Different Standards for Nonpublic Companies?

Many members of the AICPA believe FASB-promulgated GAAP should not be applicable to nonpublic business entities (NBEs). The AICPA’s council now is asking FASB “to identify and implement a process that would evaluate, where appropriate, potential changes to recognition, measurement and disclosure differences from current GAAP as applied to public companies [that then would apply to NBEs].” (See page 1 of The CPA Letter, July 2005, www.aicpa.org/pubs/cpaltr/index.htm .)

I infer that the thrust of that request is for FASB to take current GAAP, pare it down and reduce it to fit NBEs. That approach will not work. There will be no way to determine or justify a reduced FASB-promulgated GAAP as being appropriate for NBEs but not for public companies. What would FASB do—cut out or modify FASB accounting or disclosure for leases, pensions, income taxes or consolidation, to name but a few? Where would FASB stop cutting or modifying? Would FASB add something that is not part of GAAP generally but would be applicable only to NBEs?

I suggest a different approach. The AICPA should ask FASB to allow two sets of GAAP for NBEs: (1) FASB GAAP as it is today and as it may be in the future or (2) fair value accounting for NBEs’ assets and liabilities. Most NBEs are owned by individuals. Individuals prepare their financial statements on the basis of fair value pursuant to AICPA Statement of Position 82-1, Accounting and Financial Reporting for Personal Financial Statements. So it is a small step, and a logical one, to have NBEs prepare their financial statements on the basis of fair value.

FASB soon will issue a standard on “fair value measurements.” It would be easy for it to specify that NBEs use that standard if they wish to prepare their financial statements on the basis of fair value.

The AICPA then would have to deal with auditing and reporting on the fair value financial statements of NBEs. CPAs are qualified and competent to audit and opine on that which can be determined as a matter of fact by reference to objective evidence such as cash balances and balances of receivables and payables. But they are not qualified or competent to express opinions on the fair value amounts of noncash assets and liabilities, which can be determined only judgmentally and subjectively—for example, the fair value of land and buildings. NBEs would have to engage independent, third-party valuation experts to opine on the fair value amounts of noncash assets and liabilities. The reports of both the CPA and the valuation expert then would need to be included in the financial reports of the NBEs.

I think commercial bankers, who are the primary users of the financial reports of NBEs, would be very pleased to receive the reports with asset and liability amounts at fair values. For the first time, they would be receiving relevant, decision-useful information.

Walter P. Schuetze, CPA
Boerne, Texas