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FINANCIAL REPORTING

VIEs among first issues PCC identifies for discussion

 

By Ken Tysiac
December 7, 2012

Variable-interest entities (VIEs), which have long been identified as one of the most frustrating concepts in accounting for private companies, were among the four issues the new Private Company Council (PCC) identified for further study in its initial meeting Thursday in Norwalk, Conn.

The PCC was created by FASB’s parent organization, the Financial Accounting Foundation (FAF), in part to identify and vote on potential modifications and exceptions to U.S. GAAP for private companies. In addition, the PCC advises FASB on private company considerations for projects on FASB’s current agenda.

Chaired by Billy Atkinson, the PCC on Thursday asked FASB’s staff to draft papers for discussion on four issues that have caused substantial concern among private companies and their financial statement preparers. The staff papers will describe problems stakeholders have identified with the standards, background, history, and possible scoping options for each issue, should the PCC decide to add it to its agenda.

FASB’s staff will prepare discussion papers for the PCC’s next meeting, scheduled for Feb. 12, on the following issues:

VIEs. The requirements of FIN 46(R), codified in ASC Topic 810, Consolidation, were created in the wake of Enron’s collapse in order to prevent the hiding of liabilities on the balance sheets of dummy corporations. FIN 46(R) requires consolidation of the financial data of a VIE with the company that is the VIE’s primary beneficiary. This forces consolidation, for instance, when an owner of a small business buys property through his or her LLC and leases it back to the company. This is costly and does not necessarily create financial statements that are more helpful to users such as lenders.

Fair value accounting. The discussion will apply particularly to certain interest-rate swaps, where FASB Statement No. 133, codified in ASC Topic 815, Accounting for Derivative Instruments and Hedging Activities, requires costly, mark-to-market accounting that often does not produce relevant information for users.

Recognizing and measuring various intangible assets (other than goodwill) acquired in business combinations. This discussion will include Level 3 fair value measurements and disclosures associated with them, as referenced in ASC Topic 805, Business Combinations. The PCC also plans to discuss goodwill accounting in general at a later date.

Uncertain tax positions. FIN 48, mostly incorporated into ASC Topic 740, Income Taxes, requires companies 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. The calculation is time-consuming and expensive, and is thought by some to be an appropriate requirement for large public companies that are audited regularly, but less appropriate for private companies.

“I’m confident that we’re on the right track,” Atkinson said.

FASB staff member Jeff Mechanick said those initial discussions would cover all but one of the issues identified most commonly as necessary for review in outreach performed by the Blue-Ribbon Panel on Standard Setting for Private Companies. The remaining issue is accounting for pensions and post-employment benefits. Mechanick said that issue might be addressed for all companies—private and public—in FASB’s disclosure framework project.

The PCC also discussed aspects of FASB’s Private Company Decision-Making Framework and Definition of a Nonpublic Entity projects. The lengthiest discussion involved the question of whether a private company that elects to apply any difference in recognition or measurement guidance should be required to apply all existing and future differences. This so-called “all-or-nothing” approach was largely opposed by PCC members.

In addition, the body that formerly advised FASB on private company issues, the Private Company Financial Reporting Committee (PCFRC), formally passed the torch to the PCC. Two PCFRC members—Thomas Groskopf and George Beckwith—remain on the PCC, whose mandate as a board that can identify and vote on GAAP exceptions exceeds the advisory capacities of the PCFRC.

“We’re going to learn from the best practices of the PCFRC, and then we’re going to do some new things to try to improve on that and do an even better job,” said FASB Chairman Leslie Seidman.

GAAP modifications for private companies that are approved by a two-thirds supermajority of the PCC must be endorsed by a simple majority of FASB members to move forward through the standard-setting process.

FAF President and CEO Terri Polley welcomed the PCC, which she called a group of “exceptional leaders” who are well-acquainted with the issues of financial reporting.

“I’m sure there are going to be times when PCC members and FASB members might not agree on every issue,” she said. “But we know that the spirit of cooperation will carry us through, and most importantly result in significant progress.”

Ken Tysiac (ktysiac@aicpa.org) is a JofA senior editor.

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