Chair outlines Private Company Council’s top 4 priorities

The views expressed in this article are those of the author only. Official positions of the Private Company Council and the Financial Accounting Standards Board on accounting matters are determined only after extensive public due process and deliberation.

Earlier this summer, the Private Company Council (PCC) reaffirmed its support for focusing our attention on the financial reporting issues currently most important to U.S. private companies. PCC members unanimously supported conducting preliminary research on:

• Credit losses — short-term trade accounts receivable and contract assets;
• Debt modifications and extinguishments;
• Presentation of conditional retainage and overbillings as contract assets and liabilities; and
• Lease accounting simplifications, such as practical expedients and accounting alternatives.

The PCC is considering these issues under a prioritization process we initiated earlier this year. The goals of this process are to increase the PCC’s effectiveness and efficiency by routinely and systematically evaluating private company issues and to benefit stakeholders by prioritizing the financial reporting issues that are the most pervasive and applicable to the greatest number of entities.

PCC agenda priorities

Credit losses and CECL simplification

One of the four issues the PCC supports conducting preliminary research on is the application of guidance on current expected credit losses (CECL) (FASB ASC Topic 326, Financial Instruments — Credit Losses) to short-term accounts receivable and contract assets. Trade accounts receivable are short-term financing arrangements for a customer’s payment on the purchase of nonfinancial assets after a seller provides goods or services. PCC members supported research in this area, specifically, a simplification for private companies that would help reduce ongoing costs.

PCC members discussed the ongoing annual costs of applying this guidance because private company stakeholders have told the PCC that the effect of adopting this aspect of Topic 326 on the financial statements normally is not material.

FASB staff is conducting outreach with a variety of private company stakeholder groups to develop a more detailed understanding of the issues and potential benefits expected from simplification.

Debt modifications and extinguishments

The PCC supports conducting preliminary research on the application of Debt — Modifications and Extinguishments (Subtopic 470-50).

From a debt issuer’s perspective, the guidance requires an entity to assess whether the exchange of a debt instrument results in debt terms that are “substantially different” or results in a “substantial modification” of debt terms.

If the new or modified debt is deemed substantially different, then the entity is required to treat the transaction as an extinguishment. If instead the debt issuer determines that the original and new debt instruments are not substantially different, then the entity is required to treat the transaction as a modification.

Private company stakeholders have told the PCC that applying this guidance can be costly and complex and that the different financial reporting outcomes from applying it may not provide financial statement users with information they can use to make decisions.

FASB staff is conducting additional research including stakeholder outreach to provide PCC members with a more detailed understanding of the issues.

Presentation of conditional retainage and overbillings as contract assets and liabilities

The PCC also supports conducting research on the presentation of conditional retainage and overbillings as contract assets and liabilities under Topic 606, Revenue From Contracts With Customers, and Subtopic 910-10, Contractors — Construction — Overall.

Entities that operate in the construction industry are often subject to contracts that contain retainage or retention provisions, which often allow the customer to withhold a portion of the consideration billed by the entity until certain project milestones are met or the project is completed.

Before the adoption of Topic 606, the standard practice was to present conditional retainage separately from billings in excess of deferred costs (deferred revenue). In applying Topic 606, retainage that is classified as a contract asset is required to be presented on a net basis with a contract liability for the same contract. As such, a net contract asset (that is, a contract for which conditional retainage exceeds overbilling) is presented with other contract assets, or a net contract liability (that is, a contract for which overbilling exceeds conditional retainage) is presented with other contract liabilities on the balance sheet.

Private company financial statement users have told the PCC that current balance sheet presentation guidance does not provide information that is useful for making related decisions and is not in keeping with how this industry evaluates the financial position and results of operations.

Next steps in researching this area include defining the scope of the issue, performing targeted outreach with private company stakeholders, and researching potential private company alternatives.

Lease accounting simplifications

The PCC supports conducting research on potential private company simplifications to Topic 842, Leases, such as practical expedients or accounting alternatives. Private company preparer and practitioner stakeholders have told the PCC that applying the guidance presents a number of challenges, which can be costly and complex, and have asked whether opportunities for simplification for private company stakeholders can be considered.

As a part of its ongoing post-implementation review of Topic 842, FASB has provided a number of simplifications for applying this guidance. These include practical expedients, some of which are available to all entities, while others apply to only private companies and certain not-for-profits.

Next steps for PCC consideration include establishing a working group whose objectives would be to identify areas of significant complexity for private companies, perform preliminary research and outreach to understand which areas of complexity to explore for potential private company simplification, and develop potential private company alternatives that are cost-effective.

Final thoughts

The PCC recognizes that private companies are balancing many dynamics in successfully operating. Hiring and retaining accounting personnel is one of the foremost challenges. We are focused on identifying opportunities to reduce complexity while also meeting the needs of stakeholders, lenders, and other users. At our June meeting, we discussed next steps in pushing forward the research in each of these areas and mapped out initial timelines for making progress. We will work together over the next 12 to 18 months to bring these issues to fruition

To learn more about the PCC and what we are working on, visit fasb.org/pcc.

Note: “At its Sept. 24 meeting, the PCC made progress on the four agenda priority projects described in this article. Chair Shawver will provide an update on that progress during the AICPA A&A Focus webcast on Oct.  2.

— Jere Shawver , CPA, is CEO of Baker Tilly US, LLP, and the chair of FASB’s Private Company Council. To comment on this article or to suggest an idea for another article, contact Jeff Drew at Jeff.Drew@aicpa-cima.com.