Private company accounting following a new path

By Ken Tysiac

The relief for private companies in the hedge accounting standard FASB issued this week was largely hidden from view, but it still was significant.

Private Company Council (PCC) members explained to FASB that private companies face challenges in completing hedge documentation in a timely manner. In some cases, private companies were being excluded from hedge accounting because they didn't produce quarterly financial statements.

FASB responded by allowing private companies to time their performance and documentation of effectiveness testing with the timing of the issuance of their financial statements. It was a simple change that expanded the availability of hedge accounting to private companies.

But it didn't get much attention because the news was overshadowed by the larger story about the creation of the new hedge accounting standard. The PCC's headlines have waned as its focus has shifted away from creating changes to existing GAAP and toward helping FASB consider private company issues while it develops its standards.

Nonetheless, the hedge accounting exceptions demonstrate that the PCC's advocacy for private companies has not abated.

"Initially maybe the success of the PCC was being measured on how many alternatives got issued that were specific PCC projects," PCC Chairman Candy Wright said in a telephone interview. "And I think it's much more important for us to have influence on the front end of a project and to get the private company needs and unique items on the front end of a project."

FASB Chairman Russell Golden attributed the PCC's continued influence to a change in culture at the board. He said the board is welcoming PCC input at various points in the standard-setting process, including times that might not be obvious to the public.

For example, before FASB issues a proposal or standard, Golden asks Wright to assign at least one PCC member to review the draft to make sure the language will be understandable in a private company environment.

Sometimes the PCC's input even leads to changes that are implemented for all organizations. For example, a PCC recommendation led to a standard issued in July for all entities that simplifies the accounting for certain financial instruments with down round features.

"We've brought them into our process so we can make those private company changes," Golden said in a telephone interview. "Sometimes those private company changes are for the system as a whole, and sometimes they are unique to private companies. But we can do that at the time that the board is making the changes for everyone. And I think that is substantially better for the system as a whole."

Accepting the differences

In a speech during a private company town hall at the Georgia Society of CPAs' Southeastern Accounting Show on Thursday in Atlanta, Golden acknowledged some of the standard-setting board's shortcomings in the past.

He said FASB's past reluctance to accept differences—in the interest of maintaining comparability for all financial reporting—sometimes made the board reluctant to consider alternatives that would improve financial reporting for users of private company financial statements.

But FASB and its parent organization, the Financial Accounting Foundation, heard and responded to private company complaints that in some cases it was appropriate to have accounting rules for private companies that are different from the rules for public company accounting. That led to the creation of the PCC, which quickly got to work in 2012 under Chairman Billy Atkinson, creating exceptions for private companies in the areas of GAAP that were most problematic for them.

Four areas were identified, and exceptions were created for private companies to amortize goodwill; apply a simplified hedge accounting method for certain interest rate swaps; elect not to apply variable-interest entity (VIE) guidance to a lessor under common control; and elect an accounting alternative for the recognition of certain intangible assets acquired in a business combination.

Those changes received attention because they were changes to existing GAAP that began as PCC projects. Now the PCC's influence is more subtle, but it remains substantial, as FASB Vice Chairman James Kroeker said when the hedge accounting standard was issued.

"It was very helpful to have us understand that perhaps what would really be useful is private companies identifying that they are engaging in a hedge but giving them more time up until they issue the financial statement to do all the work," Kroeker said in a telephone interview.

With the PCC's help, FASB also is considering expanding the GAAP exception to VIE guidance. Under a current proposal, a private company would not have to apply VIE consolidation guidance to legal entities under common control, including common-control leasing arrangements, if both the parent and the legal entity being evaluated for consolidation are not public business entities.

A private company would provide the accounting policy election to all current and future legal entities under common control that meet the criteria for applying the alternative.

"I'm really excited about the possibility that VIEs are going to be able to be scoped out for private companies that meet the qualifications to be scoped out," Wright said. "That has been a struggle since day one. It's going to be really, really good when that becomes a final standard."

Passing the torch

This year will mark a transition for the PCC, as the terms of the last original members of the council are set to expire at the end of December.

Four members—Jeremy Dillard, Michael Minnis, Dev Strischek, and Frank Tarallo—will begin new three-year terms. Golden saw evidence that the process is working in the enthusiasm around recruitment for new council members as Steve Brown, Jeff Bryan, and Larry Weinstock exit the PCC.

"The level of interest in the private company community for being on the PCC was the highest it has [ever been] in this interview cycle," Golden said. "I think those out there are seeing the benefit that it provides, and they want to be part of it."

In the current environment, Golden said, FASB is taking into account the needs of all its stakeholders—public companies, private companies, not-for-profits, and employee benefit plans. The board is seeking comments on its future agenda, with topics such as liabilities and equity, performance reporting, intangibles, and pensions and other post-employee benefits among the top candidates for standard-setting work.

During his speech in Atlanta, Golden acknowledged that some preparers who are busy implementing the new revenue recognition and leases standards probably wish FASB would take a vacation. But he reassured the audience that the standards the board is considering for its agenda would take a significant number of years to complete.

Meanwhile, FASB's work with the PCC on topics such as hedge accounting and expanding the VIE exception for private companies is designed to make financial reporting easier for preparers without compromising the quality of information provided to financial statement users. And as FASB works on its agenda, private company issues will continue to be considered.

"The FASB has really been open to having dialogue all along the way from a standard-setting perspective," Wright said. "… It's been an inclusive process. In the past, we were trying to insert ourselves. And now we don't have to do that very often. There's been a lot of outreach from the FASB's perspective to want to include us."

Ken Tysiac (Kenneth.Tysiac@aicpa-cima.com) is a JofA editorial director.

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