Risk & Compliance

Is Private Company GAAP a Threat?

FASB struggles with changes that would make private company financial reporting easier – but only if the company remains private.
David KatzNovember 25, 2014

Greg Jonas, director of the office of research and analysis at the Public Company Accounting Standards Board, seemed alarmed. Speaking at a Standard & Poor’s accounting conference a few months ago, he worried aloud about the possibility that U.S. generally accepted accounting principles might be split into two parts.

“In this country, there is, for the first time in my career, now a considerable risk of the possibility of having a separate GAAP for private companies versus public companies,” said Jonas, who previously worked in equity research at Morgan Stanley and at Moody’s Investors’ Service after 23 years in accounting at Arthur Andersen.

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“This is a world-class bad idea. We should do everything we can to preserve common recognition … for public and private companies,” he said.

At first, it might have been hard to grasp where Jonas was coming from. It had been more than three years, after all, since the Financial Accounting Foundation, the parent organization of the Financial Accounting Standards Board, struck down a proposal by a blue ribbon panel that aimed to make it easier for private companies to report under GAAP.

FASB Chairman Russell Golden

FASB Chairman Russell Golden

Spearheaded by the American Institute for Certified Public Accountants, the panel sought to set up a private-company standard-setting board separate from FASB and make changes to GAAP “that recognize the unique needs of users of private company financial statements,” according to an AICPA backgrounder issued at the time.

What happened, however, was that FAF set up the Private Company Council (PCC) in May 2012. Far from being the separate body pushed by the AICPA, the PCC was set up to operate under FASB’s tent.

“Based on criteria mutually developed and agreed to with the Financial Accounting Standards Board,” the PCC’s main job is to gauge whether changes to GAAP are needed to meet the needs of users of the financial statements of private companies, according to the FAF press release. Each change that PCC proposes is now subject to endorsement by the FASB and submitted for public comment before being incorporated into GAAP.

The constituency for a separate GAAP for private companies hasn’t proved very extensive among the CFOs of such companies. “I think one GAAP is probably fine for us,” says Tom Sweet, the new CFO of Dell, which went private about a year ago.

The finance chief sees a danger for a private company that selects an alternative system of financial reporting instead of deciding to go public. “How would you transition to public-company GAAP? What does that look like? Over what period of time? I think there are still questions about that,” he told CFO earlier this month.

From their perspective, some investors and rating agencies also balk at what used to be called a split between “big GAAP” (for public companies) and “little GAAP” (for private companies) because of similar apples-to-oranges concerns. “We would ideally like to see one set of standards applicable to all,” says Joyce Joseph, a Standard & Poor’s managing director who oversees the rating agency’s global accounting and governance group.

A single set of standards better enables comparisons between public and private companies, according to Joseph. She noted that S&P focuses on such factors as the nature of a company’s business and where it operates, and “whether you’re private or public is not going to be a distinction in terms of the analysis.”

Considering such widely held opposition to the notion of private GAAP, what are Jonas and other opponents of it afraid of? After all, even the blue-ribbon panel merely proposed making changes in existing GAAP, not an entirely new system that would be easier for private companies to use.

The anxiety may stem from the idea that the seemingly small moves the PCC is taking could have the effect of destabilizing existing GAAP. If FASB is willing to give private companies a bye on certain provisions, shouldn’t the board also take a look on easing up on public companies as well?

Give Me a Break
That question was very much in the air at a recent FASB vote to endorse a  PCC-proposed change in GAAP that would give private companies a break on two requirements to report intangible assets in a merger.

Like all other PCC alternatives, the change would be optional. But like other such changes have, this one is spawning worries about potential problems in comparing public and private company financials.

In September, the PCC voted to finalize the proposal, which would exempt private companies from separately recognizing and measuring non-competition agreements and customer-related intangible assets.

At a November 5 FASB meeting, the measure squeaked through by a vote of 4-3. While such squeakers aren’t unusual, the lack of support for the measure, even by its supporters, was notable.

While FASB member Harold Schroeder voted to endorse it, for instance, he remained skeptical about its benefits for private issuers. Only private companies not envisioning an IPO or a sale to a publicly held company would take advantage of it, he said in a statement read at the meeting.

Similarly, while voting to break a tie and enabling the action to pass, FASB chairman Russell Golden agreed with other members that “it could impact a company’s ability to raise capital in the U.S.”

The red tape involved in going public could be discouraging, the reasoning goes. “If a private company elected the alternative accounting and later decided to go public, it would have to go back and restate its financials as though it had not made the election,” explains Mark Zyla, a managing director of Acuitas, an Atlanta-based valuation firm.

That concern was apparently one of the factors that led James Kroeker, vice chairman of FASB, to vote against the change. On one hand, he acknowledged, it pained him not to support it because he thought private companies could save money if they didn’t have to figure out and report the value of certain customer relationships – a hard-to-gauge intangible.

But more significantly, he said, by eliminating “a difference between public and private, we’re actually increasing the potential cost of capital for the system as a whole. I think we’re going to create impediments within our capital markets to the growth of capital in the U.S.”

Further, Kroeker, said he didn’t see why the measure would be more useful for private companies than public ones. Like other FASB members, he sees a need for the board to take a look at sprucing up the accounting for intangibles and goodwill in mergers affecting public companies as well as private ones – a matter that FASB will be looking at in the coming months.

The qualms of FASB members about setting up such relatively minor exceptions for private companies, then, begin to make it clearer why opponents like Greg Jonas may be worried that the “world class bad idea” of a separate GAAP might someday happen.