The Financial Accounting Foundation appears to be ready to accept a recommendation from an advisory panel that it establish a separate standard-setting board for privately held companies.

At a meeting Friday at the FAF’s headquarters in Norwalk, Conn., the Blue Ribbon Panel on Standard Setting for Private Companies met with the FAF and representatives of the Financial Accounting Standards Board, which the FAF oversees. The panel has been holding meetings over the past year on how U.S. accounting standards can best meet the needs of users of private company financial statements.

In October, the panel voted to recommend that a separate private company standards board be created under the oversight of the FAF, using a new standard-setting model that follows U.S. GAAP, with exceptions for private companies (see Panel Favors Separate Board for Private Companies). During Friday’s meeting, the panel discussed how the new board would work with FASB in the standard-setting process, the nature of the new board’s mission and structure, and how it might be funded.

The panel has already begun preparing a draft report containing its recommendations. The panel is expected to issue the report to the FAF Board of Trustees in early 2011, and then to the public. After deliberation, the FAF Board of Trustees will create an action plan, which is expected to be subject to further input from constituents, including exposing the plan for public comment prior to being implemented.

American Institute of CPAs president and CEO Barry Melancon told me in a telephone interview after the meeting Friday that the FAF will have to take the recommendations and decide what to do with them.

The panel will discuss the final report in a conference call in January, and the report will again be on the FAF’s agenda in May. Melancon hopes that by summer’s end, “we will know what the direction will be.” He cautioned that the Blue Ribbon Panel report has not yet been finalized, but he emphasized that the recommendation to establish a new board has been finalized.

“I would say that it’s a certainty that the report will go to the FAF with the new board in it,” he said. “I think that was reaffirmed today. Ultimately the FAF will get the report in February, and it will have to wrestle with the recommendations and decide what the next steps are, and that will take some time as well.”

The panel was formed last year by the AICPA, the FAF, and the National Association of State Boards of Accountancy. Members include a variety of financial reporting constituencies: lenders, investors, business owners, financial statement preparers, auditors and government regulators. However, one major sticking point will be the role of FASB, which is not exactly thrilled with the prospect of having one of its major responsibilities yanked away, especially at a time when it is under pressure to complete its major convergence projects with the International Accounting Standards Board by next year.

With the IASB expected to ultimately take over much of the responsibility for standard setting for publicly traded companies in the next few years, assuming the Securities and Exchange Commission decides by the end of next June to incorporate International Financial Reporting Standards into the U.S. financial reporting system, the role of FASB could be greatly diminished if it loses its authority over standards for privately held companies too. Not surprisingly, FASB’s role was a major point of discussion at last Friday’s meeting in Norwalk, where FASB is headquartered along with the FAF and the other board presently overseen by the FAF: the Governmental Accounting Standards Board.

“We had a good opening discussion and spent a lot of time talking about how a new board would work cooperatively with the existing FASB, the protocols, and the charge with that,” said Melancon. “We spent the bulk of the day really talking about some of the practical implementation and application issues.”

The panel is not expected to recommend that a separate set of accounting standards be created for private companies. Businesses instead would still be expected to rely on U.S. GAAP, but with exceptions for private companies. The new board would decide on which standards would be applicable or not for private companies.

“GAAP with exceptions is how people generally refer to it,” said Melancon. “There needs to be this notion of FASB and this new board [working] in a very strong collegial and cooperative fashion. No one wants differences there because they aren’t working well together or anything.”

Hypothetically, whenever the two boards issue a joint exposure draft of some new proposed accounting standard update, there would be a process for deciding on how it would apply, or not, to private companies. “It could be done in a joint fashion,” said Melancon. “Exactly how it works is going to take a little bit more time, and it’s obviously going to evolve with practice.”

Also to be worked out is the continuing role of FASB’s Small Business Advisory Committee and the Private Company Financial Reporting Committee. The PCFRC is a joint committee of FASB and the AICPA.

“The [Blue Ribbon Panel] committee did ask that question today, but we did not come to an agreement on it,” said Melancon. “We thought there needed to be some rationalization of that, exactly how that would work and what the roles would be. That was not in the draft report we worked with, and the staff was asked to go back, look at that, and put something in the [draft] report that we would include in our final report. That issue was raised, and it’s something that needs to be addressed, but that part of it is not yet finalized.”

Another point of uncertainty is what to do about the looming possibility of IFRS supplanting U.S. GAAP in the near future. The IASB has issued a stripped-down set of standards that private companies can use, known as IFRS for SMEs, or small and midsized enterprises, but so far it has gained little acceptance in the U.S. amid continued uncertainty about the convergence process with U.S. GAAP. The Blue Ribbon Panel had considered using IFRS for SMEs during its earlier meetings, Melancon noted.

“That was a model that was considered at the October meeting, and the committee rejected that under the theory that the SEC has not yet made a decision, and to try to change to IFRS for 44,000 firms and 29 million private businesses, that’s a pretty daunting task before it’s implemented at the public company level,” said Melancon. “One of the things that we put forward that the committee has agreed to is that there should be some sunset review process for this new board. Five years later, we would know exactly what IFRS is and how it’s being implemented for public companies. During that review, that question could be resolved for private companies in a more effective way.”

Friday’s meeting was the last face-to-face meeting of the Blue Ribbon Panel, as the final meeting in January will be over the phone. “We’re happy with the outcome and the recommendations of the committee,” said Melancon. “It’s worked very hard, and it’s been a very diverse committee. People gave a lot of time to that, which we were very appreciative of, and I think they took their responsibilities very seriously.”

The only party that may be unhappy with the outcome is FASB. At October’s meeting, prior to the vote on the recommendation, FASB acting chair Leslie Seidman argued forcefully for continuing her board’s work in overseeing accounting standards for both public and private companies. She outlined how the board has begun paying more attention to the needs of the private company accountants and consulting with them on new accounting standards.

“Not everybody agrees with everything,” Melancon acknowledged. “People have differences of opinion, and I think they asked good questions. Obviously the report is going to try to address all of those points to make people more comfortable.” But he added that a “significant majority” of the panel had voted to approve the establishment of a new board back in October.

The details of how the new board will work with FASB are only just starting to emerge and are likely to change over time as FASB adjusts to a new accounting environment.