Dear Financial Leader,
A historic effort has been under way to implement meaningful and much-needed change in private company financial reporting. I want to update you on the work of the special Blue Ribbon Panel addressing standards for private companies, and explain why it is so important to CPAs in business and industry. 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 Financial Accounting Foundation (FAF), which also oversees the Financial Accounting Standards Board
- proposed that existing U.S. GAAP incorporate changes and modifications for private companies that would recognize the unique needs of their financial statement users
Sponsored by the AICPA, the FAF and the National Association of State Boards of Accountancy, the panel is expected to issue a report to the FAF Board of Trustees by January 20, 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.
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.
- AICPA Private Companies Practice Section 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. 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.
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. Many prior groups looking at the private company issue spoke out with little impact about 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.
Finally, lenders, venture capitalists and the company owners—the people who actually rely on private company financial reporting -- will appreciate the opportunity to review results that are truly relevant to their needs. According to the 2010 PCPS/TSCPA National MAP Survey, 50% of CPA clients are still in crisis mode due to the lingering recession. That’s a particularly compelling reason to ensure that financial reporting is meaningful to financial statement users. Additional measurements and disclosures can be extremely costly to collect and calculate, and business and industry members should not be forced to report unnecessary information that they can ill afford to provide. During my travels, members are clear that reduction of financial reporting costs is an important issue. They should instead be spending their revenues on enhancing their operations and maintaining jobs rather than complying with financial reporting standards that simply have no meaning for private companies.
Be Prepared to Speak Out
As I mentioned, the FAF trustees will likely ask for public comment on the action plan they develop. 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 and after calendar year audit and tax filing requirements. 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 your business partners, owners, lenders and bankers, so be sure to introduce the subject to them and encourage them to be prepared to express their opinions when the time comes. You can learn more about this issue and the panel’s deliberations from the Journal of Accountancy.
Given the importance of this issue to business and industry, I urge you to take advantage of your chance to influence the future of private company financial reporting. The AICPA works diligently to advocate on behalf of our profession. We will continue to keep you informed through email, articles and our BusIndNews newsletter. You 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