A blue-ribbon panel on Wednesday submitted a report to FASB’s parent organization—the Financial Accounting Foundation (FAF)—recommending significant changes to the future of accounting standard setting for private companies, including a separate standard-setting board.
The panel concluded that “there are urgent and growing systemic issues that need to be addressed in the current system of U.S. accounting standard setting,” the report states.
FAF is expected to discuss this report at its Feb. 15 meeting.
The panel believes that “the system should focus on making exceptions and modifications to U.S. GAAP for private companies that better respond to the needs of the private company sector rather than move toward a separate, self-contained GAAP for private companies or a wholesale reorganization of GAAP,” at least in the near term, according to the report.
The report recommends establishing, under FAF’s oversight, a separate private company standards board to help ensure that appropriate and sufficient exceptions and modifications are made, both for new and existing standards. The new board would work closely with FASB to create a coordinated and efficient standard-setting process but would have final authority over such exceptions and modifications.
A comprehensive review of the new board would be conducted in three-to-five years to evaluate its effectiveness and determine whether to “maintain it as is, make additional process improvements, or sunset it,” according to the report.
The panel also recommends creating “a differential framework (set of decision criteria)… to facilitate a standard setter’s ability to make appropriate, justifiable exceptions and modifications.”
Several short-term and transitional actions meant to provide near-term relief for private companies and help ensure a smooth transition to a new board are also outlined in the report. These processes will most likely continue once the new board is in place, but will be led by and/or significantly involve the new board, according to the report.
Among these short-term recommendations is that FASB should consider a delay for private companies in the effective date of major new standards, especially those issued in connection with the FASB-IASB Memorandum of Understanding (MOU) projects, that is longer than the now-routine one-year delay. The delay would be with respect to the public company effective date. For example, if the effective date for a particular MOU project is 2014 for public companies, this recommendation would contemplate an effective date of 2016 or later, rather than 2015, for private companies.
Additionally, FASB should begin to articulate “what differentiates private companies from public companies,” using what it has learned from the two recent round-table meetings on private company issues with existing GAAP standards as key input, the report states. This information would be used to create the differential framework for private company accounting that would be used to determine whether differences for private companies should be approved.
“The FAF Board of Trustees, as part of its strategic initiative to review private company issues, will consider the panel’s recommendations as it deliberates improvements to the standard-setting process,” according to a FAF press release. “The FAF trustees’ resulting plan is expected to be subject to further input from constituents, including exposing for public comment any potential significant changes to the standard-setting process and structure.”
This report follows the culmination of a year’s worth of work by the panel, which was formed in December 2009 as part of a joint effort by the AICPA, FAF and the National Association of State Boards of Accountancy, to examine private company financial reporting.
For more background on the panel, including previous JofA articles, visit journalofaccountancy.com/Web/BRP.htm and the AICPA’s “Private GAAP” Web page, which includes videos of Institute and profession leaders explaining the blue-ribbon panel’s recommendations and potential benefits.
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