The Blue-Ribbon Panel on Standard Setting for Private Companies submitted a report Wednesday recommending that the Financial Accounting Foundation set up a separate board to determine private company accounting standards.

The report, submitted to the FAF board of trustees, calls for fundamental changes to the system of standard-setting, including the creation of a new board, to be overseen by the FAF. The new board would focus on making exceptions and modifications to U.S. GAAP for private companies to better respond to the needs of private companies.

The report also recommends the creation of a differential framework—a set of decision criteria—to facilitate a standard-setter’s ability to make appropriate, justifiable exceptions and modifications. The report does not advocate a move toward a separate, self-contained GAAP for private companies or a comprehensive reorganization of GAAP.

“I think it’s a very strong and substantive recommendation,” said AICPA president and CEO Barry Melancon in an interview. “This issue has been debated for 30-plus years. This is a very diverse panel and they made an overwhelming recommendation here to create a new board.”

The FAF board of trustees, as part of its strategic initiative to review private company issues, will consider the panel’s recommendations as it deliberates improvements to the standard-setting process. The FAF trustees’ resulting plan is expected to be subject to further input from constituents, including exposing for public comment any potential significant changes to the standard-setting process and structure.

“The panel’s report, along with further analysis and constituent input, will be valuable in reaching sound decisions that improve standard-setting and financial reporting for private companies,” said FAF president and CEO Teresa S. Polley in a statement.

The panel was formed in 2009 by the American Institute of CPAs, the FAF and the National Association of State Boards of Accountancy. However, NASBA's leader disagreed with the recommendation to create a separate standards board for privately held companies.

“We share the panel’s concerns regarding the relevance, complexity and cost of today’s accounting standards,” said NASBA chairman Billy Atkinson. “As this is a significant public policy issue that is not unique to private companies, we believe the best approach for needed change is through the existing FAF-governed FASB, which should be more strategically aligned to continuously address these concerns. In our view, a separate accounting standard-setting body for private companies would lead to differential standards and result in other unintended consequences. We urge the FAF to carefully consider the potential effect on the financial reporting system.”

The members of the panel included a cross-section of financial reporting constituencies, including lenders, investors, and owners as well as preparers, auditors, and regulators. The panel was chaired by Moss Adams LLP chairman Rick Anderson.

The Financial Accounting Standards Board, which has been overseeing accounting standards for public and private companies, has made efforts of late to do more outreach and meetings with private companies. Earlier this month, FASB added Daryl Buck, a senior vice president and CFO at Reasor’s Holding Company, to its now seven-member board, but Melancon does not believe those moves will be enough to sway FAF from deciding to create a separate board.

“The Blue-Ribbon Panel was aware of all of those steps,” he said. “They said good, but insufficient. I think a lot of these steps started to take place once the Blue-Ribbon Panel was in place. There’s urgency to get this done. It should not be a reason why FAF can’t implement these recommendations.”

Melancon anticipates the FAF’s decision on whether or not to set up a separate board could happen this summer after a meeting scheduled for February. Assuming the decision is yes, the board could be constituted as soon as this fall. However, any new or revised standards from the board probably would not emerge until next year at the earliest.

“Anything the new board does would be subject to public deliberation,” said Melancon. “We’re not looking to any new standards that could reasonably take place this year, but we could start to see some of those in 2012.”

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