The rules for providing alternative financial reporting guidance for private companies were formally established Monday when FASB and the Private Company Council (PCC) issued their Private Company Decision-Making Framework: A Guide for Evaluating Financial Accounting and Reporting for Private Companies.
FASB also issued its definition of a public business entity, clarifying which entities are eligible for alternative guidance for private companies.
The framework will assist FASB, the PCC, and the Emerging Issues Task Force in determining whether and when to provide alternative recognition, measurement, disclosure, display, effective date, or transition guidance for private companies.
According to the framework, five factors separate private companies from public companies with respect to financial reporting. The factors are:
- The number of primary financial statement users and their access to management.
- The investment strategies of primary users.
- The ownership and capital resources.
- Accounting resources.
- The manner in which preparers learn about new financial reporting guidance.
Meanwhile, Accounting Standards Update No. 2013-012, Definition of a Public Business Entity: An Addition to the Master Glossary, gives one definition of “public business entity” for use in future standard setting. Existing requirements are not affected by the definition.
An entity is a public business entity if it meets any of the following criteria:
- It files or is required to file financial statements with the SEC (including voluntary filers).
- It is required to file financial statements with a foreign or domestic regulator in preparation for selling or issuing securities that are not subject to contractual restrictions on transfer.
- It has securities that are traded, listed, or quoted on an exchange or over-the-counter market.
- It has one or more securities that are not subject to contractual restrictions on transfer, and it is required by law, contract, or regulation to prepare U.S. GAAP financial statements (including footnotes) and make them publicly available on a periodic basis.
Employee benefit plans and not-for-profits are not considered business entities under the standard.
FASB expects to issue its first two GAAP exceptions for private companies in January 2014. The exceptions will exempt private companies from a requirement to perform goodwill impairment tests following a business combination and will provide private companies with a simplified hedge accounting approach for accounting for certain interest rate swaps.
—Ken Tysiac (
) is a JofA senior editor.