FASB and PCC Finalize GAAP Framework for Private Companies
By Jason Bramwell
A decision-making framework that outlines criteria to determine whether and in what circumstances it is appropriate to adjust financial reporting requirements for private companies following US Generally Accepted Accounting Principles (US GAAP) was finalized by the Financial Accounting Standards Board (FASB) and the Private Company Council (PCC) on July 16.
The Private Company Decision-Making Framework will aid the FASB and the PCC in identifying opportunities to enhance the relevance of accounting standards to users as well as to reduce the cost and complexity of preparing private company financial statements in accordance with US GAAP. The framework is expected to be issued by the end of the summer.
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 – 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 FASB and the PCC have taken measures recently to enhance the relevance and reduce the complexity of certain standards for private companies that prepare US GAAP–based financial statements.
On June 10, the FASB endorsed three accounting proposals from the PCC, which involve intangible assets acquired in business combinations, goodwill, and certain types of interest rate swaps. Stakeholders have until August 23 to provide comments on the exposure drafts for the three proposals.
A fourth accounting proposal, an alternative within US GAAP for applying consolidation guidance for leasing entities under common control, was discussed by the FASB and the PCC on July 16.
The proposed GAAP alternative – PCC Issue No. 13-02, Applying Variable Interest Entity Guidance to Common Control Leasing Arrangements(formerly FIN 46[R] and FAS 167) – would exempt private companies from applying the consolidation guidance for variable interest entities under common control leasing arrangements, according to the FASB.
A variable interest entity is an organization in which consolidation is not based on a majority of voting rights. The disclosures to be provided under the alternative would better align the information that lenders and other users of private company financial statements typically use in assessing the cash flows of a reporting entity.
The PCC's decision to move forward with the proposal is the first step in a process toward exposure by the FASB. A detailed proposal will be drafted by FASB staff, which will be discussed by the board in the coming weeks. If the proposal is endorsed, it will be issued for public comment as a proposed accounting standards update, according to the FASB.
"In advancing the PCC's fourth accounting standards proposal, the PCC is making significant progress in tackling issues top of mind for users, preparers, and auditors of private company financial statements", PCC Chairman Billy Atkinson said in a written statement.
In June, the American Institute of CPAs (AICPA) introduced the Financial Reporting Framework for Small- and Medium-Sized Entities (FRF for SMEs), a non-US GAAP framework for private company financial reporting.
The AICPA has stated that the framework complements the efforts made by the FASB and the PCC to modify US GAAP for private companies.
The purpose of the FRF for SMEs is to help small businesses prepare financial statements that clearly and concisely report what a business owns, what it owes, and its cash flow, according to the AICPA.
The AICPA will be working with the National Association of State Boards of Accountancy (NASBA) on a decision-making tool that will help small businesses decide whether the FRF for SMEs is right for them.
"The AICPA and NASBA are committed to engaging in an effort to ensure that the FRF for SMEs, as a nonauthoritative framework, is not confused with GAAP and that entities that utilize GAAP or a non-GAAP solution do so in a suitable and transparent manner", the AICPA and the NASBA said in a joint statement on July 15.