Along-awaited structure for creating differences in U.S. GAAP for private companies was implemented May 23 when the Financial Accounting Foundation (FAF) voted to establish a new council during a meeting in Washington.
The Private Company Council (PCC) will identify and vote on exceptions and modifications to U.S. GAAP for private companies. FAF, FASB’s parent organization, created a structure with substantial differences from the one proposed in October.
As a result, FASB will be responsible for “endorsement” rather than “ratification” of the PCC’s decisions. Following its October proposal, FAF received more than 7,000 comment letters, and FAF President and CEO Terri Polley, CPA, said the changes were responsive to the input received without creating a two-GAAP system.
The changes reduce FASB’s role in the process as follows:
- The PCC chair will not be a FASB member as originally proposed.
- FASB will “generally” have 60 days to act on PCC decisions. If FASB fails to endorse a PCC decision, it must provide public, written notice of the reasons.
- The PCC will determine which elements of existing GAAP to consider for possible exceptions or modifications by a vote of two-thirds of all sitting members, in consultation with FASB and with input from stakeholders.
Differences in U.S. GAAP advanced by the PCC and endorsed by a simple majority of FASB members will be exposed for public comment. Following the comment process, the PCC will redeliberate the proposed exceptions or modifications and send final decisions to FASB. Upon FASB endorsement, exceptions or modifications will be incorporated into U.S. GAAP.
The PCC will have between nine and 12 uncompensated members appointed by FAF, and will meet at least five times a year in its first three years of existence. Deliberative meetings will be open to the public and attended by FASB members, but the new council also will be allowed to hold closed educational and administrative meetings without FASB members present. The PCC is expected to hold its first meeting in the fourth quarter of this year.
FASB already is developing a Private Company Decision-Making Framework, which will be a set of criteria for decisions about whether and when to adjust requirements for recognition, measurement, presentation, disclosure, effective dates, and transition methods for standards that apply to private companies.
Although FASB Chairman Leslie Seidman, CPA, plans to present the framework for public comment this summer, FASB will not complete the framework until the PCC provides input. FASB also is in the midst of a project to provide a consistent, clear definition of a nonpublic entity.
A FAF committee consisting of some of its trustees led by Mack Lawhon, CPA, will oversee how the PCC and FASB respond to the needs of private companies. The Private Company Financial Reporting Committee, which has advised FASB on private company issues since 2007, will cease to exist after a transition period.
The AICPA said it supports the PCC and also announced plans to create an “other comprehensive basis of accounting” (OCBOA) framework for small and medium-size private companies that are not required to file U.S. GAAP financial statements. The OCBOA will be designed to provide a less comprehensive, less costly alternative. In a statement released by the AICPA, Polley said she welcomes the AICPA’s support and believes the OCBOA plan is “an important and complementary undertaking.”
AICPA President and CEO Barry Melancon, CPA, CGMA, said in a statement that FAF “has taken solid steps in the right direction” with the decision.
“The AICPA is encouraged by this approach and awaits more of the details of the FAF decision,” Melancon said. “We look forward to continuing to work together to effect meaningful changes in U.S. GAAP for private companies and the users of their financial statements.”
Ken Tysiac is a JofA senior editor. To
comment on this article or to suggest an idea for another article,
contact him at