- What does the Financial Accounting Foundation’s decision to establish a new Private Company Council mean?
- Does FAF’s decision result in giving the PCC the same level of authority and independence as the FASB?
- What was the Blue Ribbon Panel on Standard Setting for Private Companies and what was its charge?
- What is different in FAF’s final decision from its earlier proposal?
- Now that FAF has made a decision to create the PCC, how long will it take to get the new council in place? How will the members of the PCC be selected? When can the new council begin to issue private company standards?
- How will the PCC be staffed?
- Will FAF be evaluating whether the PCC is working as it should?
- What will be the process by which the PCC modifies existing GAAP for private companies?
- Will private companies be required to use the private company modifications issued by the PCC?
- What is the planned financial reporting framework for small- and medium-sized entities (FRF-SME)?
- What form will the new AICPA financial reporting framework take?
- What entities can use the FRF for SMEs?
- Why would small- and medium-sized entities use the FRF for SMEs?
- Where does this project fit in with overall standard setting in the U.S. and with the work of FAF’s new PCC?
- When do you expect the FRF-SME to be ready?
After years of discussion, studies and committees, the Financial Accounting Foundation (FAF) announced on May 23 the establishment of a new body to improve the process of setting accounting standards for private companies. The Private Company Council (PCC) will decide on exceptions and modifications to U.S. GAAP for private companies and will advise the Financial Accounting Standards Board (FASB) on treatment for private companies for items on FASB’s agenda.
Although the AICPA had serious concerns with FAF’s original plan, the Institute supports the creation of the Private Company Council which includes important changes from the initial proposal in fall 2011. AICPA President and CEO Barry C. Melancon, CPA, CGMA, said in a statement that FAF “has taken solid steps in the right direction with the decision.”
No, the PCC does not have the same level of authority and independence and its decisions are subject to the FASB’s endorsement. The AICPA believes that a new, independent standard-setting board under FAF, as recommended in 2011 by the Blue Ribbon Panel on Standard Setting for Private Companies, would have been the best method for sustainable change going forward. However, FAF’s final plan contained important differences from its initial proposal that moved toward achieving the goals of meaningful changes in U.S. GAAP for private companies. The AICPA is committed to working within the system and we support the creation and work of the PCC and we look forward to seeing the council produce substantive modifications, where appropriate, for private companies.
The panel, formed by the AICPA, FAF and the National Association of State Boards of Accountancy, began meeting in early 2010. The panel’s mission was to provide recommendations on the future of standard setting for private companies. The 18 members of the panel 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, CGMA, served on the panel.
Here are some of the specific differences from FAF’s proposal of last October:
- The PCC chair will not be a FASB member, as originally proposed.
- Rather than require FASB’s ratification of any exceptions or modifications to GAAP proposed by the council, FASB instead will endorse them and will have 60 days to act on the PCC’s decisions. If FASB fails to endorse a PCC decision, it must provide written notice of the reasons and changes the PCC could make to obtain FASB’s endorsement. The written notice will be made public.
- The council will meet at least five times a year, which is more frequently than originally proposed; and
- The council will be smaller, consisting of 9 to 12 members rather than the 11 to 15 members initially suggested.
Taken together, these changes result in a stronger and more independent body that will be nimble and able to address issues on a timely basis.
Now that FAF has made a decision to create the PCC, how long will it take to get the new council in place? How will the members of the PCC be selected? When can the new council begin to issue private company standards?
FAF began soliciting nominations for PCC members and the chair position very quickly after it released its decision. FAF’s plan states the first meeting will occur in the fourth quarter of 2012.
The PCC will consist of 9 to 12 members, including a Chair, all of whom will be selected and appointed by the FAF Board of Trustees. The PCC Chair will not be a FASB member. Membership of the PCC will include a variety of users, preparers and practitioners with substantial experience working with private companies. Members will be appointed for a three-year term and may be reappointed for an additional term of two years. Membership tenure may be staggered to establish an orderly rotation. The PCC Chair and members will serve without remuneration but will be reimbursed for expenses.
The PCC membership will consist of individuals with backgrounds and experience in using, preparing and auditing private company financial statements, including:
- Users of private company financial statements, including bank lenders, equity investors and/or sureties.
