The passage of a resolution directing AICPA management to work with the Financial Accounting Foundation and FASB to identify and implement a process that would evaluate, where appropriate, potential changes in recognition, measurement, and disclosure from current generally accepted accounting principles (GAAP) as applied by public companies is very welcome. The aim is to evaluate potential changes to GAAP for privately-held, for-profit companies.
The AICPA Council's recent action indicates an understanding that private company financial reporting can be structured so it is markedly different from financial reporting for public companies. The underlying motivation would be to alleviate some of the cost and burdens that private companies now experience in complying with current GAAP without sacrificing consistency and comparability among companies. The vote was a direct result of the findings in the AICPA's Private Company Financial Reporting Task Force Report issued in March.
This is not a new issue but living under Sarbanes-Oxley has raised it again. Sarbanes-Oxley requirements, such as Section 404 internal control ones, are aimed in a large part to protecting distant third party investors. Public companies, especially smaller ones, are bristling at the cost and burdens that have resulted as a result of their compliance efforts, so it should come as no surprise that private companies identify with them.
It will be fascinating to see the discussion that will follow about GAAP for private companies. I am particularly interested in what the external stakeholders of private companies have to say. These stakeholders, primarily lenders, creditors, investors, and sureties, have to verbalize what's in it for them. Is it an advantage for them or are there aspects of current GAAP they simply don't care about and never examine? Their needs are the key as to whether GAAP for private companies can be implemented successfully.
And, If there is to be Big GAAP and Little GAAP, there must first be a clear statement of the conceptual differences as well as a way of comparing exactly what each requires in key areas.
We are off to a very good start because, in conjunction with its report, the AICPA's Private Company Financial Reporting Task Force released a detailed methodology overview of how it reached its conclusion. This type of transparency goes a long way toward ensuring that all interested parties are being heard. Let the talking begin in earnest.
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