One Size Does Not Fit All: A Look at Private Company Financial Reporting in the U.S. and Tiered GAAP Alternatives Being Considered Abroad
EXECUTIVE SUMMARY * The Blue-Ribbon Panel on Standard Setting for Private Companies recommended in January 2011 U.S. GAAP for private companies based on existing U.S. GAAP but with exceptions and modifications and a "private company accounting standards board" under the oversight of the Financial Accounting Foundation (FAF), independent of FASB. * In October, FAF proposed the creation of a Private Company Standards Improvement Council (PCSIC) to determine whether exceptions or modifications to U.S. GAAP are required to improve standards for private companies. But any proposed changes to existing U.S. GAAP and ongoing FASB agenda projects would be subject to ratification by FASB, which is contrary to the Blue-Ribbon Panel's recommendation. Comments on the FAF plan are due Jan. 14. * Other countries are considering making changes to their private company accounting standards. The United Kingdom's Accounting Standards Board in October 2010 proposed a three-tier system for GAAP. Based on accountability criteria as adopted from IFRS, the proposal calls for a system for financial reporting that requires entities to prepare financial statements in one of three tiers (an entity may voluntarily elect to adopt a higher tier). * The New Zealand External Reporting Board issued a position paper in September 2011 outlining a proposed new accounting (and assurance) standards framework for general-purpose financial reporting. The paper proposes a two-tier system for for-profit entities. ********** [ILLUSTRATION OMITTED] The U.S. stakeholders--issuers, preparers, users, auditors, standard setters and others--have expressed concern over "the goodness of fit" of current FASB standards to public companies as well as approximately 28 million private companies and businesses. The "one size fits all" school of thought has dominated the FASB mentality Private companies' financial reporting requirements have continuously been trumped by public company issues. On the heels of a call in 2011 for an independent standard setter for private companies, the Financial Accounting Foundation (FAF), FASB's parent organization, proposed the creation of the Private Company Standards Improvement Council (PCSIC). The council's decisions would be subject to ratification by FASB. It appears that the FAF solution to this private company financial reporting problem is very similar to past promised solutions, such as the creation of the Private Company Financial Reporting Committee (PCFRC), which has struggled to gain traction on key issues. The report by the Blue-Ribbon Panel on Standard Setting for Private Companies expressed the concerns of the professional accounting community in the U.S., which are consistent with questions being raised about private company standards by the international professional accounting community The international community standard setters are addressing the issue directly, as outlined in this article by examples of tiered GAAP proposals. U.S.GAAP STANDARD SETTING In 1971, the Wheat Committee was asked to find ways for the AICPA to improve its function of establishing accounting principles. Their work and final report in 1971 led to the creation of FASB and FAF. From the beginning, FAF was expected to seek the best course for establishing accounting standards while keeping in mind the needs of financial information users, including investors. FAF appointed FASB members, and the process of reviewing and changing existing accounting standards commenced. CASTELLANO REPORT AND SMAI,L BUSINESS COMMITTEES The separate reporting needs of private companies have not gone unnoticed. In 2004, FASB created a Small Business Advisory Committee (SBAC) to generate more active involvement by the small business community in the development of financial accounting and reporting standards. The SBAC provides additional and ongoing input on issues before FASB. …