FASB Seeks Input on Private Company Decision-Making Framework

August 01, 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 U.S. Generally Accepted Accounting Principles (GAAP) for private companies.

The paper 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 U.S. 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 U.S. GAAP.

Many private companies issue financial statements in accordance with U.S. GAAP for the benefit of their investors and lenders. The FASB is the private-sector, independent, organization that sets U.S. 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 upon jointly by the FASB and the PCC. The PCC is a new body created by the Financial Accounting Foundation (FAF) to identify issues in U.S. 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 U.S. 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
Investment strategies
Ownership and capital structures
Accounting resources
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
Disclosures
Display (presentation)
Effective dates
Transition methods

“The development of a sound decision-making framework is essential to our ongoing efforts to address the unique needs of private company stakeholders while maintaining the high quality of U.S. GAAP,” stated FASB Chairman Leslie F. Seidman. “We anticipate that the guidance designed to identify cost-effective alternatives for private companies also will benefit some of the FASB’s public and not-for-profit standard-setting activities.”

The Board 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 Board and the PCC will jointly reach tentative conclusions about the criteria to be included in the framework.

 

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