CFOs and their tax departments at privately held companies will no longer be faced with the difficult and costly task of applying public accounting standards to their situations. The Financial Accounting Foundation (FAF) today established a new council to improve standard setting for private companies.
The decision comes after thousands of comment letters, roundtables, and heated discussions from public- and private-sector companies alike that often pitted the Financial Accounting Standards Board (FASB) against the American Institute of Certified Public Accountants (AICPA). (The FAF is FASB’s parent organization.)
The new Private Company Council (PCC) will be the go-to body for private-company accounting issues and will advise FASB on all things related to private companies. It specifically will have to determine whether U.S. generally accepted accounting principles need to be altered to better address private companies.
The council is similar in scope to what originally was proposed by the AICPA back in 2009 when a blue-ribbon panel recommended a separate body with standard-setting ability for private-company accounting. But it differs significantly from what FASB had originally proposed in its recommendation for a Private Company Standards Improvement Council, which would have fallen under FASB’s jurisdiction. Unlike that idea, the FAF board of trustees will select the new PCC chair and staff of 9 to 12 members. The board will also create a Private Company Review Committee, which will have primary oversight responsibilities for the PCC.
“This group needs to be independent. It needs to be able to look at things fresh and then advise FASB and also take its own actions, which would then be brought to FASB,” says John Taylor, vice president of research and a CFO Task Force point person at the National Venture Capital Assn. “We wanted to make sure actions coming from the council would be as close to veto-proof as possible.”
FASB’s involvement in private-company standards dates back to 2006, when it created a Private Company Financial Reporting Committee with assistance from the AICPA. But the committee was widely viewed as needing more of a targeted focus. In 2010 FASB began to address those concerns.
The new PCC reporting regime will differ dramatically in some respects from the original recommendations. The council, for example, will be smaller than originally recommended and will hold more frequent meetings, with at least five a year in its first three years of operation. The PCC will also be required to provide quarterly written reports to the FAF board of trustees.
Establishing the council strikes an important balance in recognizing that the needs of public- and private-company financial-statement users, preparers, and auditors are not always aligned, FAF president and chief executive officer Teresa S. Polley said in a statement. The plan, she noted, “ensures comparability of financial reporting among disparate companies by putting in place a system for recognizing differences that will avoid creation of a ‘two-GAAP’ system.”
Although some industry participants have said that having multiple sets of accounting standards would not be a problem since they already exist amid certain Securities and Exchange Commission reporting requirements, others feel more of a one-GAAP system would be more beneficial.
Even though the AICPA supports the FAF’s new private-company standards body, it does not favor a one-GAAP accounting system. Gregory Anton, chairman of the board of directors of the AICPA, said in a statement that a “one-size U.S. GAAP does not fit all companies, especially smaller privately held businesses.”
The AICPA believes more work needs to be done when considering the accounting needs of small- and medium-sized enterprises. It plans to launch an “other comprehensive basis of accounting” financial-reporting framework just for SMEs and for those that do not need to comply with U.S. GAAP.