The Financial Accounting Foundation’s board of trustees released a proposed plan Tuesday calling for the establishment of a new council that would be able to identify, propose and vote on improvements to U.S. accounting standards specifically for private companies, but the changes would still be subject to ratification by the Financial Accounting Standards Board.

Teresa Polley

The council would include between 11 and 15 members, appointed by the FAF trustees. The members would include people representing investors, lenders, auditors, accountants and others with experience in using and preparing private company financial statements.

The eagerly awaited plan does not go as far as the recommendation by a Blue-Ribbon Panel on Standard-Setting for Private Companies to create a separate board for private company accounting standards under the oversight of the FAF and independent of FASB. The new council, known as the Private Company Standards Improvement Council, would take the place of the Private Company Financial Reporting Committee, and could still be overruled by FASB, which is overseen by the FAF.

In addition, the chairman of the group would be a member of FASB and also would be appointed by the FAF trustees. Any changes in accounting standards for private companies would need to be approved by a two-thirds majority vote of the new council and would then be forwarded to FASB for ratification.

The Financial Accounting Foundation is seeking comments on the proposed plan by Jan. 14, 2012 and is planning to conduct roundtables across the country in early 2012. The council would be established by sometime next year.

“The plan basically is that the board of trustees will establish a Private Company Standards Improvement Council, and this council would determine if exceptions or modifications to GAAP are required to address the needs of users of private company financial statements,” said FAF president and CEO Teresa Polley, in an interview with Accounting Today. “Basically, the first order of business would be, jointly with the FASB, this group would develop criteria for determining when exceptions or modifications are warranted for private companies, and then based on those criteria, which they are going to develop jointly with the FASB, they would conduct a review of existing U.S. GAAP, and identify standards that they believe would require reconsideration and they would vote on possible exceptions or modifications for private companies. Those changes would then be subject to ratification by the FASB and then they would undergo due process.”

It is unclear how the new proposals will be received by proponents of an independent standards board. The American Institute of CPAs has been pushing for the creation of a separate standards board, and organized a letter-writing campaign in support of that effort. The AICPA announced last week that 33 state CPA societies have also expressed their support so far for the creation of a separate standard-setting board for private companies (see 33 State CPA Societies Back Private Accounting Standards Board). The AICPA was one of the organizations that spearheaded the creation of the Blue-Ribbon Panel on Standard Setting for Private Companies, along with the FAF and the National Association of State Boards of Accountancy.

The AICPA reacted with dismay to the FAF proposal. “Three thousand private company constituents and a majority of the state CPA societies, representing more than a quarter million CPAs, have spoken," said AICPA president and CEO Barry Melancon in a statement. "They want a separate independent standard setting board and they have sent letters to FAF asking for change. Over the years, FASB’s main focus has understandably been on the needs of constituents of publicly traded companies. The pent up frustration we are witnessing by the private company constituency is a direct result of that public company focus and not seeing that differences can be and are appropriate for private companies and their financial statement users.” 

AICPA chairman Paul Stahlin also criticized the proposals. “Unfortunately, FAF’s proposal has failed to accept the views of the many voices of the private company constituency asking for a separate board," he said. "We don’t think the concerns of smaller private companies can be fully appreciated until there is an independent board dedicated and focused solely on the needs of private companies. Therefore, we will continue to ask our members and others who support more relevant, more cost beneficial standards for private companies to make their voices heard loud and clear that the best answer is an independent private company board.”

In contrast, the National Association of State Boards of Accountancy welcomed the FAF proposals. “We applaud the Financial Accounting Foundation for actively soliciting the views of all interested parties,” NASBA chair Michael D. Daggett said in a statement. “As NASBA has stated, complex and irrelevant accounting standards need to be reined in, for both private and public companies. Recent efforts by the Financial Accounting Standards Board have demonstrated that they are aware of the need to give added attention to private companies and we look forward to further progress in that direction.”

NASBA president David Costello noted the long history of the issue. “For more than 30 years, the differences between the accounting needs of private companies and public companies have been underscored," said Costello. "State Boards of Accountancy, who hold the authority to set the standards under which CPAs practice, are united in their support of a process which produces standards that fill the public’s needs and that can effectively be met by CPAs.”

In the report they released in January, the Blue-Ribbon Panel called for the creation of a separate standard-setting board under the oversight of the FAF, like FASB and the Governmental Accounting Standards Board. A trustee working group at the FAF has been studying those recommendations in the months since then in preparation for the release of its proposed plan Tuesday. Meanwhile, FASB has been expanding its outreach to private company constituents, opening a Web portal for private companies and not-for-profit organizations, and adding a board member, Daryl Buck, who comes from the private company world as CFO of grocery retailer Reasor’s Holding Company.

Polley noted that the PCSIC would be overseen by the FAF, and its proposals would be subject to ratification by FASB.

“It’s not a separate authoritative board, but they do have the ability to set their own agenda and they do have the ability to vote,” said Polley. “The expectation is that they will meet jointly with the FASB, so all of the FASB members would be in attendance at their meetings to facilitate general communication and understanding of the different perspectives, whether from the PCSIC members or the FASB members.”

She noted that the chair of the PCSIC would be a FASB member as well. “We think that’s important because that provides a direct link between this group and the FASB. It will facilitate that dialogue and communication and understanding,” said Polley.

She declined to say whether Buck would be appointed to run the new council. “That will be a trustee decision on who will be the chair, but we would want the chair to be someone who has had exposure to private companies during his or her career,” said Polley. She added that many of the FASB members have had exposure to private companies during their pre-FASB careers.

The FAF has not yet decided on the exact size of the new council, but Polley said it would be in the range of 11 to 15 members. “They would come from the varying backgrounds of user, preparer, auditor of private company financial statements,” she said. “The CPA types, the auditor types, would have experience with auditing private company statements and/or compiling and reviewing, because we understand that many private companies may not have audited statements, but they involve their auditors or their accountants in compiling and reviewing their statements.”

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