PCC seeks accounting relief for smallest private companies

By Ken Tysiac

Concerns about accounting compliance overload at the smallest private companies bubbled to the surface Tuesday as Private Company Council (PCC) members debated whether to initiate a formal review of the Private Company Decision-Making Framework.

Overload has become a big issue as financial statement preparers are working to implement new high-impact FASB standards on revenue recognition, leases, and financial instruments. FASB Chairman Russell Golden acknowledged the tension last week when he said some preparers have asked the board to minimize the new projects it plans to undertake while companies absorb the newly issued guidance.

The issue of overload has gained the attention of the PCC, which provides input to FASB on private company issues and drafts alternatives to GAAP for private companies when appropriate. During a meeting Tuesday, the PCC voted not to undertake a formal review of the Private Company Decision-Making Framework, which determines when the PCC can consider drafting private company alternatives.

Instead, the PCC asked FASB’s staff to attempt to come up with recommendations for considering which entities are within the scope of the framework. The PCC is attempting to solve the problems of complexity that frustrate small private companies as they prepare their financial statements.

Under the current framework, it is difficult to take action on behalf of small private companies because their cost/benefit concerns are much different from those of large private companies that have large accounting staffs, PCC Chairman Candace Wright said.

It’s a challenge to make accounting rules that will make sense for the smallest private companies as well as the large ones, Wright said.

“When you think about trying to have some support for a differentiating alternative,” Wright said, “the fact that there are private companies that fall in this space that do have large accounting departments and resources versus the family-owned businesses that have two people every day, and that’s all they do, that makes a big difference.”

Golden agreed that the broadness of the scope of organizations to which the Private Company Decision-Making Framework applies appears to be causing some of the challenges. He referenced an earlier discussion on a hedge accounting standard FASB is developing.

“Those that wanted more relief were focused on shops that have four or five people,” Golden said at the PCC meeting. “But those that were arguing against that were using examples of private companies that had trading desks, that had multibillions in operations.”

But FASB Vice Chairman James Kroeker said the smallest private companies are not the only preparers with complaints that their concerns are overlooked. He said small public company preparers who recently met with FASB as part of its Small Business Advisory Committee would say availability of accounting resources is emphasized too much in FASB’s rules. Those small public companies also have limited resources and can’t benefit from GAAP alternatives, Kroeker said.

“It’s a daunting task to come to a solution,” said the PCC’s Jeffery Bryan.

More scope challenges

Questions about scope also were encountered during the PCC’s discussion of research FASB is undertaking on the definition of a public business entity. The board’s staff is trying to determine how broad the board intended Criterion D to be in its definition of a public business entity. Some companies, especially in financial services, don’t consider themselves to be public and have questioned whether the definition is too broad.

FASB’s staff is trying to determine how broad the board intended Criterion D to be. Wright said it would be helpful for FASB to provide educational material on the board’s intentions. But FASB members created more confusion at the PCC meeting because they disagreed on how broad the definition was intended to be.

“Trying to provide clarity through educational materials, I just see that it might be challenging,” Kroeker said.

PCC member Thomas Groskopf said that because private companies have an extra year to implement the new revenue recognition standard, it’s imperative that companies have clear guidance that will allow them to accurately determine whether they are a public business entity.

“I would encourage the board to do whatever it can to clarify [Criteria] D and E as soon as possible,” Groskopf said.

Hedging and VIEs

Several PCC members expressed support for FASB’s proposed amendments to simplify hedge accounting.

But the PCC also requested that FASB consider providing an exception that would allow private companies flexibility in completing the hedge documentation and effectiveness testing requirements given their limited accounting resources.

Many PCC members also recommended that private companies under common control be exempted from applying variable interest entity guidance in FASB Accounting Standards Codification Topic 810, Consolidations.

Ken Tysiac (ktysiac@aicpa.org) is a JofA editorial director.

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