GAAP and IFRS

FASB, CPAs Eye Private-Company Changes

But their goal "is not to create a separate, new set of GAAP requirements for private companies," the standards board and AICPA say.
David KatzJune 8, 2006

(Corrected: An earlier version of this story inaccurately stated that the AICPA set accounting and financial reporting standards before the Sarbanes-Oxley Act of 2002. In fact, the accounting society’s role had been to set auditing standards.)

Shut out of rulemaking since the creation of the Public Company Accounting Oversight Board, the American Institute of Certified Public Accountants has found a new entree into the game. Together with the Financial Accounting Standards Board, the AICPA will look into whether current accounting and reporting standards should have differences tailored to fit privately held companies.

Under a joint proposal issued on Thursday by the AICPA and FASB, the standards board would make improvements in its procedures aimed at clarifying its positions on private-company accounting and financial reporting. Further, the two groups plan to sponsor and fund a joint committee whose job would be to make sure that the views of FASB’s private-company constituents are incorporated into the standard-setting process.

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Until the enactment of the Sarbanes-Oxley Act in 2002, the AICPA set auditing standards applicable to a wide range of companies. But Sarbox, in creating the PCAOB, stripped the CPA association of its standard-setting role in the public-company arena. Since then, the AICPA has sought to expand its status among private companies as a way of filling the gap.

The organizations make it clear that they don’t want to spawn a miniaturized version of Generally Accepted Accounting principles. “The objective of the change is not to create a separate, new set of GAAP requirements for private companies,” they said in an invitation for comment.

Instead, they have a more modest goal: FASB should get better input from a private-company perspective when it sets standards. Up until now, the board hasn’t been consistent about saying where it stands on “whether differences for recognition, measurement, disclosure, or transition and effective date should exist” for private companies within the current reporting and accounting regime, they said. Nor has FASB “consistently asked for input on whether differences in those areas should exist for private companies.”

To make sure that it meets reporting needs of its private-company constituents, FASB intends to make a number of changes in its procedures:

• The board’s staff would seek out input from users, preparers, and auditors involved in financial reporting for private companies.

• As FASB sets its standards, the staff would provide board members with alternatives for private companies. The differences would be based on the needs of financial-statement users and on cost-benefit calculations.

• In the sections of exposure drafts and final statements where it explains the reasoning behind its conclusions, FASB would say whether differences should exist for private companies—and which ones they should be.

Further, the board and the AICPA agreed to co-sponsor and co-fund a committee that would make recommendations to the board about whether there should be changes in prospective and current accounting standards for private companies. The committee will have 11 non-paid members and a paid part-time chair. The two organizations, which are currently looking for nominations, will jointly choose its members from among users (including lenders, investors, and bonding companies) and auditors of private-company financials and financial managers and owners of the companies.

The two organizations are encouraging anyone involved in private- company financial reporting to comment on the proposal. The comment period ends on August 15, 2006. After FASB receives the comment letters, the board plans to “analyze and evaluate whether differences are warranted for private companies.”

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