Private company stakeholders have never been in a better position to have their concerns addressed in the standard-setting process, according to Billy Atkinson, the chairman of the brand-new Private Company Council: "We have the wind in our sails."
The council was created by the Financial Accounting Foundation last year to work with the Financial Accounting Standards Board to recommend exceptions or modifications to U.S. GAAP for private entities, and represents the start of what Atkinson described as a "cultural change" in accounting standard-setting. It met for the first time in December 2012, and will meet five more times this year, in February, May, July, September and November.
As part of its process, the council will identify issues that it wants to focus on, ask the FASB staff to gather information and canvas the latest thinking on the issues, and then use that information to determine whether to proceed to issuing recommendations for exceptions or modifications to GAAP. It has already identified four areas for consideration in its first meeting. It will also serve as a resource for FASB and the Emerging Issues Task Force on a forward-looking basis.
In a wide-ranging, exclusive interview with Accounting Today, Atkinson discussed his conception of the role of the council, the different reporting needs of public and private companies, what he hopes to achieve as the PCC's inaugural chair, and much more.
Tell us a little bit about the PCC process.
Atkinson: Well, we're drawing on three elements. We're drawing on the experience of the PCC members, which is broad. The council is made up of users, preparers and auditors -- none of whom seem to me to be very shy. They also have a strong background for this project, this task and this council. There's also the resourcefulness of the staff of the FASB, which is dedicated to this effort. And then the third element is the information that has been gathered, either directly or indirectly, over the last several years concerning the various issues.
So we're drawing on those issues, and we're taking each one of them and looking at them very seriously to determine if, indeed, there is an issue and if it continues to exist today. You know, some issues can disappear over time, with experience, with practice and with transitions. Other issues may involve some substantial, fundamental problems with a standard as it relates to private companies, and that's our mission, to deal with those.
How often do you plan to meet?
Atkinson: We're going to try to meet every other month, between five and six times a year. This first year it'll probably be five, just because of the way it's hitting the calendar. We met in December, we're meeting in February, and our scheduled meetings are in May, July, late September, and then November.
What's your conception of the mission of the PCC?
Atkinson: First of all, the PCC is born out of change at the FAF and the FASB. That change is greater or more formal attention to the private company stakeholders, emphasizing users as well as preparers and auditors, because in the private market they are very closely intertwined. The way the PCC is constructed now really will help us work toward the same goal, and will prevent us from being too far back in the shadows, if you will, of the issues as they evolve.
The objectives that we have, obviously, are to improve the financial reporting for private companies, and make it more relevant and less complex for the users, as well as the preparers, lenders and auditors. Our focus is on the universe of private company stakeholders. I try my best to emphasize users, because that's really the purpose of standard-setting -- sure, it's a set of rules for all of us to follow as auditors as well as preparers, but they need to be useful to users, and they need to result in proper recognition, proper measurement of transactions as they occur. And as we all know, these transactions are getting ever-more complex, so it takes a little more time and study.
Although our focus is on the universe of private company stakeholders, exceptions and modifications may end up benefiting both public and private companies, because over time, certain issues for private companies may indeed invade public companies' accounting as well. So it's incumbent on the FASB, as we begin to deal with issues on a look-back basis and prospective basis, to have its awareness of the private stakeholders raised, if you will, as they deliberate, [so they're not considering] exclusively the public company stakeholders.
The PCC is going to work with FASB to agree on criteria for determining whether and when exceptions or modifications to U.S. GAAP are warranted for private companies. That's in our mission, that's in our construction by the FAF, and that's first and foremost in our minds as we move forward, and we're trying to do so very deliberately.
Using that criteria, we're conducting a review of existing U.S. GAAP to identify the standards that require consideration, and that will be over a fairly routine period of time this first time, and it will continue until we don't see issues that require that attention.
We'll also be very heavily involved, if not directly then certainly indirectly, as a primary advisory body to the FASB on the appropriate treatment for private companies for items under active consideration on the FASB's technical agenda. I would add that that probably includes the [Emerging Issues Task Force] as well, because at the end of the day, when thereis an interpretation process, it must include the private company domain. Otherwise, we'll find ourselves in a look-back that includes those items.
While the PCC is not going to be actively involved in sitting on the EITF, we will make ourselves available as a resource, whether it's us as a group, or individuals within our body.
The existence of the PCC -- and, hopefully, its credibility -- will be a cultural change that will affect all of the FASB's technical agenda processes. It's a cultural change within the FASB organization, to which we appertain. That is a big difference today. It puts a little wind in our sails, as opposed to wind in our face. I'm very gratified by it; I'm very gratified by the FAF process, as well as by the FASB board members' and staff's understanding of it and active pursuit of the same goal.
