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Between Big GAAP and Little GAAP, There are Many Gaps

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September 26, 2013

The Financial Accounting Standards Board hopes to reduce some of the complexity of its standards by leveraging the work of its sister organization, the Private Company Council, which has been working to adjust the accounting rules for the scaled-back needs of smaller businesses.

At a roundtable discussion Monday at New York University’s Stern School of Business, a panel of accounting standard-setters, academics and practitioners discussed the contrasts between public company and private company financial reporting, and the ongoing “Big GAAP” vs. “Little GAAP” debate.

Former FASB chairman Bob Herz was on hand to discuss the developments in recent years as FASB first set up a Private Company Financial Reporting Committee that eventually gave way to the PCC after accountants balked at the increasing complexity of the standards under U.S. GAAP, which have little to do with the way most businesses in the U.S. are run. “This is a very important issue given the importance of private companies to our economy, to job creation, and the like,” he said. “As far as the accounting, whether there should be Big GAAP, Little GAAP, or somewhere in between, I think there are differing points of view.”

He pointed to the need to keep things simple and avoid having to learn two different forms of GAAP. On the other hand, many privately held businesses face resource constraints and cannot satisfy the complex demands of GAAP accounting without outsourcing it to an outside accountant who possesses the necessary expertise. But the main users of the financial statements are lenders, who are mostly interested in seeing cash-based forms of accounting. In between Big GAAP and Little GAAP, some users prefer to see some carefully crafted differences for private companies without completely abandoning GAAP accounting.

Herz noted that different countries around the world had taken different approaches to resolving the various demands, such as the United Kingdom and Canada, which retained their slimmed-down form of GAAP for private companies when they transitioned to International Financial Reporting Standards. The International Accounting Standards Board also produced its own form of IFRS for Small and Medium-sized Entities.

In the U.S., FASB’s Private Financial Reporting Committee gave way to the recently established Private Company Council to adjust the standards within U.S. GAAP for private companies, while the American Institute of CPAs recently introduced a Financial Reporting Framework for SMEs, which is intended to be a non-GAAP Other Comprehensive Basis of Accounting, or OCBOA.

NYU Stern accounting professor Sy Jones, who moderated the panel discussion, wondered aloud, “So we might not be talking about Big GAAP vs. Little GAAP, but Big GAAP vs. Many GAAP.”
Brendan Dougher, managing partner of PricewaterhouseCoopers’ New York Office, noted that PwC has many private companies among its client base who have trouble dealing with complex issues such as intangibles, goodwill, variable interest entities on consolidation, and derivatives. “There’s no question, for a private company population, is that they would like to see simplification,” he said. “The question, from our perspective, gets to be what does simplification look like? Does it extend to public companies? Should we look at some of these key topics and say, ‘Why just for private companies? If we’re going to simplify GAAP, why wouldn’t we simplify it for public companies? Why put that burden on public companies.’”

Jeffrey Mechanick, assistant director of non-public entities at FASB, described how the work of the Private Company Council was helping inform FASB’s thinking on standard-setting for both public and private companies. FASB has been setting up a Private Company Decision-Making Framework, a guide to help the PCC and FASB achieve a better balance in relevance and cost in GAAP standards for private companies by taking into account who the users of private company financial statements actually are and what they are using them for and not using them for, according to Mechanick. The framework is close to being finalized and will be issued in October, he noted.
The PCC has proposed a number of changes in GAAP standards for private companies in areas such as intangibles recognized in business combinations, goodwill, certain interest rate swaps and certain variable interest entity situations. FASB has sent out the recommendations for public comment, and the PCC will be redeliberating them and holding public roundtable discussions with the public. Mechnick noted that the PCC will also be doing “lookback” work on disclosures, perhaps using the Disclosure Framework that FASB has been developing.

“While the PCC’s focus is and will be on private companies, FASB’s mission spans all nongovernmental entities,” said Mechanick. “It has a standing project on its agenda to assess the appropriateness of any of these PCC proposals or any future PCC proposals to see if they should be extended to public companies and not-for-profit organizations or, where applicable, employee benefit plans. That is what the board and staff are doing with the current proposals. One of the most important benefits of having an interconnected standard-setting process for private, public and not-for-profits is that we seek to bring a better cost-benefit balance within GAAP for private companies, we’re initiating at least potential simplification for all entities from yet another direction.”

Mechanick was asked by Accounting Today about whether FASB and the AICPA will be working together on private company accounting standards and drawing on each other’s frameworks after the National Association of State Boards of Accountancy agreed to end a dispute with the AICPA over the AICPA’s FRF for SMEs. NASBA and the AICPA agreed to develop a decision-making tool to provide accountants with guidance for deciding when to apply any particular frameworks for private company accounting.

“I don’t know to what extent we will,” he responded. “I guess their framework is a point of reference just like IFRS for SMEs is, yet we’re trying to do this within GAAP. I think that the concern that NASBA raised—and frankly it’s a concern that we had—is the potential for marketplace confusion. Because while this product is perhaps meeting a need, it’s something in the OCBOA space that’s so much closer to GAAP than anything that’s ever been there before, so arguably the concern would be to what extent somebody using this may be confused as to what they are getting. That’s what we’re trying to work to do to head off those kind of issues.”

Bob Durak, director of private company reporting at the AICPA, noted the Institute had worked with NASBA to resolve the differences. “The National Association of State Boards of Accountancy came out and expressed some concerns about the FRF for SMEs and wanted to make sure that the Private Company Council should be allowed to operate to work on GAAP,” he said. “There was confusion in the marketplace and it might confuse the framework for GAAP. So we sat down and we worked with them. We developed some tools to help people choose which accounting framework would be best for them under their circumstances. We came out and we publicly expressed our support for the PCC. We also made sure that our tools and illustrative examples were very clear that the FRF for SMEs is not GAAP. It’s a non-GAAP framework.”

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