Grant Thornton, Others Release Papers, Articles, On Private Co. Accounting

Mar 25th 2010
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Last week, Grant Thornton LLC released a paper on Private Company Financial Reporting. The paper, available at, authored by GT partners John Hepp and Gary Illiano, discusses the age-old question of whether it is time to develop a separate set of Generally Accepted Accounting Principles for private vs. public companies, a concept known as 'differential GAAP,' or 'Big GAAP/Little GAAP.' This is the central question to be considered by the new Blue Ribbon Panel on Private Company Accounting, cosponsored by the Financial Accounting Foundation (which oversees FASB), the American Institute of Certified Public Accountants, and the National Association of State Boards of Accountancy. As previously reported, the Blue Ribbon Panel is set to hold its first meeting on April 12.

What's Different About Differential GAAP Now?
With the question of Big GAAP/Little GAAP having a long history, GT's Hepp and Illiano discuss what's different now, including their view that there has been a shift in the fundamental financial accounting model - as evidenced by changes and proposed changes in the FASB and IASB's Conceptual Framework, and through relatively recent accounting standard-setting activities - from "one based on the traditional accounting model" to "one based on financial economics and capital markets research." Hepp and Illiano say this has created 'dueling paradigms.'

In my view, (I remind you of the disclaimer which appears on the right side of this blog), a crucial point in the GT paper relates to changing definitions of critical terms in the world of accounting standard-setting, and the fact that the definition of some terms has shifted over time toward the 'financial economics' or 'capital markets' model, as so described by Hepp and Illiano. This point is detailed in footnote 9 in the paper:

One characteristic of the shift to a different financial reporting paradigm is changes in the definitions of terms. In many cases the terminology remains the same, but with different meanings. The definitions of key terms such as general purpose financial reporting, investor, creditor, operating cash flows and fair value have all changed, sometimes in subtle ways. The term “professional judgment” is also changing to reflect more emphasis on evaluating future cash flows rather than judgment in terms of the meaning of contractual rights and obligations and realization. The FASB and IASB also plan to change the definitions of assets and liabilities to remove references to past transactions. This can be a source of confusion for accountants educated in earlier years.

But, it is not just a question of how current one's education is, in terms of how one may view the the pros and cons of the newer school of thought, or the 'financial economics' model; there are other issues as well, as described on pg. 7 of GT's paper:

The shift to a financial economic paradigm, while not complete, has increased concern among all preparers, but especially those in private companies, about the relevance of the information used in their financial statements. The declining relevance of earnings is not the only concern. There are also reservations about reliability, training and education, and the relative costs and benefits of applying new accounting standards.

Read more highlights from the GT Paper, and the related recommendation of the FASB-AICPA  Private Company Financial Reporting Committee (PCFRC), and see links to additional articles on this subject here.


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