How do you see the PCC differing from its predecessor, the Private Company Financial Reporting Committee?
Atkinson: The PCFRC had a different set of circumstances with which to deal. They had the wind in their face. They had a FASB that was going through a lot of change, a lot of demands from the [Securities and Exchange Commission], a lot of complex transactions on Wall Street, particular before 2008, and the agenda of the private company stakeholders was not as clear as it is now, for a lot of different reasons.
They did great work. Particularly in the last two years, they did very effective work, as the FASB began to change its approach, viewing the Blue Ribbon Panel process and the emergence of this issue of private company stakeholders and private company standards.
The PCC is kind of a natural evolution now, with the FAF appropriately studying this and getting good feedback from all areas of the stakeholder world, and coming up with something that complemented the FASB with the needs of the private company stakeholders. I think that the approach is very well-founded, very well set out, and provides the opportunity to have mutual work on the topics, as opposed to exclusive work on the topics.
How do you view the PCC in terms of the work of the Blue Ribbon Panel?
Atkinson: There's something that's been inherently unfair in the backlash, or the post-logue, to the Blue Ribbon Panel process. The title or the theme reads, "Blue Ribbon Panel recommendation of separate board was rejected," and that's really not the case. There were many aspects of the Blue Ribbon Panel recommendations, other than the construction of an independent standard-setting board, that are all in place with what were doing with the PCC, with the FASB's cultural adjustment to the private company world, as well as the FAF's strategic adjustment to it.
All of the things that came out of the Blue Ribbon Panel, with the minor -- and I emphasize "minor" -- exception of the existence of a separate or an autonomous board, are in place.
That's the real benefit to that whole process, including those who led that process. It was very well done and we got a lot of good input to move forward. Sure, I was a member of the minority viewpoint, but I had a lot of respect for all the people in the room on that issue, and they all brought great comments and discussions and ideas that we are hopefully dealing with today.
How do you see the relationship between FASB and the PCC working?
Atkinson: I would say that once I was appointed as chair -- and I learned that I was chair at the same time that I learned who the other members were; it was all very well-managed by the FAF and its committees -- I made a trip to Norwalk for about three days to meet with each of the FASB board members and staff that I would be working with.
In my conversations with them, I found that there was a lot of room for agreement on approach, that there was a high level of respect at looking back on the private company stakeholders and their needs, and that there was obviously a stress on how we maneuver some of these differences, if we have any, into accounting standards or exceptions or modifications.
And the reason is that there is a shared, underlying theory that an economic transaction should dictate the accounting, and not the capital structure of a company. So, not that there won't be differences - there could very well be -- but we will together talk over that before we make a decision, they in voting on our decisions, and we in reaching our decisions. That's a healthy process to go through. And they were very conversant, very open and very receptive.
Having a liaison FASB member, Darryl Buck, sit with us in the PCC is very helpful. Our council is connected to Darryl at the hip, and he's a very good choice. So, we're able to communicate, we're able to deal with issues. ... At the end of the day, there's an overlay of wisdom that says we need to consider [standard-setting] holistically [so that it includes private company considerations], at least in our discussions and our deliberations. The PCC is not planning on putting the brakes on an issue that really is a concern of private company stakeholders just because the FASB has to work out the dynamics for public companies. We're not meant to slow things down, and our history here will shortly prove that we're not slowing things down.
How do you see the difference between the needs of private companies versus public companies?
Atkinson: When it comes to private company accounting standards, you have to look at the types of users that are out there versus public company users. You have to look at the element of access to management, which exists with private companies but does not exist with publics. You have to look at ownership structures and the multiplicity of them that you may find in private companies that are different than publics. You have to look atthe investment strategies and accounting resources and other enablers or issues that may present different types of needs or different points of references.
I start out with this issue of access to management -- obviously the thing we heard through out the Blue Ribbon Process was that access to management does become an "enabler" for standard exceptions or modifications that might fit with private companies, but wouldn't at all fit with public companies, because the access does add an extra layer of relevance.
The most significant factor that differentiates those private company users, of course, is the ability for more private access. And I would say that's not just relegated to primary investors or lenders; it's also relegated to customers or vendors who deal with those companies. Many users of private company financials indicated in the Blue Ribbon Panel process and otherwise that they use the statements to validate and corroborate their preliminary views about a company, and to engage in a better-informed dialogue with management. ...
The greater level of access often allows investors and other users of private company financials to demand less detailed information, or, if you will, simpler recognition or measurement approaches in the financial statement compared with those of public companies and others users. Not in all cases, but in some. ...
When you get down to users, of course, private company financials presented in accordance with GAAP are often prepared primarily for a limited number of lenders -- equity investors, surety bond providers, family members ... .
