In what many hope will be the end of over three decades of debate, the trustees of the Financial Accounting Foundation's board of trustees voted in late May to establish a new Private Company Council that will determine whether exceptions or modifications to U.S. GAAP for privately held companies are necessary -- and gathered crucial support from various professional bodies, most notably the American Institute of CPAs.
The new council will replace the Private Company Financial Reporting Committee and will have the ability to identify, deliberate and vote on any proposed changes, which will be subject to endorsement by the Financial Accounting Standards Board, which the FAF oversees, and be submitted for public comment before being incorporated into GAAP. The PCC will also serve as the primary advisory body to FASB on the appropriate treatment for private companies for items under active consideration on the FASB's technical agenda.
A LONG ROAD
While the issue of separate, or differential, standards for private companies -- sometimes referred to as Big GAAP-Little GAAP -- has been debated since at least the 1970s, the new council came more or less in response to a report from the Blue Ribbon Panel on Standard-Setting for Private Companies that the FAF, the American Institute of CPAs and the National Association of State Boards of Accountancy set up in late 2009. The report the panel issued in January 2011 called for a separate standard-setting board to be set up under the auspices of the FAF. The FAF, however, issued a proposal last October calling for the establishment of a Private Company Standards Improvement Council, whose recommendations would still be subject to approval by FASB and which would be chaired by a member of FASB.
The AICPA said that the October proposal did not go far enough in separating the council from FASB control and organized a letter-writing campaign that generated thousands of comments to the FAF from CPAs. The AICPA even suggested that it would create its own standard-setting board. NASBA was more supportive of the FAF proposal.
The revised proposal comes in response to some of those complaints, but still leaves accounting standards for private companies in the hands of FASB. Based on criteria mutually developed and agreed to with FASB, the Private Company Council will determine whether exceptions or modifications to existing nongovernmental U.S. GAAP are necessary to address the needs of users of private company financial statements.
"The plan approved by the trustees strikes an important balance," said FAF president and CEO Teresa S. Polley in a statement. "On one hand, the plan recognizes that the needs of public and private company financial statement users, preparers and auditors are not always aligned. But at the same time, the plan ensures comparability of financial reporting among disparate companies by putting in place a system for recognizing differences that will avoid creation of a 'two-GAAP' system."
WHAT'S IN A NAME?
"The first thing is that we changed the name to the Private Company Council," Polley told Accounting Today in an interview shortly after the vote. "We had a few comments from stakeholders that the original name was too complicated and didn't roll off the tongue. We tried to simplify that."
Polley acknowledged that many of the changes from the original proposal came from the comments that poured in after it was released. "Many of these changes were influenced by the input we received from that process," she said. "One of the things that we heard was concerns about too much influence in the original proposal. One of the things that we changed was not having a FASB member be the chair of the group. ... We also decided to reduce the size of the group. ... We just thought a smaller group would be a little bit more nimble in getting the important work on their agenda underway."
Polley said that the FAF also elected to increase the number of meetings of the new council as it goes about its work. "We also decided, because we had heard concerns that there weren't enough meetings and a tremendous amount of work to be done, so we've stipulated a minimum number of meetings, at least for the first three years, of five meetings a year, with the chairman having the ability to call other meetings as necessary," she said. "We also made it clear that while FASB members will be expected to attend the deliberative meetings of the PCC, the PCC could meet with or without FASB members present for educational or administrative meetings."
One of the key differences is the endorsement process, she noted. "We've decided to move away from a ratification process to an endorsement process," said Polley. "We believe an endorsement process more positively describes the more collaborative relationship that we expect between FASB and the PCC. FASB's being at the table for the deliberations by the PCC we believe will enable a mutual understanding of views, both FASB members understanding what the PCC members believe and the PCC members understanding what FASB members think, etc. ... We had heard that concern from some commenters that there should be at least some kind of time limit for FASB to complete PCC issues. We have a general expectation that FASB would act within 60 days. If it does not, it needs to provide to the PCC in writing the reasons why not. In addition, should there be a decision not to endorse by FASB, FASB would need to explain in writing the reason why, and also as we heard as a suggestion from people we conducted outreach with, FASB would provide alternatives or other perspectives that the PCC should consider that could result in a decision to endorse."
She does not expect there to be many disagreements between FASB and the PCC over any recommendations for changes in the standards for private companies. "I would anticipate that the endorsement process is not going to be a surprise," she said. "If FASB disagrees vehemently with somewhere the PCC is going, the PCC will know that before it even gets to that point."
WHO'S IN CHARGE?
Another change from the original proposal involves oversight. "The FAF created the committee that was referred to in the original proposal," said Polley. "They created that committee today, the Private Company Review Committee. We have specified who the members will be. Mack Lawhon will be the chair, and that committee will be charged with holding the PCC and FASB accountable for achieving the goals, which is to ensure that private company issues are very well considered in the standard-setting process."
None of the FASB members will be members of the PCC, Polley noted, but there will be a FASB member assigned as a liaison to the council. That person has not been decided yet. "They'll have the primary responsibility for the relationship, but I expect all seven FASB members to be very much engaged with the PCC," said Polley. "It's not going to be delegated to the liaison."
"FASB and the PCC will mutually agree on a set of decision criteria that's going to be their guidebook for determining when exceptions or changes are appropriate for private company standards," said Polley. "That's really one of the major differences between the PCFRC and the PCC."
The AICPA issued a statement of support for the new council later on the same day that the FAF trustees issued their announcement.
"With the news announced today by the FAF, we recognize and appreciate that the FAF has taken solid steps in the right direction regarding the Private Company Council," said institute president and chief executive officer Barry Melancon. "The AICPA is encouraged by this approach."
