The Financial Accounting Foundation (FAF) voted Wednesday to create a Private Company Council (PCC) to identify and vote on differences in U.S. GAAP for private companies.
FASB will be responsible for “endorsement” rather than “ratification” of the newly created council’s decisions.
The PCC will decide on exceptions and modifications to U.S. GAAP for private companies and will advise FASB on treatment for private companies for items on FASB’s agenda. It is expected to hold its first meeting in the fourth quarter this year.
After receiving more than 7,000 letters on this much-debated subject, the FAF trustees, during a meeting in Washington, implemented by unanimous vote a structure with substantial changes from the recommendations FAF made in October:
- The PCC chair will not be a FASB member, as originally proposed.
- FASB will “generally” have 60 days to act on PCC decisions. If FASB fails to endorse a PCC decision, it must provide public, written notice of the reasons.
- The PCC will determine which elements of existing GAAP to consider for possible exceptions or modifications by a vote of two-thirds of all sitting members, in consultation with FASB and with input from stakeholders.
Exceptions or modifications to U.S. GAAP advanced by the PCC and endorsed by a simple majority of FASB members will be exposed for public comment. Following the comment process, the PCC will re-deliberate the proposed exceptions or modifications and send final decisions to FASB.
Upon FASB endorsement, exceptions or modifications will be incorporated into U.S. GAAP.
Terri Polley, president and CEO of FAF, said during Wednesday’s trustees meeting that many stakeholders believed the original proposal gave FASB too much influence, while some others disagreed. She said the plan strikes an important balance, recognizing private company needs without creating a “two-GAAP” system.
“They don’t go as far as some might like us to go,” Polley said of the changes, “but they certainly were responsive to the input we received.”
The PCC will have between nine and 12 uncompensated members appointed by FAF, and will meet at least five times a year in its first three years of existence. Deliberative meetings will be open to the public and attended by FASB members, but the new council also will be allowed to hold closed educational and administrative meetings without FASB members present.
FASB already is developing a Private Company Decision-Making Framework, which will be a set of criteria for decisions about whether and when to adjust requirements for recognition, measurement, presentation, disclosure, effective dates, and transition methods for standards that apply to private companies.
Although FASB Chairman Leslie Seidman plans to present the framework for public comment this summer, FASB will not complete the framework until the PCC provides input. FASB also is in the midst of a project to provide a consistent, clear definition of a nonpublic entity.
Seidman praised the structure that FAF implemented.
“I think the plan will amplify our recent efforts and help us do an even better job [responding to private company needs],” Seidman said.
Meanwhile, FAF is establishing a committee, consisting of its trustees and led by Mack Lawhon, CPA, that will oversee the way the PCC and FASB respond to the needs of private companies.
The Private Company Financial Reporting Committee (PCFRC), which has advised FASB on private company issues since 2007, will cease to exist after a transition period.
AICPA President and CEO Barry Melancon, CPA, CGMA, said in a statement that FAF “has taken solid steps in the right direction” with the decision.
“The AICPA is encouraged by this approach and awaits more of the details of the FAF decision,” Melancon said. “We look forward to continuing to work together to effect meaningful changes in U.S. GAAP for private companies and the users of their financial statements.”
While supporting the PCC, the AICPA will develop an OCBOA framework that it said will provide a less comprehensive and less costly alternative to U.S. GAAP for entities that don’t need to comply with U.S. GAAP.
Greg Anton, CPA, CGMA, chairman of the AICPA’s board of directors, said in a statement that one-size U.S. GAAP doesn’t fit all companies, especially smaller private companies. He said FAF has moved in the right direction, and that the AICPA plans to remain fully engaged with FAF and the PCC.
“While doing so, we will also use our resources and expertise to develop an enhanced OCBOA financial reporting framework that is objective, relevant, and responsive to the concerns of preparers and users of small and medium private company financial statements where GAAP financial statements are not required,” Anton said.
Polley said in a statement released by the AICPA that she welcomes the AICPA’s support for the PCC and FAF’s efforts to improve the standard-setting process for private companies.
“We also believe that the AICPA’s plan to develop a financial reporting framework for smaller private entities, which would be used as a form of OCBOA reporting where appropriate, is an important and complementary undertaking,” she said. “Taken together, these actions demonstrate the commitment of both organizations to the private company financial reporting constituency.”
—Ken Tysiac (email@example.com) is a JofA senior editor.