Financial Accounting Foundation president and CEO Terri Polley explained to Accounting Today some of the thinking behind the new Private Company Council that the FAF Board of Trustees voted to create on Wednesday.
That included shortening the name from the Private Company Standards Improvement Council to the Private Company Council (see New Private Company Standards Improvement Council Established). “The first thing is that we changed the name to the Private Company Council,” she said. “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 the FAF issued its proposal last October. At the time, the American Institute of CPAs and many state CPA societies said the original version would leave the Financial Accounting Standards Board with too much control over private company accounting standards.
“Many of these changes were the result of the tremendous outreach that was undertaken by the trustees,” said Polley. “We had a large number of comment letters. We had a series of roundtables, all of which were extremely helpful. We had other outreach with other groups and state societies, and things like that. Many of these changes were influenced by the input we received from that process. 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 had originally proposed that, but now we’ve determined that the chair of the group be external to the FASB, a member of the Private Company Council. So that’s one change. We also decided to reduce the size of the group. The original range was 11 to 15, plus the chairman. We’ve narrowed it to 9 to 12, including the chairman. We just thought a smaller group would be a little bit more nimble in getting the important work on their agenda underway. Instead of having a FASB member as a chairman, we decided to identify the FASB member who would be assigned as a liaison, as we’ve done successfully with other groups that the FASB works with.”
Polley said 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 without or without FASB members present for educational or administrative meetings, again trying to react to concerns from some people about problems with too much FASB influence.”
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 the FASB and the PCC. The 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. And under an endorsement process, we also would provide a general expectation that FASB would act within 60 days. 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 the FASB, the FASB would need to explain in writing the reason why, and also 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.”
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 the FASB accountable for achieving the goals, which is to ensure that private company issues are very well considered in the standard-setting process.”
She explained that FASB will decide whether to endorse or not to endorse a proposal by the PCC. "If they endorse a proposal by the PCC, they would go out for public comment and then the comments would come in, and the PCC would redeliberate, come to a final decision, which then would be endorsed by the FASB,” said Polley. “If the FASB does not endorse, it would go back to the PCC with some suggestions 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 the FASB disagrees vehemently with somewhere the PCC is going, the PCC will know that before it even gets to that point.”
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.”
She sees a number of differences between the new Private Company Council and the Private Company Financial Reporting Committee it will replace.
“The 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.”
Possible First Projects
As for the possible projects that the new council might take up, Polley was uncertain, but she acknowledged that some of the possibilities might include Financial Interpretation 48, “Accounting for Uncertainty in Income Taxes,” which has been a subject of complaint by private company representatives who sat on the Blue-Ribbon Panel on Standard-Setting for Private Companies. FIN 48 was also the subject of the FAF’s first post-implementation review of an accounting standard and received a mixed review.
Along with FIN 48, other possibilities for consideration 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.”
On June 1, the FAF plans to issue a call for nominations for the chair and members of the PCC. Polley said she is pleased with the AICPA’s positive statement in reaction to the new council (see AICPA Says It Supports New Private Company Council). The AICPA also said it would develop an “other comprehensive basis of accounting” (OCBOA) financial reporting framework to meet the needs of some privately held small- and medium-sized enterprises (SMEs), as well as the users of the financial statements of these entities. The SME OCBOA framework will be a less complicated and a less costly alternative system of accounting to U.S. GAAP for SMEs that do not need U.S. GAAP financial statements.
“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. I think the PCC will provide some assistance to companies that have challenges with some of the reporting issues, and then I think some of the PCC’s work will benefit public companies as well.”
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