On July 31, 2012, the Financial Accounting Standards Board (FASB) issued an Invitation to Comment on a staff paper that outlines an approach for deciding whether and when to modify US Generally Accepted Accounting Principles (GAAP) for private companies. The paper, Private Company Decision-Making Framework: A Framework for Evaluating Financial Accounting and Reporting Guidance for Private Companies, contains initial FASB staff recommendations for criteria to determine whether and in what circumstances it is appropriate to adjust financial reporting requirements for private companies following US GAAP. Stakeholders are asked to provide input on the document by October 31, 2012.
The decision-making framework would help the FASB and the newly created Private Company Council (PCC) identify the unique needs of users of private company financial statements as well as opportunities to reduce the complexity and cost of preparing private company financial statements in accordance with US GAAP.
Many private companies issue financial statements in accordance with US GAAP for the benefit of their investors and lenders. The FASB is the private sector, independent organization that sets US GAAP standards used by private companies, public companies, and not-for-profit organizations.
Before it is implemented, the proposed decision-making framework must be agreed on jointly by the FASB and the PCC. The PCC is a new body created by the Financial Accounting Foundation (FAF) to identify issues in US GAAP related to private companies and advise the FASB on ongoing private company issues. Working with the FASB, and guided by the framework, the PCC will determine whether exceptions or modifications to existing nongovernmental US GAAP are necessary to address the needs of users of private company financial statements. The PCC then will identify, deliberate, and vote on any proposed changes, which will be subject to endorsement by the FASB and submitted for public comment before being incorporated into GAAP.
The recommendations contained in the Invitation to Comment reflect what stakeholders told the FASB staff about their experiences using, preparing, auditing, reviewing, and compiling private company financial statements. Individuals and organizations are asked to provide comments on six significant factors the staff identified that differentiate the financial reporting considerations of private companies, specifically:
Types and number of financial statement users
Access to management
Ownership and capital structures
Learning about new financial reporting guidance
The Invitation to Comment also seeks stakeholder feedback on five areas where financial accounting and reporting guidance might differ for private and public companies:
Recognition and measurement
The FASB has chosen not to deliberate the topics in the Invitation to Comment until stakeholders have provided input on the staff's preliminary recommendations, and the chairman and all members of the PCC have been appointed. At that time, the FASB and the PCC will jointly reach tentative conclusions about the criteria to be included in the framework.