FAQ: Private Company Financial Reporting

After so many years of trying, what is the driving force behind allowing more substantive differences in U.S. GAAP for private companies now?

For many decades, CPAs who serve or work for private companies in the United States have been saying that the financial information needs of private company users (lenders, investors, management, owners and others) are different from those of public companies. In recent years, this situation has reached a tipping point, as accounting and reporting guidelines too often have lacked relevance and have become unnecessarily complex. Much of that complexity relates primarily to new standards to address investor and public company needs, yet any time a new standard is issued, in substance it applies to every company. The result is that too much of what’s included in current financial statements is not useful to private company owners, lenders or investors.

This issue impacts vast reaches of the U.S. economy. Only about 15,000-17,000 companies are registered with the Securities and Exchange Commission (SEC), while there are about 29 million private businesses (including approximately 550,000 nonprofits). Accounting standards driven by issues in the public company environment should not be imposed upon private businesses.

Go to top

What is the Blue Ribbon Panel on Private Company Financial Reporting and what was its charge?

The Blue Ribbon Panel was formed in early 2010 by the AICPA and the Financial Accounting Foundation (FAF, the oversight body of the Financial Accounting Standards Board (FASB) and the Governmental Accounting Standards Board) with support from the National Association of State Boards of Accountancy (NASBA).

The panel’s mission was to provide recommendations on the future of standard setting for private companies. The panel chair was Rick Anderson, CEO of Moss Adams LLP and a former member of the FAF Board of Trustees. The other 17 members represented a top level cross-section of financial reporting constituencies, including lenders, investors, owners, preparers and auditors. AICPA President and CEO Barry C. Melancon, CPA, served on the panel.

Go to top

How was the panel’s mission unlike other attempts over the years to create differences in reporting standards for private companies?

The panel’s mission was different from those of prior committees or groups created to study the issue because it looked at the standard-setting process from a policy level, rather than at specific changes to individual standards. This was a significant departure from the past. It was about exploring whether and how there should be a standard-setting process that recognizes there are differences between public and private companies.

Go to top

Why are the Blue Ribbon Panel’s recommendations important?

The Blue Ribbon Panel’s recommendations represent an historic moment of change in financial reporting. The possibility of truly differential accounting standards for private companies is closer to reality than at any time in the decades the issue has been debated. Given the momentum behind the issue now, the opportunity to achieve such a major shift may never arise again.

Go to top

What are the panel’s major recommendations for change?

The panel's two major recommendations agreed to by a supermajority of its members are that FAF accept:
  • A new, separate standard-setting body reporting directly into FAF and consisting of people with private company constituent experience.
  • Changes and modifications in U.S. GAAP for private companies that are set by the new, autonomous body (i.e., not subject to FASB approval).

The new board would work closely with the FASB throughout the standard-setting process. The new board would have the authority to change or modify recognition and measurement requirements as well as disclosure differences, for example.

Another recommendation is that the new standard-setting structure and process be reviewed after 3 to 5 years to determine if it is working as effectively and efficiently as it should. FAF at that point would determine if the changes are performing as intended, and whether additional structural modifications are necessary.

Go to top

Why is a separate board critical to having private company accounting standards?

There have been years of studies and research, a joint advisory committee with the FASB (the Private Company Financial Reporting Committee), private company constituent representation on the FASB Board and comment letters in the past, without meaningful results. It’s imperative that there be a board made up of private company oriented people who would set the different standards affecting the private company financial reporting system. As it stands now, issues affecting public companies are what drive accounting standards and impact how they are written.

Go to top

What is the process for putting these recommendations into effect?

The Blue Ribbon Panel’s final report was submitted to FAF in late January. FAF discussed the report at its February 15 meeting. In March, FAF formed a Trustee Working Group to gather public input on the Blue Ribbon Panel's recommended solutions to the private company reporting problem and to explore related issues involving nonpublic entities (including nonprofit organizations). FAF expects to issue an action plan this fall.

Go to top

Why not develop private company reporting standards from scratch rather than base them on existing GAAP?

While an eventual transition to a set of separate standards may occur, action is needed now. Private companies’ struggles with implementing standards that too often are irrelevant, costly and driven by public company issues have reached an unacceptably burdensome level. Creating a brand new body of private company GAAP from scratch would not deliver needed relief on a timely basis to the private company sector. The panel wanted expediency.

Go to top

Did the panel consider other possibilities, such as standards based on IFRS?

Yes. Keeping the status quo and continuing to do what is being done now was rejected fairly quickly by the panel. It also looked at the International Accounting Standards Board (IASB) standard for small and medium-sized entities (SMEs). While that might ultimately be a good option for private U.S. companies, asking 44,000 CPA firms and many of the U.S.’s 28 million private businesses to change to IFRS when the SEC has not made a decision for public companies did not seem like the right step to take at this time. And the panel did not want to wait four to five years until IFRS may take hold here.

