FASB adds project to define “nonpublic entity,” as FAF private company decision looms
As its parent foundation works to develop a plan on improving private company accounting standards, FASB is trying to determine which entities can call themselves nonpublic.
FASB announced Wednesday that it will undertake a project to reexamine the definition of a “nonpublic entity.” The announcement is likely to be welcome news to CPAs working in the nonpublic sector, where many believe that a more consistent and clear definition of a nonpublic entity is needed.
Clarifying the definition of nonpublic entities is necessary for determining the scope of FASB’s ongoing project to develop a Private Company Decision-Making Framework, which will essentially be a set of criteria for making decisions about whether and when to adjust the requirements for recognition, measurement, presentation, disclosure, effective dates, and transition methods for financial accounting standards that apply to private companies.
FASB plans to issue a discussion document on the framework for public discussion in the second quarter of this year, but it will not finalize the framework until the Financial Accounting Foundation (FAF) makes a decision as part of its work plan to address private company standards. Any new private company council that FAF forms would have an opportunity to evaluate and agree on the new framework, according to a FASB news release.
FAF President and CEO Terri Polley said in January that she expects the FAF trustees to announce their final plan on private company standards in early spring. FAF’s October proposal, which called for the creation of a Private Company Standards Improvement Council (PCSIC) to recommend changes to U.S. GAAP for private companies, met a wave of objections because the PCSIC’s recommendations would be subject to FASB approval.
The AICPA was among those disappointed with FAF’s October proposal and voiced its support for the creation of a standard-setting board independent of FASB to modify U.S. GAAP for private companies. More than 6,200 comment letters were sent to FAF in response to its proposal.
Wednesday’s announcement shows that standard setters are trying to determine which entities will be included in the scope of the private company plan FAF will announce. FASB also will evaluate whether any changes that result from a consistent definition of nonpublic entities should be applied prospectively or retrospectively to affected accounting standards.
“The FASB Accounting Standards Codification includes several definitions of private companies that the FASB established to address specific types of issues over the years, including the scope of a standard, differences in accounting or disclosure requirements, and different effective dates,” FASB Chairman Leslie Seidman said in a statement. “The FASB identified an opportunity to simplify the definition of a nonpublic entity and to address a few known practice issues. This project will also help us identify the scope of entities that would be considered in future discussions about potential differences in requirements for nonpublic entities.”
Seidman said the project was based on comments from stakeholders, who questioned which nonpublic entities would qualify for practical expedients, reduced disclosures, and deferred effective dates. Stakeholders had presented ongoing questions about which definition of a nonpublic entity was being used in various projects.
—Ken Tysiac (ktysiac@aicpa.org) is a JofA senior editor.
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