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FINANCIAL REPORTING

Panel Moves Forward With Recommendations for a Separate Private Company Financial Reporting Board

 

By ALEXANDRA DEFELICE
DECEMBER 10, 2010

A more detailed outline of what would be a blue ribbon panel recommendation for a new private company accounting standard-setting board began to take shape Friday. The new standard-setting board could have between five and seven members with private company financial reporting experience, an estimated $4 million annual budget and face a sunset provision of five years or less to evaluate the overall process, under a draft plan.

 

Panel Chairman Rick Anderson said the goal is to present a report to the Financial Accounting Foundation, FASB’s parent organization, by Jan. 20. That date will allow FAF trustees time to review the report prior to discussing it at their Feb. 15 meeting and deciding what steps to take next, he said.

 

The mission of the proposed new board is, “to establish exceptions and modifications to U.S. GAAP for private companies, while ensuring that such exceptions and modifications provide decision-useful information to lenders and other users of private company financial reports,” not to issue new standards, according to the draft report. “That mission is accomplished through a comprehensive and independent process that encourages broad participation, objectively considers all stakeholder views, and is subject to oversight by the FAF’s Board of Trustees.”

 

Although this is consistent with FASB’s mission, panel members emphasized the word “lenders” demonstrates how this board would be different from FASB, saying that lenders constitute the largest user base of private company financial reports.

 

As proposed, the new board would have the authority to modify existing and future GAAP for private entities and FASB would consider input from all entities during the standard-setting process. The panel believes both boards should work closely together in their endeavors.

 

There was some debate as to whether FASB should be able to cite potential exceptions and delayed implementation time for private companies--as it does currently--or whether that task should be left to the new board alone. Many panel members expressed interest in having an advisory group or groups similar to the existing Private Company Financial Reporting Committee (PCFRC) to express the opinions of that constituency to both FASB and the new board.

 

All the panel members supported a “sunset period” after which the new processes that are adopted could be revisited. The staff’s initial suggestion was five years, but many members favored a shorter timeframe--some suggested three years--to encourage faster progress.

 

One of the largest remaining unanswered questions is where the funding will come from for this new board. Revenue from FAF publications could constitute part of the funding, but not all, panel members agreed. They reasoned that there are companies that would be willing to subsidize the process, but did not decide how to organize securing the funding.

 

Regardless of what the panel, and ultimately FAF, recommends, the staff did not recommend returning to a system where standard-setting bodies would have to rely on year-to-year voluntary contributions desired, again due to concerns around potential independence issues.

 

Anderson emphasized that the panel’s recommendations must still be deliberated by FAF and that whatever the foundation decides will be exposed to the public for comment. Because of the time necessary to do that and to establish a new board, creating a new board and the accompanying infrastructure and policies could take, “a good portion” of 2011, according to panel staff, who suggested the panel make a list of short-term or transitional actions by the FAF and/or FASB to move toward creating standards that are most applicable to private companies.

 

One of the top transitional recommendations is to fill one or both of the two FASB board positions created in August with individuals who have primarily private company background and experience.

 

The draft proposal also suggested FASB starting work on the creation of a broad set of differential criteria that articulates what differences private companies have from public companies. Panel members agreed this framework would be of critical importance to serve as the basis for making appropriate modifications and exceptions for private companies. Some members cited the criteria used by the International Accounting Standards Board in its IFRS for SMEs standard.

 

The 18-member panel is a joint effort by the AICPA, FAF and the National Association of State Boards of Accountancy. It was created in December 2009 to provide recommendations by the end of 2010 on the future of U.S. accounting standards for private companies.

 

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