FAF trustees expected to rule on private company reporting standards

BY KEN TYSIAC

The much-debated future of private company financial reporting is expected to be decided this week.

Proponents of differential financial reporting standards for private companies—and advocates of uniform reporting rules—will turn their attention to Washington on Wednesday as 2 ½ years of formal discussion appear ready to end.

The Financial Accounting Foundation (FAF) board of trustees is expected to vote Wednesday on a structure for private company standard setting. The meeting will not be available by webcast or audiocast.

FAF President and CEO Terri Polley told small business and private company advisers to FASB this month that she plans to brief the FAF trustees on constituents’ reaction to a proposal that the FAF create a Private Company Standards Improvement Council (PCSIC) whose recommendations would be subject to FASB approval.

Polley said she will present recommendations to the trustees, with the expectation that they will vote on a package describing a plan for private company standard setting.

“I’m hoping they will be able to come to a vote on what the final structure might look like,” Polley told FASB’s Small Business Advisory Committee (SBAC) and Private Company Financial Reporting Committee (PCFRC) on May 10.

The issue has been the subject of a lengthy, passionate debate. In December 2009 the AICPA, FAF, and National Association of State Boards of Accountancy (NASBA) established a blue-ribbon panel to address how accounting standards can best meet the needs of users of U.S. private company financial statements.

Some private company advocates have long been concerned that certain U.S. GAAP standards lack relevance and cause small, nonpublic businesses in particular to waste significant time and money preparing certain aspects of financial statements.

It is estimated that there are more than 28 million private companies in the United States, many of which are required to file financial statements that critics of the current system say were constructed primarily to help investors understand the assets and liabilities of approximately 15,000 publicly traded companies.

After more than a year of deliberation, the blue-ribbon panel recommended by a supermajority vote in January 2011 that the FAF trustees create a separate board, independent from FASB, to create U.S. GAAP differences for private companies.

In October, the FAF trustees proposed establishing the PCSIC, which would not be independent. Rather, the trustees proposed that any changes to existing U.S. GAAP recommended by the PCSIC be subject to FASB ratification.

The FAF received 7,367 comment letters on the issue, Polley said.

“We learned a lot in the process of this outreach,” Polley told the SBAC and PCFRC. “Again, it’s reinforcement for us about how due process works.”

One comment letter gave an example of the difficulties that current U.S. GAAP poses for private companies.

Dipak Bhakta, CPA, is senior director of finance and controller for Save Mart Supermarkets, a privately held operator of more than 200 grocery stores and three distribution centers in California and Nevada. Bhakta wrote that the chain’s accounting staff and external auditors spend a lot of time and effort evaluating asset impairment adjustments and LIFO inventory valuation reserves. The company pays valuation consultants for analyses, but Bhakta said the resulting adjustments provide “very little value” to the users of the company’s financial statements. He said the chain’s bank specifically excludes these line items when calculating ratios for debt covenant compliance on the company’s revolving line of credit.

But proponents of the idea of uniform standards for all entities say that allowing any deviation for private companies would weaken U.S. GAAP, reduce transparency and provide few benefits for financial statement users.

The SBAC and PCFRC also heard Polley’s summary of stakeholders’ comments on specific issues related to the possible creation of a PCSIC. She said:

  • FASB’s influence over the group was a key topic. “There was concern expressed about the potential for FASB dominance, and then, of course, the ratification process,” Polley said.
  • The trustees proposed a committee of 11 to 15 members. Stakeholders presented a range of 5 to 15, with larger numbers if the group is an advisory board and smaller numbers if the board sets standards.
  • Some commenters said the trustees’ proposal of four to six meetings per year for the council would be inadequate. Polley said in the first couple years the group may need to meet more frequently to address what she called “the inventory of issues” in current GAAP that concern private companies.
  • Although the trustees recommended having FASB members attend all meetings of the group, many commenters suggested the council should be able to meet with or without FASB members present. Some stakeholders agreed with the trustees’ proposal that a FASB member chair the council, but there were many different suggestions on how to handle the chairman’s role.


Should the new council be approved, Polley said, under the best case scenario it would hold its initial meeting before the end of the year. It has been proposed that trustees would appoint council members from the ranks of preparers, investors, and auditors.

Polley said that the trustees want to do the right thing and make sure that private company voices are heard. She said trustees also recognize FASB’s efforts to be responsive to private company issues over the past several years. In January 2011, a private company perspective was added to FASB with the appointment of board member Daryl Buck, a founding member of the PCFRC in 2007.

“They’re trying to balance what they believe is best for financial reporting,” Polley said, “and in that regard I think they are just trying to come out with the best answer.”

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

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