GAAP has high value—for the most part—say a growing number of external users of private company financial reports, CPAs and other financial professionals working in or serving private companies, which represent more than 99% of the nation’s incorporated businesses. But while a recent AICPA-sponsored survey revealed the prevalence of this opinion, respondents also said certain GAAP standards aren’t relevant and useful enough to help private companies make management, credit and investment decisions.
Following its research, the task force recommended that a cooperative effort including representatives of the key constituents of private company financial reporting be undertaken to
Determine who should establish private company GAAP.
Determine how best to effect change in the GAAP standard-setting process to meet the financial reporting needs of private company constituents.
Develop and oversee the implementation process on a timely basis.
This article explains why the topic of private company GAAP is important to the profession and those it serves, and it provides details on how current GAAP in some cases does—and in others does not—meet the needs of private company financial reporting constituents.
A FRESH START
The report also noted that although private company financial statement preparers sometimes use GAAP exceptions and other bases of accounting, such usage is not always appropriate—even when there is no current alternative—because it erodes GAAP’s consistency while failing to truly satisfy private company financial report users.
A practitioner. James G. Castellano, CPA, the group’s head and a former AICPA chairman, is the chairman of Rubin, Brown, Gornstein & Co. LLP in St. Louis, an accounting and business consulting firm serving private company clients.
“Because I’ve worked in this market segment for many years, I knew it was time for a fresh assessment of GAAP’s value to constituents of private company financial reporting,” Castellano said. From 1983 to 1985 Castellano chaired the AICPA Technical Issues Committee, and he served on a FASB task force on private and small public companies. The results of FASB’s research on the accounting standards for private companies were published in 1983 ( www.aicpa.org/members/div/acctstd/pvtco_fincl_reprt/download/FASSUM81.pdf ). They revealed that fewer than 10% of external stakeholders saw a need for differences in the underlying accounting for public and private companies.
“Since then, though, there’s been a fundamental shift in the thinking of key constituents,” Castellano said. “Our current research reflects much greater support for standards specific to private companies, as stated by more than 50% of creditors and investors among those expressing an opinion.” (See “ External Stakeholders .”)
A private company manager. Financial consultant Gary M. Cademartori, CPA, of Tatum Partners LLP, has more than 20 years’ experience as chief financial or operating officer of public companies. In recent years, while serving as CFO or strategic financial consultant to six private companies, he realized GAAP required much information that those businesses, their lenders, creditors and investors felt had little value. “Since joining the task force, I’ve learned firsthand how widespread this problem is,” he said. “Our research showed that although respondents valued GAAP highly overall, they—as my clients do—found certain GAAP principles insufficiently useful or relevant. The survey gave us a general sense of where GAAP meets private company constituents’ needs and where it doesn’t.”
For example, owners and managers of private companies of all sizes considered certain GAAP requirements pertaining to leases, guarantees, intangibles, variable interest entities and share-based payments not very relevant or useful to their businesses, the survey found. Practitioners from larger firms were less critical of these requirements than were those from smaller ones. External stakeholders’ opinions varied by their area of specialization; for instance, lenders and sureties found GAAP’s guarantee requirements more useful than did investors and venture capitalists.
Because the 2004 survey was the first systematic exploration of this topic in years, its aim was to identify any issues or problems with GAAP rather than to propose specific solutions—which subsequent reform efforts should address as necessary. “The requirements of a private company version of GAAP would be determined by the body that assumes the task of formulating private company standards,” Cademartori said. “It’s not useful to speculate what such standards would require or cost to develop and implement, although I think it’s safe to say most of the cost would relate to initial standard-setting activities, rather than to their implementation.”
A bank lender. David L. Maraman, senior vice-president and chief credit officer of First Indiana Bank in Indianapolis, said, “Taking part in the research quickly removed my initial uncertainty about the importance of private company GAAP to CPAs and especially to their clients. The question is not whether to act; it’s how to accomplish what’s absolutely necessary.”
Maraman said future efforts must be committed to ongoing communication with private company bankers, investors, sureties, owners and regulators to ensure any new standards provide the information each needs. He doubts that private company standards would undermine public company GAAP, which he believes will remain viable and useful because of its critical role in fostering the uniform, high-quality corporate financial information essential to a stable economy.
THE MARKETPLACE RESPONSE
More information is available at the AICPA Private Company Financial Reporting Web site ( www.aicpa.org/members/div/acctstd/pvtco_fincl_reprt/index.htm ).
The Case for Private Company GAAP
May 1, 2005