Turf War over Private-Company GAAP

The who and how of creating a separate GAAP for private companies are matters of growing debate.
Alix StuartJuly 1, 2011

The debate over who will tell private-company finance executives how to do their accounting is exploding, showing up even in such obscure areas as Website design.

The Financial Accounting Standards Board announced Wednesday that it has set up a new section on its Website dedicated to the issues most relevant to private companies, as well as nonprofit organizations. The portal is mostly a compendium of items that already existed on the site, such as the meeting schedules of groups like the five-year-old Private Company Financial Reporting Committee (PCFRC), as well as links to FASB projects that might have the greatest impact on the group. It also includes the names and e-mail addresses of FASB’s recently expanded eight-person nonpublic-entity team, who are standing by for direct comments and other feedback.

What the new portal is really about, however, is probably the item at the very bottom of the list of links: the Financial Accounting Foundation’s “Standard Setting for Non-Public Entities.” That’s an oblique reference to the controversial recommendations for private-company GAAP that the American Institute of Certified Public Accountants’s blue-ribbon panel made earlier this year, and that the FAF, FASB’s overseer, is currently considering.

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The main bone of contention: the AICPA wants the FAF to set up a separate board, akin to the Government Accounting Standards Board, to handle GAAP modifications for private companies. FASB, however, maintains it should have the rulemaking responsibility.

The AICPA has made a big deal of the difference, bringing it up in a mid-June Webcast entitled “Urgent Developments in Private Company Financial Reporting.” If the FAF decides that FASB should oversee private-company rulemaking, “that is essentially what we’ve had for the last five years with PCFRC,” says AICPA president and CEO Barry Melancon. “Because of the spotlight our activities have put on it, people are trying to package it differently . . . but our forecast is that it’s more of the same, which is no change.”

Within the same week of the AICPA’s Webcast, FASB held its own Webcast on the topic, reiterating the board’s commitment to the private-company world. in a presentation earlier this year, chairman Leslie Seidman also said publicly she “strongly hopes” the FAF will appoint FASB to the role.

Why is FASB so opposed to a separate board? At least one expert sees it as the logical result of the standard-setter potentially losing its prestige when and if the United States transitions to international financial reporting standards (IFRS).

According to a recent document released by the Securities and Exchange Commission, FASB’s role could shrink to “being a rubber stamp for what’s happening in London,” says John Hepp, a partner at Grant Thornton. If that were to happen, setting standards for private companies, even if only to tweak the public-company standards, would be a key responsibility for FASB. “To have a separate board would substantially reduce FASB’s role,” notes Hepp.

Whatever the case, a recent survey by Grant Thornton indicates that more than 50% of private-company CFOs don’t mind having FASB regulate the accounting standards. Only 22% support a separate body; 18% think the United States should simply adopt IFRS for SMEs (small and medium enterprises), a set of standards that has been legal to use in this country for nearly two years but has gained little traction so far.

FASB, for its part, is continuing to solicit comments on the topic, particularly from constituents who did not weigh in during the blue-ribbon-panel process. Interested parties can feed those comments through the new Web portal. FASB also expects to release for comment soon a white paper on how private-company financial statements are used, according to the June Webcast.