Blue-Ribbon Panel Narrows Field for Private Company Financial Reporting

BY ALEXANDRA DEFELICE
July 20, 2010

A blue-ribbon panel weighed in on seven alternative models for private company financial reporting at its meeting Monday, eliminating models that were based on IFRS and a model that effectively would have maintained the status quo.

 

All of the remaining models under consideration by the panel would result in differences in GAAP for privates companies, where warranted, compared with GAAP for public companies.

 

The panel directed its staff to come back with a narrowed down list of U.S. GAAP-based standard setting models. The models presented by panel’s staff Monday represented several variations of models based on U.S. GAAP and IFRS. The panel agreed to focus in on three of the U.S. GAAP-based models to create two or three hybrid models that are more detailed and focused.

 

The three primary models that are advancing for more consideration are:

  • U.S. GAAP with Exclusions for Private Companies—with enhancements
  • U.S. GAAP—Baseline GAAP with Public Company Add-Ons
  • Separate, Stand-Alone GAAP Based on Current U.S. GAAP

 

Regardless of which model the panel eventually selects to recommend, several panel members said the group that sets those standards needs to understand the needs of the users for whom they are designing the standards. Most of the panel members expressed discontent with the current makeup of the FASB board and noted its heavy—but appropriate—focus on public companies. This was the center of debate on the structure of whatever model is ultimately selected—th e current FASB board; a restructured FASB board (with greater private company representation); or a new, separate Private Company Standards Board under the oversight of FAF.

 

The panel, meeting in Chicago, recommended exposing a series of questions related to the potential standard-setting models for public comment through FASB's website by the end of July to ensure that it isn’t leaving out any critical elements or pieces of information for consideration.

 

All comments will be made public on the FASB website and the panel’s staff plans to summarize the comments and present them to the panel members at their Oct. 8 meeting.

 

The 18-member panel, which was announced in December 2009, is tasked with providing recommendations on the future of U.S. accounting standards for private companies by the end of this year. It is part of a joint effort by the AICPA; the Financial Accounting Foundation, FASB’s parent organization; and the National Association of State Boards of Accountancy. Panel chairman Rick Anderson, chairman and CEO of Moss Adams LLP and a current FAF board member, said he would like any recommendations to be ironed out by the panel’s Dec. 10 meeting.

 

Anderson said that selecting a model that is relevant to the users of private company financial reports should be the No. 1 focus of the panel moving forward, noting that seemed to be the consensus view at the table.

 

“Relevance is the overriding issue. It’s impacted by complexity, cost benefits [and consistency],” Anderson said. “Does this make the financial statements more useful and better for the intended audience of those statements? [If so,] we’d be moving in the right direction. Relevance—it’s the word and concept that cuts across all of this .”

 

If the changes are relevant and reasonable, users will get the information they need, even if that means certain differences between public and private company GAAP, added Dev Strischek, senior vice president and senior credit policy officer, Corporate Risk Management for SunTrust Banks Inc.

 

“It’s more about relevance than anything, not necessarily complexity, we can always deal with that,” said Krista McMasters, CEO of Clifton Gunderson. “[But] when the most complex issues are the least relevant and most costly, we need to deal with that.” She added that the “most troubling” issue to her is the increased number of users she sees accepting “except for” qualified opinions. “When generally accepted accounting principles isn’t accepted anymore, that’s troubling,” she said.

 

“Users were not in love with all of the GAAP standards that exist today. They take financial statements in accordance with GAAP and made adjustments. If standards change, they could live with that. They are open to different standards as long as there are legitimate reasons for different standards,” Anderson said at the start of Monday’s meeting, summarizing previous meeting discussions. However, he noted, some panel members have expressed concern over the fact that users aren’t demanding change.

 

“Historically, they haven’t risen up but accepted the new standards whether it’s one they wanted or not,” he said. “Change needs to be supported by and accepted by the user community, not necessarily driven by them.”

 

What Kind of Board?

 

Discussion at the meeting included what body should set accounting standards for private companies.

 

“The attitude on the FASB board is that one size has to fit all,” said Judith O’Dell, panel observer and chairman of FASB’s Private Company Financial Reporting Committee. “It’s very hard to get any carve-outs and differences in the private company world. The goal is to raise standards of private company financial statements, not dumb it down.”

 

FAF President Terri Polley acknowledged that FAF has been hearing these concerns. “Clearly we have a disconnect with private company constituents. We need to understand the root cause of that disconnect,” she said.

 

AICPA President and CEO Barry Melancon advocated a board separate from FASB to oversee private company accounting standards.

 

“I believe it isn’t practical to have one board set both private and public company standards. It isn’t just a matter of private company representation. We’ve had private company representation on FASB in the past and that hasn’t produced significant differences in GAAP,” Melancon said. “I believe FAF should establish a separate board for private companies, let the currently constructed FASB still drive the train and set public company standards, but have the new board constituted solely with individuals that are focused on private companies decide whether, what and how GAAP should apply to private companies starting with the FASB standards.”

 

David Morgan, co-managing partner of Lattimore, Black, Morgan, and Cain PC, supported the idea of a separate board.

 

“I’m not sure [FASB is] capable of listening because of its bias toward public companies,” he said. “You can put an alien and an earthling in the same room together, but they aren’t going to get the same results. They have different needs. Trying to convince the other side what private company needs are is a futile process.”

 

To get the necessary changes in GAAP for private companies, there needs to be a separate board setting that GAAP, added Daryl Buck, senior vice president and CFO, Reasor’s Holding Co. Inc.

 

A recorded audio stream of Monday’s meeting should be available at fasb.org in the near future.

 

The next meeting is Oct. 8 at the AICPA’s New York office.

 

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