said. "An increasing number of private company financial statements are being issued with GAAP exceptions. This does not concern FASB because these statements are considered special purpose and as long as the user is willing to accept them there is no problem. But our concern is that as more and more of these statements are issued -- and some, we have heard anecdotally, are coming out with two or three GAAP exceptions -- what do you really have? It is no longer GAAP with an exception, but something else altogether.
"The Blue Ribbon Panel is looking to improve private company financial reporting. If done properly it can be expected that more private companies will report under GAAP and those financial statements can be audited in a cost effective manner. This will have the effect of raising the quality of private company financial statements, not dumb them down."
About the Blue Ribbon Panel
Expressions of concern about the usefulness of current U.S. GAAP for private companies in the context of the number and complexity of accounting standards issued by the FASB in recent years reached such a volume that the Financial Accounting Foundation (FAF) decided to convene a "Blue Ribbon Panel" in December 2009 to examine private company issues and make recommendations. The panel is comprised of private company executives, bankers, CPAs, Barry Melancon, CEO of the AICPA, and other constituents.
Chaired by Rick Anderson, chairman and CEO of Moss Adams LLP and a member of the board of the FAF, the panel has met three times in 2010, and expects to complete its recommendations on changes in standard setting and standards for the 29 million private companies in the U.S. by December 2010. The recommendations will be presented at the February 2011 meeting of FAF. The Blue Ribbon Panel is sponsored by (FAF), the American Institute of Certified Public Accountants (AICPA) and the National Association of State Boards of Accountancy (NASBA).