I'm a member of the board of directors of Atkinson Candy Co., which is a private candy manufacturing company that's 80 years old in Lufkin, Texas, with $40 million in revenues, and the only users of the financial statements are me and the other board member. Now, on occasion, if we have a new vendor, a new supplier of sugar, if you will, or a new major customer, such as WalMart or Family Dollar or
Dollar General, they may ask for financials or they may ask for certain financial information in order to improve the credit or that sort of thing, and they're important users in that regard. But the primary users are us, because we don't have any debt, and we're the investors. You have that in a lot of private companies. ...
By contrast, public company financial statements are used by a much larger number of equity and debt investors and investment professionals. ...Public company equity investors and investment professionals have a broader and more diverse set of needs that commonly focus more on earnings and the current value of their investments. On the other hand, as we heard from the Blue Ribbon Panel process and others, lenders and other investors in private companies have a focus in the long-term prospects of a company's business venture and its enterprise and how it's managed and how it's run and that sort of thing. There is a more sharply focused concern on cash flow and cash flow derivatives like EBITA, EBITDA, all cash flow iterations which they bake into their lending agreements and/or investment agreements. That's because, as they told us, their funds come in five- or 10-year tranches or less, and they're looking at a shorter horizon on those investments or loans from a cash flow perspective, and not necessarily from a GAAP earnings perspective. That was very revealing to me in the Blue Ribbon Panel process, and it made incredible sense, too. ...
Effective date and transition guidance has to be given a lot of consideration when we're looking at new standards or changes to standards going forward, as well as in our look-back, because when you have a simpler accounting structure, you need a little more absorption time to make things properly, and we should continue to recognize that.
As founding chairman, do you have a place you want to leave the PCC when your tenure is up?
Atkinson: It can't be "me" -- it's got to be "us." For this process to have the respect of the stakeholders and all the other constituent groups, it has to be a process that this council uniformly agrees to - not just the process, but the decisions that we reach. That's why it's constructed as it is, with three representatives from user groups, three from preparers groups, and three from the auditor realm, including myself. My primary goal is for it to be a "we" process.
The cooperation and mutual respect with the FASB and the FAF is very important to me. We must get off to a fundamentally good start, and construct a process of mutual respect, not just among the institution of the FASB, but also with the stakeholders that are watching carefully what we are doing. It's got to work properly and it's got to have all the right considerations.
If you ask me my biggest stress, it will be getting good input from stakeholders, from users, preparers and auditors from all strata in the private company domain. It's very important that we make decisions based on contemporary viewpoints of users that truly represent the users' needs, as well as those of preparers and auditors. Each time, before we dismiss an issue or move forward on an issue, we'll painstakingly take care to make sure we are getting good input. ... We want to be sure that we're getting the right answers, and that they work. Looking back on me? "He worked with the team to uniformly get it started right."
What do you bring to the council?
Atkinson: I guess the first thing I bring to this is no fear. It's not about me; it's about the PCC members. I have a lot of strength in leading this group because of the strength of the group. They were selected by the FAF for all the right reasons. I'm confident that we're going to move forward as a team, as it's intended and as it's designed.
I've had 39 years in public accounting in the Houston and the Texas market, and our office grew from 25 to 1,300 before I retired, and it owes its growth to private companies. When you look at my career, it's private companies. ... It wasn't just our firm, it was our community that grew, and in that growth, you see issues. You know, the auditor has to explain to the client what the standard is and what it means, and the "why" of a standard, and over the years, particularly the more recent 15 years of so, it became hard to explain the why. Hence the frustration. And so that's my reference. ...
I have become accustomed to the growing angst in the private company marketplace with the inability of auditors, or preparers as they talk with their boards or with their users, often having difficulty in explaining the why for an accounting standard. ... I also served on the state board of public accountancy and the NASBA board on the regulatory board at the same time. My time there reinforced the "why" that you need to have in explaining accounting standards, and it also reinforced the transparency, the honesty and the ethic, if you will, of accounting and financial reporting under GAAP, and what it should be.
And so I have a deeply ingrained belief as a regulator and a practitioner in doing the right thing, and what you should do to be able to do the right thing, and how you communicate with preparers and users and auditors. And I don't believe that it must stay broken if it's broken.
I believe that we owe it to ourselves to try to keep standards uniform, so that in the education process, we don't have to have this side of the room and that side of the room when it comes to accounting education. By that, I mean I don't subscribe to the bifurcation of standards between public and private. I do recognize that there have to be differences, there will be some differences, some modifications, some exceptions for private companies -- as we have had in the past -- but they've got to each be individually evaluated and determined.
It's not appropriate to have a single view that there should be a lot of changes or there should be no changes. I respect the process too much to do it otherwise. At the end of the day, the financial statements need to reflect the financial position, as well as the activities of the company, and that's what GAAP seeks to do.
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