The Private Company Council (PCC) is forging ahead with more in-depth analysis of three of the four issues it initially identified as candidates for possible GAAP exceptions or modifications for private companies.
On Tuesday, during the newly created PCC’s second meeting, the council added the three items to its agenda for examination of possible GAAP exceptions or modifications. These were:
- Recognizing and measuring intangible assets acquired in business combinations.
- Accounting for variable-interest entities (VIEs).
- Accounting for “plain vanilla” interest rate swaps.
Accounting for uncertain tax positions was the lone item of
initial interest that the PCC decided not to place on its agenda.
The PCC identified those four issues during its first meeting in December as the items of greatest concern to private companies and users and preparers of their financial statements. The PCC received pre-agenda reports from FASB staff members on the issues and decided to move forward with more extensive, formal reviews of them, except for uncertain tax positions.
Two new items were identified for pre-agenda discussion, and FASB’s staff was asked to prepare preliminary background on them for consideration at the next PCC meeting on May 7. Those items are:
- Stock compensation, including measurement, modifications and settlements accounting for private companies.
- Accounting for development-stage enterprises.
The PCC was formed by FASB’s parent body, the Financial
Accounting Foundation (FAF), in part to determine whether and when
exceptions or modifications to GAAP should be created for private
companies.
Intangible assets in business combinations
Accounting Standards Codification (ASC) Topic 805, Business Combinations, (formerly FAS 141(R)), and ASC Topic 350, Intangibles—Goodwill and Other (formerly FAS 142) govern this topic.
FASB’s staff review explained that for private companies, the standards require valuations that are not easy and often require the hiring of external valuation specialists. In addition, the review said many users of private company financial statements pay no attention to these valuations.
PCC member Neville Grusd, president of Merchant Financial Corp., said financial statement users totally disregard these valuations.
“This is something that private companies could well do without,” Grusd said.
Preliminary alternatives suggested by FASB’s staff included recognizing intangibles only in certain situations, or eliminating the requirement to recognize any intangibles. The PCC committed to study both the recognition of intangibles and the amortization of goodwill with respect to this issue.
Variable-interest entities
This topic is subject to the requirements of ASC Topic 810, Consolidation. Formerly known as FIN 46(R) and FAS 167, this standard requires consolidation of the financial data of a VIE with the company that is the VIE’s primary beneficiary.
This standard was created after Enron’s bankruptcy to prevent companies from hiding liabilities on the balance sheets of dummy corporations. In private company circumstances, though, this consolidation can be costly and may not create financial statements that are more helpful to lenders.
Private company owners particularly have problems with this standard when they own buildings and lease them back to their companies. Requiring companies to consolidate those buildings on their financial statements adds complexity to the financial statements that may not be of interest to users.
“I think more than any other standard, this is the one that, it is difficult for many users,” said PCC member Diane Rubin. “It’s costly for the preparers, it’s more costly for the audit.”
Interest rate swaps
ASC Topic 815, Derivatives and Hedging, requires costly accounting when swaps are used to convert variable interest rates on loans to fixed interest rates.
The PCC decided to proceed with further analysis in situations where just one counterparty is involved. The PCC is having FASB’s staff perform more pre-agenda research in situations involving more than one counterparty or lending arrangement.
No FIN 48 on agenda
Some PCC members said that uncertain tax position calculations are appropriate as required by FIN 48, Accounting for Uncertainty in Income Taxes, mostly incorporated into ASC Topic 740, Income Taxes.
Although PCC members agreed that the calculations can be costly, the standard was not deemed appropriate for an agenda item at this time. PCC members will continue to solicit feedback on this issue..
“There’s a certain unease among preparers that they have to assess whether there’s a liability,” said PCC member Mark Ellis. “But that’s part of your job.”
Ellis advocated for the new pre-agenda item on stock-based compensation because he said accounting in such situations can become strange in a private company environment. He said that when companies’ values decrease, some “interesting” results occur in the accounting for such compensation.
“I get the theory behind it, but the practicalities of it are really pretty strange when the value of the business decreases,” Ellis said.
With regard to the other new pre-agenda item, PCC members said there may be simplifications that could be made to disclosures for development-stage enterprises in a private company setting.
“It probably does not impact that many private companies,” said PCC member Jeffery Bryan, “but it impacts, for all intents and purposes, only private companies.”
The PCC also voted with FASB to seek more public input on the proposed private company decision-making framework, which will create criteria to determine whether and when it is appropriate to adjust financial reporting requirements for private companies using GAAP.
The proposal is expected to be re-exposed in March with a 90-day
comment period.
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Ken Tysiac (
ktysiac@aicpa.org
) is a JofA senior editor.
