By Jason Bramwell, Staff Writer
Almost three years after it was included as one of the most important recommendations in the January 2011 Report to the Board of Trustees of the Financial Accounting Foundation by the Blue-Ribbon Panel on Standard Setting for Private Companies, the Financial Accounting Standards Board (FASB) and the Private Company Council (PCC) on December 23 issued a final decision-making framework for users and preparers of private company financial statements.
Also on Monday, the FASB issued Accounting Standards Update No. 2013-12, Definition of a Public Business Entity: An Addition to the Master Glossary.
The final guidance – Private Company Decision-Making Framework: A Guide for Evaluating Financial Accounting and Reporting for Private Companies – is intended to assist the FASB and the PCC in determining whether and in what circumstances it is appropriate to adjust financial reporting requirements for private companies following US Generally Accepted Accounting Principles (GAAP).
The FASB and the PCC will use the decision-making framework – along with the existing FASB conceptual framework for financial reporting – in making user-relevance and cost-benefit evaluations for private companies.
In particular, the framework describes the following five primary factors that differentiate the financial reporting considerations of private companies from public companies:
- The number of primary financial statement users and their access to management
- The investment strategies of primary users
- The ownership and capital structures
- Accounting resources
- The manner in which preparers learn about new financial reporting guidance
The framework also includes criteria for five areas, or modules, where financial accounting and reporting guidance might differ for private and public companies:
- Recognition and measurement
- Display (or presentation)
- Effective date
- Transition method
FASB Chairman Russell Golden said in a written statement on December 23 that the framework will “help the FASB and the PCC identify opportunities for private companies to reduce the complexity and costs of preparing financial statements in accordance with US GAAP.”
PCC Chairman Billy Atkinson added that the framework will “ensure that the quality of reported information remains high for the benefit of all private company stakeholders and our capital markets.”
In December 2012, the FASB met with the PCC for the first time to discuss feedback that was provided during an initial comment period on the proposed framework in July 2012. The Financial Accounting Foundation (FAF) – the FASB's parent organization – created the PCC in May of that year to work with the FASB to determine whether and when to modify US GAAP for private companies.
This past April, the FASB issued a second invitation to comment on the decision-making framework, in which private company stakeholders had until June 21 to offer their input.
The framework was finalized by the FASB and the PCC on July 16.
Public Business Entity Definition
The definition of a public business entity will be used by the FASB, the PCC, and the Emerging Issues Task Force (EITF) to determine the scope of new accounting and reporting guidance, as well as to identify the types of companies that are excluded from the scope of the decision-making framework.
Golden said the accounting standards update will also address stakeholder concerns with the “inconsistency and complexity of having multiple definitions of ‘nonpublic entity’ and ‘public entity’ within GAAP.”
The measure, which was proposed by the FASB on August 7, amends the master glossary of the FASB Accounting Standards Codification to include one definition of public business entity for future use in US GAAP. The definition does not affect existing requirements.
According to the FASB, an assessment of whether an organization is a public business entity is based on meeting any one of several criteria, including:
- It is required by the US Securities and Exchange Commission (SEC) to file or furnish financial statements, or does file or furnish financial statements, with the SEC (including other entities whose financial statements or financial information are required to be or are included in a filing).
- It is required by the Securities Exchange Act of 1934, as amended, or rules or regulations promulgated under the Act, to file or furnish financial statements with a regulatory agency.
- It is required to file or furnish financial statements with a regulatory agency in preparation for the sale of securities or for purposes of issuing securities.
- It has (or is a conduit bond obligor for) unrestricted securities that are traded or can be traded on an exchange or an over-the-counter market.
- Its securities are restricted, and it is required to provide US GAAP financial statements to be made publicly available on a periodic basis pursuant to a legal or regulatory requirement.
The FASB expects to issue final accounting standards updates on the first two PCC consensuses – on accounting for goodwill and on the simplified hedge accounting approach for certain interest rate swaps – in January.