The Financial Accounting Standards Board and the Private Company Council voted Tuesday to finalize the Private Company Decision-Making Framework, which outlines criteria they intend to use for determining whether and under what circumstances it is appropriate to adjust financial reporting requirements for private companies following U.S. GAAP.
The framework is intended to help the PCC and FASB identify opportunities to reduce the cost and complexity of preparing private company financial statements in accordance with U.S. GAAP, while enhancing the relevance of accounting standards for private companies. FASB had previewed the decision-making framework in April, issuing an invitation to comment on a draft version of the framework (see FASB Previews Framework for Deciding on Accounting Standards Changes for U.S. Companies). The finalized framework is expected to be issued sometime this summer.
FASB and the PCC, which both operate under the auspices of the Financial Accounting Foundation, have already begun to issue several proposals for improving the accounting for private companies, including three earlier this month related to the accounting for intangible assets acquired in business combinations, goodwill, and certain types of interest rate swaps under U.S. GAAP (see FASB Issues Proposals for Private Company Accounting).
At Tuesday’s meeting at their headquarters in Norwalk, Conn., they proposed another improvement related to the consolidation of variable interest entities. They voted to expose a proposed alternative within U.S. GAAP for applying consolidation guidance for leasing entities under common control.
The proposed GAAP alternative, PCC Issue No. 13-02, Applying Variable Interest Entity Guidance to Common Control Leasing Arrangements (formerly FIN 46(R) and FAS 167), would exempt private companies from applying the consolidation guidance for variable interest entities under common control leasing arrangements.
The framework finalized by FASB and the PCC on Tuesday differs from the Financial Reporting Framework for Small and Medium-sized Entities, or FRF for SMEs, introduced by the American Institute of CPAs last month, which is intended to be a non-GAAP framework. The AICPA and the National Association of State Boards of Accountancy said Monday they would work on decision-making tools and illustrative examples to clear up confusion about when FRF for SMEs should be applied (see NASBA and AICPA End Spat over FRF for SMEs).
A variable interest entity is an organization in which consolidation is not based on a majority of voting rights. The disclosures to be provided under the alternative would better align the information that lenders and other users of private company financial statements typically use in assessing the cash flows of a reporting entity.
The PCC’s decision to move forward with the proposal is the first step in a process toward exposure by FASB. The FASB staff will draft a detailed proposal, which the board will discuss in the coming weeks. If the board decides to endorse the proposal, it will be issued for public comment as a proposed Accounting Standards Update.
“In advancing the PCC’s fourth accounting standards proposal, the PCC is making significant progress in tackling issues top of mind for users, preparers, and auditors of private company financial statements,” said PCC chairman Billy M. Atkinson in a statement.
In addition, at the PCC’s recommendation, FASB voted to add a project of comparatively narrow scope to its agenda to address the concerns of public and private company stakeholders on development-stage companies, such as startups.
Accounting Standards Codification Topic 915, Development Stage Entities (formerly FAS 7), requires a development stage company to conduct its accounting and prepare its financial statements using the same accounting principles as an established operating company. It also requires a company to report additional cumulative information for each income statement item and in the statement of cash flows from the company’s inception. In addition, a company must report the history of all transactions from inception, including noncash considerations.
“The PCC and the FASB identified issues concerning development stage companies that were found to affect both private and public companies—therefore we agreed that the project should be added to the FASB agenda,” said FASB member and PCC liaison Daryl E. Buck. “The FASB will be seeking input on the issue from investors and preparers from public and private companies alike.”
During Tuesday’s meeting, the PCC also continued its discussion on FASB’s projects on Accounting for Financial Instruments, Leases and Disclosure Framework, among others. The PCC also announced a public roundtable and town hall meeting, scheduled for Monday, Nov. 4, 2013 at Ohio State University in Columbus, Ohio to seek input from private company stakeholders on issues affecting them, the PCC’s projects to date, and FASB’s projects affecting private companies.
For more information, visit the PCC’s Web site.