After decades of deliberation on the process for deciding accounting standards for private companies, the standards themselves are about to be reviewed by a new council.
The new Private Company Council (PCC) created by the Financial Accounting Foundation (FAF) will meet for the first time Thursday in Norwalk, Conn. The inaugural meeting will be webcast live on FAF’s site. Some of the PCC’s initial discussions will involve the council’s input on FASB’s development of a framework for creating modifications and exceptions to U.S. GAAP for private companies.
But the agenda also calls for PCC Chairman Billy Atkinson and the nine other members of the council to hold preliminary discussions on the more problematic standards for private company owners and the CPAs who prepare their financial statements.
According to a presentation last month by FAF Vice President for Government Affairs and External Relations Grace Hinchman at the AICPA Controllers Workshop East in Atlanta, standards of concern for the PCC include:
- FIN 48, which governs accounting for uncertain tax positions.
- Standards related to fair value measurement.
- FIN 46(R), which requires consolidation of variable-interest entities (VIEs).
- Business combination standards.
When Atkinson was named PCC chair, he listed those four standards among a half-dozen items slated to get early attention from the PCC. The other standards of interest for Atkinson included accounting for warrants as liabilities, and complexity of derivatives, including simple interest rate swaps used to convert floating rate debt to fixed.
Interest in differential standards for private companies has increased over the past 10 years, accelerated by a handful of standards that have generated controversy because of the burden and cost of compliance.
In 2003, the revised standard known as FASB Interpretation No. 46(R), or FIN 46(R), required consolidation of the financial data of variable-interest entities (VIEs) with the financial data of the company considered to be the VIE’s primary beneficiary. The standard, codified in ASC Topic 810, Consolidation, was partly a response to the demise of Enron, which had hidden debts with dummy corporations that owned liabilities Enron didn’t want on its balance sheets.
But FIN 46(R) complicates small business financial statements in a way that many preparers and lenders view as unnecessary. It is common practice for a private company owner to purchase a building through his or her LLC, for example, and lease it back to the company. Under those circumstances, FIN 46(R) requires the financial statement of the LLC to be consolidated with that of the private company in an exercise that often is of little benefit to the users of those financial statements.
Difficulties for private companies increased again with the adoption in 2006 of FIN 48 regarding uncertain tax positions. The standard, now mostly incorporated in ASC Topic 740, Income Taxes, requires companies to undergo a time-consuming calculation to record a tax liability on their balance sheets showing how much they have in reserve in case the IRS or state tax authorities disagree with their tax positions.
Later in 2006, FASB’s issuance of FASB Statement No. 157, Fair Value Measurements, provided a framework for the measurement of fair value and related disclosures. Fair value accounting has long been a headache for private companies because having valuations performed can be costly.
Tom Ratcliffe, CPA, CGMA, Ph.D., a senior accounting and technical adviser for Warren Averett LLC in Alabama, said that while Statement No. 157 (now incorporated in ASC Topic 820, Fair Value Measurement) did not expand or decrease the use of fair value, the costs for private companies to comply with FASB’s fair value requirements are inordinately high, and the benefits are low.
“Almost every year since that guidance has been in play, we have had to change significantly the fair value disclosures that are included in the financial statements of our clients because they continue to ramp up those disclosures,” said Ratcliffe, a founding member of the Private Company Financial Reporting Committee, which advised FASB before being replaced by the PCC.
The PCC process is FAF’s answer to complaints from small businesses and their preparers about costly financial statement calculations that they view as unnecessary. Here’s how it works:
- The PCC and FASB are creating a framework to help them decide on potential GAAP differences for private companies.
- Using that framework, the PCC will identify, deliberate, and vote on GAAP modifications for private companies. A two-thirds supermajority will be required for approval.
- FASB must act within 60 days on PCC decisions. A simple majority will be required to endorse any GAAP exceptions.
- If FASB fails to endorse the GAAP exceptions, it must provide the PCC with written notice and outline changes that could result in endorsement.
- If FASB endorses GAAP exceptions, they will be proposed for public comment and subject to a second deliberation and supermajority vote by the PCC and a final simple majority endorsement by FASB.
- The PCC also will advise FASB on private company issues in standards that are under development.
During a speech at the AICPA fall Council meeting in October, Atkinson said he thinks the PCC should evaluate whether standards can be fixed more broadly for all companies—public and private—before creating GAAP exceptions for private companies.
But a process for the PCC to recommend changes to GAAP for all companies isn’t included in the PCC’s mission and construct, and Atkinson said the idea of a holistic approach “is really emanating from me and that’s not a decision we’ve made yet” as a council.
Hinchman cast doubt on the idea that the PCC would initiate changes to standards for public and private companies.
“I don’t know for sure because it’s not my jurisdiction, but say the PCC came and said, ‘This is the worst standard in the world. It’s going to put private companies out of business forever,’ ” Hinchman said. “That would be a trigger for the FASB to go back and say, ‘Gee, maybe we should look at it through the prism for public companies as well.’ But really, the mandate for the PCC is only for private companies. It’s not private and public.”
The 10 members of the PCC include three financial statement users; three business and industry CFOs or VPs for finance; and four auditors or CPA practitioners. When the PCC’s members were announced, FAF President and CEO Terri Polley said they are enthusiastic and appreciate independent standard setting.
“We’re optimistic about the path forward,” Polley said.
That path continues Thursday, with private company owners and preparers watching closely to see the results of a process that took years to create.
JofA senior editor Neil Amato contributed to this report.
—Ken Tysiac (firstname.lastname@example.org) is a JofA senior editor.