||Blue Ribbon Panel Submits Recommendations to Financial Accounting Foundation
||Dear Financial Leader,
The Blue Ribbon Panel on Private Company Financial Reporting (Panel) submitted theirfinal report and recommendations to the Financial Accounting Foundation (FAF) on January 25, 2011. This report is the result of an historic effort to implement meaningful and much-needed change in private company financial reporting. I want to update you on these recommendations, and explain why it is so important to CPAs in business and industry and their lenders to engage in the continuing discussion.
Consider the Recommendations
The Panel was sponsored by the AICPA, the FAF and the National Association of State Boards of Accountancy. The FAF trustees, who also oversee the Financial Accounting Standards Board, will consider next steps at their February 15 meeting. We expect the FAF trustees will issue an exposure draft detailing a proposal and calling for public comment. The public comment period will be your opportunity to explain needs of your financial statement users which are not being met or considered in the current standard setting structure. In their report, the panel:
- Recommends creation of a new, separate private company standard-setting board with authority to approve GAAP exceptions and modifications under the oversight of the Financial Accounting Foundation;
- Recommends a single U.S. GAAP model with exceptions and modifications for private companies, with process enhancements;
- Recommends creation of a differential framework to enable the private company accounting standard-setting board to evaluate whether exceptions or modifications are needed for private companies;
- Recommends short-term and transitional actions meant to provide near-term relief for private companies and help ensure a smooth transition to a new board including additional delays for private companies in the effective date of major new standards; and
- Recommends board membership to include five to seven members with private company financial reporting experience, an estimated $4 million annual budget and a sunset provision of five years or less to allow an evaluation of the overall process.
To help CPAs, financial statement users and others learn more about this critically important issue and the process to transform the Panel’s recommendations into reality, the AICPA has created a dedicated online resource at www.aicpa.org/privateGAAP.
Previous, worthy efforts to address these long-term concerns have not created significant changes in standard setting for private companies. Since the 1970s, multiple professional efforts attempted to bring standard-setter awareness of private company issues in financial reporting. Yet the issues remain though many prior groups spoke out on these and other reporting requirements:
According to private company Panel members, “most users focus heavily on cash flow measures, adjust the financial statements to meet their end needs, and do not make decisions on the basis of the financial statements alone. Users almost always require additional information when making decisions to lend, invest, or bond, and many users have access to management to obtain that information”, unlike public companies where access to management may not exist. The Panel also received general public comments by survey. The common issues and concerns cited by respondents were:
- FASB FIN 48, Accounting for Uncertainty in Income Taxes (codified as FASB ASC 740-10)
- FIN 46(R), Consolidation of Variable Interest Entities (FASB ASC 810-10)
- Fair value considerations
- Goodwill impairment
It’s clear that too much of what’s included in current financial statements is not useful to private company owners, lenders and investors. This causes so many problems in private company financial statements that we often hear about lenders accepting GAAP exception audit reports so the company can issue a more relevant statement avoiding some standards altogether. The growing use of such exceptions weakens the relevancy of GAAP. As a result, not only is this complexity not cost beneficial, it also can stand in the way of good decision making.
- Private company financial statements often lack relevance to users.
- Standards have become increasingly complex.
- The pace of the standard-setting process has increased.
- Costs often exceed benefits.
- There has been an increase in qualified opinions and use of OCBOA where possible.
Reflect and Be Prepared
As I mentioned, the FAF trustees will likely ask for public comment on the action plan they develop. Given the importance of this issue to the lending community, I urge you to:
We will keep you informed as the FAF trustees consider the Panel’s report and recommendations and publish their response. At this time it looks as though the comment period may be in the spring and after calendar year audit and tax filing requirements. You and other interested parties can learn more about this issue and read the panel’s report from the AICPA’s online resource.
- Reflect on financial reporting needs of your financial statement users.
- Reflect on the ability of current reporting standards to meet those needs.
- Discuss the issues with your lenders, bankers, investors, and other business partners.
- Be prepared to speak out during the anticipated comment period.
If you would like to share your experiences in complying with GAAP, send an email to Private Company Response and tell us your viewpoint. We look forward to sharing more with you.
The AICPA works diligently to advocate on behalf of our profession and we will continue to keep you informed through email, articles and our BusIndNews newsletter. You also can find out more about this and other important information affecting our profession in the Journal of Accountancy, AICPA News Update, BusIndNews and CPA Letter Daily.
Carol Scott, CPA, MBA
Vice President - Business, Industry & Government
American Institute of Certified Public Accountants