By Anne Rosivach
At its fourth public meeting, earlier this month, the Blue Ribbon Panel, formed by the Financial Accounting Foundation (FAF) to define the issues faced by private companies with U.S. Generally Accepted Accounting Principles (GAAP), agreed that a new model for private company reporting was required.
The new model agreed upon by the panel, which it will present to FAF in December, should be U.S. GAAP with exceptions for private companies. New standards issued by the Financial Accounting Standards Board (FASB) will be reviewed and possibly modified for private companies by a separate standards-setting board.
Members of the private company constituency, which includes banks and accounting firms, had complained in comments and submissions to the FASB's Private Company Financial Reporting Committee (PCFRC) that the FASB had become too focused on the needs of public companies, and was producing standards at a rapid pace that often had little relevance to private companies.
Judith H. O'Dell, chairperson of PCFRC, spoke with AccountingWEB about the immediate standards-setting issues for private companies, how the concerns of private companies are beginning to be heard within FASB, and how standard setting might evolve over time within the context of the Blue Ribbon Panel’s recommendations.
“The issue of relevance to private companies of positions taken by FASB in recent years had reached the point where something had to get done,” O’Dell said. “We will come to a real fork in the road if the proposed standard on fair value measurements is approved as drafted.” Private companies and the users of their financial statements have said, ‘We don’t need this information.’
“While the concerns of private companies had been raised over the years in comment letters and through the American Institute of Certified Public Accountants (AICPA) and other organizations, prior to the formation of PCFRC, private companies could not speak with one voice,” O’Dell said. As chair of PCFRC, she is a participating observer to the Blue Ribbon Panel.
In recent months, the FASB has been paying attention to the work of the Blue Ribbon Panel and PCFRC. "There has been a lot of movement from FASB reaching out to the private company constituency," O'Dell said.
O’Dell cited the two public roundtable meetings FASB has organized to discuss issues relating to existing accounting and reporting standards as they affect private companies.
"The first roundtable considered fair value, consolidations, and other standards, as well as a discussion of FASB processes and how they could be improved for private companies. All of the FASB board members were in attendance at the first roundtable.
“Other changes are that a FASB board member now sits in on meetings of the PCFRC. We now have a very good dialog with the board and staff, and internal changes have been made so that private company issues are considered by project managers. We have an acting FASB chair with very different sensibilities, a new member, and two members to be appointed. We are hoping that at least one of these will come from a private company background," O'Dell said.
“We are appreciative of these changes, but we need to have a mechanism in place to ensure that private companies will always be listened to,” O’Dell said. “We need to do something right now. We cannot wait for public companies to make the transition to International Financial Reporting Standards (IFRS). We also need to make sure that private company issues are addressed in the memorandum of understanding projects concerning financial instruments, leases, and revenue recognition in relation to convergence.”
The Blue Ribbon Panel’s decision to recommend a separate standard setting board was not unanimous – some panel members called U.S. GAAP the gold standard and others recommended totally separate GAAP for private companies.
"As a practical matter, over time it would be possible to sweep the exceptions and carve-outs for private companies into a separate document, which would be GAAP for private companies," O’Dell said. "There are already exceptions for private companies in many areas: earning per share and segment reporting, and carve outs for fair value disclosure and disclosures about uncertain tax positions. Canada already has separate private company GAAP and a separate standard-setting board."
In coming weeks, the panel will be looking at various options for the process of reviewing standards for private companies, and for the kind of actions the separate board should be empowered to take. Options the panel might consider could range from working alongside FASB to the new board taking a thumbs-up, thumbs down approach to new standards, O'Dell said.
At the AICPA’s Council Meeting in New Orleans this month, which O'Dell attended, Blue Ribbon Panel members were asked why the panel appeared to be favoring a separate standards board making modifications to existing U.S. GAAP (as compared to writing new standards), according to the Journal of Accountancy.
“Most panel members thought there needs to be some meaningful change made in the short term. [A] model [with] a separate set of standards may sound good, [but] in the short term, we can’t get there fast enough,” said Daryl Buck, senior vice president and CFO, Reasor’s Holding Company, Inc.