The AICPA is encouraging the Financial Accounting Foundation (FAF) to maintain the commitment to private company accounting that it has displayed through the work of the Private Company Council (PCC) along with FASB.
The board of trustees of FAF, which is FASB’s parent body, on Feb. 26 released a request for comment on the PCC’s effectiveness, accomplishments, and future role in setting standards for private companies. The request was part of a three-year assessment that FAF said it would undertake after establishing the PCC in May 2012.
In the request for comments, FAF’s trustees suggested a potential improvement may be for the PCC to make a transition into a body that primarily provides input on active FASB agenda projects. In addition to providing such feedback in its first three years, the PCC also has reviewed existing GAAP to establish GAAP alternatives for private companies, upon FASB's endorsement.
In a May 8 letter to the FAF trustees, AICPA President and CEO Barry Melancon, CPA, CGMA, and AICPA Chair Tommye E. Barie, CPA, wrote that the PCC cannot become merely an advisory body to FASB on active projects.
“The PCC should formally decide its project agenda and vote on the need for differences in existing GAAP, and its recommendations for differences in active FASB projects (regardless of whether FASB initially agrees with those recommendations) should be exposed for public comment along with the FASB’s rationale for its decisions regarding those recommendations,” the AICPA wrote. “This level of partnership and transparency is necessary to demonstrate that FASB is listening to the needs of the private company constituency.”
The AICPA’s letter applauds FAF, FASB, and the PCC for commitment and dedication that “have shown that all parties involved have been listening to the private company constituencies.” According to the letter, the output from FASB and the PCC has been extremely well received by private companies and their public accounting firms, which are eager for the momentum in addressing private company issues to continue.
But the letter also expressed concern that the tone of FAF’s request for comment suggests that the work of FASB and the PCC addressing issues in existing GAAP for private companies is largely done.
“If that tone was FAF’s intent, we do not agree,” the AICPA wrote. “FASB and the PCC have been doing good outreach with private company constituents to identify existing GAAP topics that should be reviewed by the PCC. Our sense from that continuing outreach, and some of our own in developing this letter, is that FASB and the PCC have more work to do on existing GAAP.”
In addition, the AICPA letter said that the current, departing PCC chairman (Billy Atkinson) has set a high bar, and will need to be succeeded by a strong, proven leader dedicated to maintaining FAF’s commitment to private company financial reporting.
Through the PCC process, FASB has issued four Accounting Standards Updates (ASUs) with GAAP alternatives that private companies can elect:
- Accounting Standards Update (ASU) No. 2014-02, Intangibles—Goodwill and Other (Topic 350), which permits a private company to subsequently amortize goodwill on a straight-line basis over 10 years, or less if another useful life is more appropriate. It also permits a private company to apply a simplified impairment model to goodwill.
- ASU No. 2014-03, Derivatives and Hedging (Topic 815), which gives private companies other than financial institutions the option to use a simplified hedge accounting approach to account for interest rate swaps that are entered into to convert variable-rate interest payments to fixed-rate payments.
- ASU No. 2014-07, Consolidation (Topic 810), which permits private companies—when certain conditions exist—to elect not to apply variable-interest entity guidance to a lessor under common control.
- ASU No. 2014-18, Business Combinations (Topic 805), which permits a private company to elect an accounting alternative for the recognition of certain intangible assets acquired in a business combination.
“FAF expended great energy and resources to rightly have the entire organization become more attuned to the private company financial reporting constituency,” the AICPA wrote. “We believe it will take no less energy and effort to continue the momentum.”
—Ken Tysiac ( firstname.lastname@example.org ) is a JofA editorial director.