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Lenders can influence the future of private company reporting for underwriting needs |
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Dear Financial Leader,
Lending institutions have an historic opportunity to help shape future reform surrounding private company financial reporting standards which form the financial data required to underwrite business loans. According to the AICPA's 2010 PCPS/TSCPA National Management of an Accounting Practice Survey, 50% of CPA firm clients are still in crisis mode due to the lingering recession. That’s a particularly compelling reason to ensure that private company financial reporting is meaningful to the lending community. I want to update you on what you can do.
Sponsored by the AICPA, the Financial Accounting Foundation (FAF) and the National Association of State Boards of Accountancy, the special Blue Ribbon Panel on Private Company Reporting (Panel) is expected to issue a report to the FAF Board of Trustees in late January, with the FAF trustees considering 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. At their meeting on December 10, 2010, the Panel:
- affirmed its belief in the need for a new, separate private company standard-setting board under the oversight of the FAF, which also oversees the Financial Accounting Standards Board (FASB); and
- proposed that existing U.S. GAAP incorporate changes and modifications for private companies that would recognize the unique needs of their financial statement users.
To help CPAs, financial statement users and others understand 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.
Why Change Is Needed
Debate on private business reporting needs since the 1970s led to the creation of multiple efforts to bring standard-setter awareness of private company issues in financial reporting. These efforts have included:
- The AICPA Private Companies Practice Section (PCPS) created the PCPS Technical Issues Committee in 1980 to ensure that standard setters were aware of the private company perspective.
- The FASB formed a Small Business Advisory Committee in 2004 to gain more insight into this segment.
- The Private Company Financial Reporting Committee, a joint effort of the AICPA and the FASB, launched in 2007 to inform the board about the consequences that proposals will have for private companies.
These have all been worthy efforts, but we still have not seen significant changes in standard setting for private companies. Paul V. Stahlin, chair of the AICPA Board of Directors, and Regional President of Skylands Community Bank, stated: “After many years of debate as accounting and reporting guidelines have become extraordinarily complex, it has become evident that the needs of private companies are quite different from the needs of public companies. Let’s face it, issues driving public companies are what drive accounting standards now and private companies have to follow those same rules. Too much of the content in private company financial statements prepared with U.S. GAAP is not relevant to users, owners, or preparers.”
The debate has had little impact on standards, creating expensive implementation with minimal or no relevance for private companies. Prime examples include:
- 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), and
- Fair value considerations.
Private company financial statement users deserve a dedicated board made up of people who have private company experience and can determine the most responsible ways to meet the needs of owners, lenders, sureties, investors and others. It seems clear at this point that the only way that the needs of private company financial statement users will be truly addressed is through the creation of a separate board with standard-setting authority. Finally, the people who actually rely on private company financial reporting will have the opportunity to review financial information that is relevant and useful.
Be Prepared to Speak Out
As I mentioned, the FAF trustees will likely ask for public comment on the action plan they develop. Lenders can submit their comments to address concerns on whether the current standard setting structure meets their information needs in areas such as collateral valuation and quality, expected cash flow analysis, credit enhancements such as key person insurance and additional guarantees, or any other underwriting need to document a borrower’s credit worthiness.
We will alert you when comment is called for so that you can ensure your voice is heard, but be sure to keep this issue on your radar screen. At this time it looks as though the comment period will be in the spring. You may want to begin to put together some preliminary thoughts now so they are ready to go later. Of course, the FAF will also welcome and value comments from bank presidents, business partners and small business owners, so be sure to introduce the subject to them and encourage them to be prepared to express their opinions when the time comes.
Given the importance of this issue to the lending community, I urge you to take advantage of your chance to influence the future of private company financial reporting. If you would like to share your or your clients’ experiences in complying with GAAP, send an email to Private Company Response and tell us your viewpoint.
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.
Sincerely,
Carol Scott, CPA, MBA
Vice President - Business, Industry & Government
American Institute of Certified Public Accountants
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