Go to top

Why are the needs of private company financial statement users different from their public company counterparts?

Public company users are most often focused on understanding the financial statements for investment purposes. Therefore, the fair value of assets and liabilities are of interest as is other information that may impact their investment decisions. Private company users, however, are typically not using financial statements for investment decisions but rather to understand the entity’s ability to generate earnings and cash flow sufficient to repay a loan, complete a project or perform under a contract. Another major difference is that private company users, unlike their public company counterparts, have access to company management and to additional financial information beyond that provided in the financial statements. Given the differences in the users’ focus and the purpose of the financial information, the accounting standard-setting process should take these different needs into account.

Go to top


What are some examples of standards or interpretations that offer many private company financial statement users little benefit and are costly to implement?

There are several, but two of the most frequently mentioned are formerly known as FIN 48, on uncertainty in income taxes, and FIN 46R, related to consolidation of variable interest entities. Many private company constituents say both are causing unnecessary challenges for private companies and are examples why private companies are spending quite a bit of their time and money developing information that may never actually be used by anyone reading their financial reports.

Go to top

How will this new board be funded?

The Blue Ribbon Panel estimates that the new standard-setting board will require an annual budget of about $4-5 million. Its method of funding is still to be determined, but revenue from FAF publications could constitute part of it.

Regardless of what FAF ultimately recommends, due to concerns about potential independence issues, the panel expressed its opposition to returning to a system where standard-setting bodies would have to rely on year-to-year voluntary contributions.

Go to top

Will private companies be required to use the private company standards issued by the new board?

Absolutely not. Under the panel's proposal, private companies could choose to continue to use existing GAAP (promulgated by FASB), or IFRS, or IFRS for SMEs for that matter. Some private companies will choose to continue to use GAAP for public companies either because they expect to go public, have complex balance sheets or for any other reason. But should FAF agree to adopt the Blue Ribbon Panel’s recommendations, the vast majority of private companies are expected to choose to use the modified private company GAAP that will be more relevant for their owners and lenders.

Go to top

If FAF approves most of the panel’s recommendations, how long will it take to get a new board in place?

Given that FAF still has to get feedback from constituent and advisory groups and make its own deliberations and recommendations, creation of a new board with the authority to issue private company standards would likely not be announced before the fourth quarter of 2011.

Go to top

What can individual CPAs do to make their own views known?

Learn about the issue so you understand the reasons behind the recommendations and why they have to take effect to successfully change private company reporting. It's critically important for CPAs in firms and private industry, and other private company stakeholders, to take action now by sending letters to FAF in support of differential standards and a separate standard-setting body that is not subject to FASB approval. CPA firms also should encourage their small business clients, private company employers and users of those entities’ financial statements, such as bankers/lenders, to offer their support as well. Visit aicpa.org/privateGAAP for information on the issue, a simple letter-writing tool to help you craft a letter, and resources to educate and engage others.

Go to top

How are accounting standards set today?

Since 1973, the FASB has been the designated organization in the private sector for establishing the standards of financial accounting governing the preparation of financial reports by nongovernmental entities. The SEC, responsible under the securities laws for establishing accounting principles, historically has delegated its authority for accounting standard-setting to the FASB.

The FASB maintains the FASB Accounting Standards CodificationTM (Accounting Standards Codification) which represents the source of authoritative standards of accounting and reporting, other than those issued by the SEC, recognized by the FASB to be applied by nongovernmental entities. Responsibility for the oversight, administration and finances of the FASB rests with the FAF. The FAF is an independent, private-sector organization that protects the independence and integrity of the standards-setting process and appoints members of the FASB.

The FASB accomplishes its mission through a comprehensive and independent process that encourages broad participation and considers all stakeholder views. The nature and extent of the board’s specific research and outreach activities will vary from project to project, depending on the nature and scope of the reporting issues involved. A high-level overview of the standard-setting process follows.

  1. The board identifies a financial reporting issues based on requests/recommendations from stakeholders or through other means.
  2. The FASB Chairman decides whether to add a project to the technical agenda, after consultation with FASB members and others as appropriate, and subject to oversight by the Foundation’s Board of Trustees.
  3. The board deliberates at one or more public meetings the various reporting issues identified and analyzed by the staff.
  4. An exposure draft is issued to solicit broad stakeholder input. (In some projects, a discussion paper may be issued beforehand to obtain input in the early stages of a project).
  5. Public roundtable meetings on the exposure draft may be held, if necessary.
  6. The staff analyzes comment letters, public roundtable discussions, and any other information obtained through due-process activities. The FASB re-deliberates the proposed provisions, carefully considering the stakeholder input received, at one or more public meetings.
  7. An Accounting Standards Update is issued describing amendments to the Accounting Standards Codification.

Go to top