FASB releases recommendations for private company framework

FASB on Tuesday released its initial staff recommendations on whether and when it will be appropriate to adjust financial reporting requirements for private companies.

The recommendations are contained in a paper, Private Company Decision-Making Framework: A Framework for Evaluating Financial Accounting and Reporting Guidance for Private Companies. FASB on Tuesday invited stakeholders to comment on the recommendations.

In May, the Financial Accounting Foundation (FAF), FASB’s parent organization, created the Private Company Council (PCC).   The new council will identify, deliberate, and vote on proposed changes, which will be subject to endorsement by FASB.

FASB and the PCC must agree jointly on the proposed decision-making framework before it is implemented. The framework will guide the PCC as it determines whether modifications or exceptions to existing U.S. GAAP are needed for private companies.

The staff paper says that in identifying guidance for possible GAAP exceptions, FASB and the PCC should first determine whether the guidance provides relevant information to private company financial statement users at a reasonable cost.

The paper gives substantial guidance to help define the cost/benefit analysis and provides a flowchart illustrating the framework to decide whether to permit exceptions or modifications in disclosures for private companies.

In addition, the staff paper recommends that:

• In some circumstances, FASB and the PCC may conclude that private companies should be provided exceptions from applying the same display requirements as public companies, or should apply a modified display requirement.
• Generally, the amendments in an Accounting Standards Update (ASU) should be effective for private companies one year after the first annual period for which public companies must adopt them. Exceptions could be made to this principle, though.
• If public companies are required to apply the full method or limited method of retrospective transition when an ASU is issued, FASB and the PCC should consider whether the same method of retrospective transition is appropriate for private companies.

The comment period ends Oct. 31.

Also read:

• New private company council includes FASB, but in reduced role, May 23, 2012
• FAF rejects independent standard setter for private companies, Nov. 20111
• Standard overseer to consider proposal for private company financial reporting, Feb. 2011

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