Speaking a few weeks later in mid-June at an AICPA conference, institute chair Gregory Anton thanked the 10,500 members who had sent letters to the FAF on the issue, and then explained that changes to the FAF's proposal for the council had made it possible for the AICPA to support it. "Why are we comfortable supporting this going forward?" he asked. Among a number of changes that reduced FASB's sway over the new council, he mentioned, "It's now an endorsement model, versus a ratification model. So FASB must endorse a proposal from the council within 60 days, or it must produce a public report as to why a simple majority didn't endorse the proposal, and it must produce explanations of what must be changed so they can endorse it."
In its initial endorsement, the AICPA also announced plans to develop an "other comprehensive basis of accounting" financial reporting framework to meet the needs of some privately held small- and medium-sized enterprises, as well as the users of the financial statements of these entities. "The enhanced and simplified financial reporting framework will be a cost-beneficial solution for smaller privately held entities that do not need to comply with U.S. GAAP," said Melancon.
"One-size U.S. GAAP does not fit all companies, especially smaller privately held businesses," said Anton. "We recognize that the FAF has moved in the right direction and the AICPA will continue to be fully engaged with the FAF and the Private Company Council."
Polley said that she welcomed the AICPA's support. "I'm very pleased with the AICPA's reaction," she said. "We have had an ongoing dialogue with Barry and the leadership of the AICPA. We have had participation in our roundtables by Rich Caturano, who is the vice chairman, so I'm very pleased and I think where we came out is a great outcome. I think they'll be able to help some of the financial report issuers who don't necessarily need to issue GAAP financial statements."
She called the AICPA's OCBOA plan "an important and complementary undertaking" to the PCC. "Taken together, these actions demonstrate the commitment of both organizations to the private company financial reporting constituency."
Separately, the Institute of Management Accountants threw its support behind the new council. Many of the recommendations from a comment letter it sent in January are incorporated in the PCC's responsibilities and operating procedures.
"The IMA is encouraged that the FAF took our recommendations into consideration when developing this plan," said Irvin AndrÃ© Alexander, who co-authored the comment letter and chairs the IMA's Small Business Financial and Regulatory Affairs Committee. "We had tremendous confidence that the original proposal would work. Further, we applaud FAF's continued efforts to reduce the complexity of financial reporting with its extensive market outreach efforts."
A week after the initial vote, the FAF issued its final report on establishing the PCC. The report, available at the FAF's Web site, includes an executive summary and sections devoted to topics such as background and key events for standard-setting for private companies, key discussion issues, and responsibilities and operating procedures of the PCC. It also contains summaries of the comment letters received on the original proposal.
At the beginning of June, the FAF issued a request for nominations for candidates to serve on the PCC. The deadline for submissions was June 30, 2012. The council membership will comprise individuals with backgrounds and experience in using, preparing and auditing private company financial statements.
As for the possible specific projects that the new council might take up, Polley was uncertain, but acknowledged that some of the possibilities might include Financial Interpretation 48, Accounting for Uncertainty in Income Taxes, which had been a subject of complaint by some of the private company representatives who sat on the Blue Ribbon Panel. Along with FIN 48, other possibilities could include fair value measurement and consolidation of variable interest entities, which also came up during the process.
But Polley added that she was only speculating. "It's important to note that the PCC will control its agenda," she said. "It will decide by a supermajority vote, but they will get input from FASB and from stakeholders to determine what goes on their agenda."
HOW IT WORKS
The Private Company Council plan generally follows the outline of the initial trustee proposal announced last October, but includes several significant changes.
• The work process. Working jointly, the PCC and FASB will mutually agree on criteria for determining whether and when exceptions or modifications to GAAP are warranted for private companies. Using the criteria, the PCC will determine which elements of existing GAAP to consider for possible exceptions or modifications by a vote of two thirds of all sitting members, in consultation with FASB and with input from stakeholders.
If endorsed by a simple majority of FASB members, proposed exceptions or modifications to GAAP will be exposed for public comment. At the conclusion of the comment process, the PCC will redeliberate the proposed exceptions or modifications and forward them to FASB, which will make a final decision on endorsement, generally within 60 days. If FASB endorses the proposals, they will be incorporated into GAAP. If FASB does not endorse, the FASB chairman will provide the PCC chair with a written explanation, including possible changes for the PCC to consider that could result in FASB endorsement.
• The membership. The PCC will comprise between nine and 12 members, including a chair, all of whom will be selected and appointed by the FAF trustees. The PCC chair will not be a FASB member. Members will be appointed for a three-year term and may be re-appointed for an additional term of two years. Membership tenure may be staggered to establish an orderly rotation. The PCC chair and members will serve without remuneration but will be reimbursed for expenses.
A FASB member will be assigned as a liaison to the PCC. FASB technical and administrative staff will be assigned to support and work closely with the PCC.
• The schedule. During its first three years of operation, the PCC will hold at least five meetings each year, with additional meetings if determined necessary by the PCC chair. Deliberative meetings of the PCC will be open to the public, although the council may hold closed educational and administrative sessions. Most of the meetings will be held at the FAF's offices in Norwalk, but up to two meetings each year may be held elsewhere.
• Oversight and reporting. The FAF trustees will create a special-purpose committee of trustees, the Private Company Review Committee, which will have primary oversight responsibilities for the PCC. The Review Committee will hold both the PCC and FASB accountable for achieving the objective of ensuring adequate consideration of private company issues in the standard-setting process.
The PCC will provide quarterly written reports to the FAF Board of Trustees. The trustees will conduct an overall assessment of the PCC following its first three years of operation to determine whether its mission is being met and whether further changes to the standard-setting process for private companies are warranted.
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