- Preparers of private company financial statements from a variety of industries and companies of various sizes.
- CPA practitioners from national, regional and local firms.
A FASB member will be assigned as a liaison to the PCC. FASB technical and administrative
staff will be assigned to support and work closely with the PCC. Dedicated full-time employees will be supplemented with FASB staff with specific expertise, depending on the issues under consideration.
The FAF Board of Trustees will create a special-purpose committee of Trustees, the Private Company Review Committee (Review Committee), which will have primary oversight responsibilities for the PCC for its first three years of operation. The Review Committee will hold both the PCC and the FASB accountable for achieving the objective of ensuring adequate consideration of private company issues in the standard-setting process.
The PCC will provide periodic in-person and written reports to the Review Committee. The PCC also will provide quarterly written reports to the full FAF Board of Trustees.
Following its first three years of operation, the FAF Trustees will conduct an overall assessment of the PCC to determine whether its mission is being met and whether further changes to the standard-setting process for private companies are warranted.
The PCC must approve of its decisions by a supermajority of its members. If the decision moves forward, it goes to the FASB for endorsement by a simple majority of FASB members. If it passes, the proposed exceptions or modifications to GAAP will be exposed for public comment. At the conclusion of the comment process, the PCC will re-deliberate the proposed exceptions or modifications and forward them to the FASB, who will make a final decision on endorsement, generally within 60 days. If the FASB endorses the proposals, they will be incorporated into GAAP. If the FASB does not endorse, the FASB Chairman will provide the PCC Chair with a written explanation, including possible changes for the PCC to consider that could result in FASB endorsement. FASB’s written explanation will be made public.
Presumably, private companies will have the option of not availing themselves of the modifications incorporated into GAAP by the PCC and the FASB. Some private companies may make that choice because they expect to go public, have complex balance sheets or for any other reason. But when given a choice, the vast majority of private companies that produce GAAP financial statements are expected to choose to use the modified GAAP for private companies that will be more relevant for their owners and lenders.
The financial reporting framework (FRF) will be a self-contained other comprehensive basis of accounting intended for use by privately held small- to medium-sized entities (SMEs) in preparing their financial statements. The FRF will draw upon a blend of accrual income tax methods and other traditional methods of accounting. The framework is being developed by a working group of experts and staff who have years of experience serving smaller- to medium-sized owner managed entities. The FRF for SMEs will be exposed for public comment to solicit broad stakeholder input. The AICPA expects to develop the framework through 2012 and issue it in the first half of 2013. More specific information about the framework will be available as the project progresses.
The AICPA is developing an “other comprehensive basis of accounting” (OCBOA), or special purpose framework, that meets the financial reporting needs of small- and medium-sized entities (“SMEs”) , as well as the users of the financial statements for these entities. The FRF-SME will be a less complicated and less costly accounting system for use by a privately held owner-managed business when U.S. GAAP financial statements are not required or needed.
The FRF for SMEs is being developed for smaller- to medium-sized owner-managed for-profit entities that need reliable financial statements where internal or external users have direct access to the owner-manager and GAAP financial statements are not required. The FRF for SMEs can be used by entities in every industry group and by unincorporated and incorporated entities.
The framework can be used by owner-managers who rely on a set of financial statements to confirm their assessments of performance and of what they own and what they owe and to understand their cash flows. Often, their financial statements support applications for banking finance, when the banker does not base a lending decision solely on the financial statements but also on available collateral or other evaluation mechanisms not related to the financial statements.
The AICPA has no authority to require the use of the FRF for SMEs for any entity. Therefore, the FRF will have no effective date and an owner-manager can decide to use the FRF once it is released. An owner-manager should make that decision in conjunction with those who may use the entity’s financial statements. The FRF-SME is not intended for use by nonprofit organizations; however, such organizations are not precluded from using it.
The FRF for SMEs will be a less complicated and less costly system of accounting for SMEs that do not need U.S. GAAP financial statements. The framework will be a cost-beneficial solution for owner-managers and others who need financial statements that are prepared in a consistent and reliable manner in accordance with a framework that has undergone public comment and professional scrutiny. The accounting principles comprising the framework are intended to be the most appropriate for the preparation of SME financial statements based on the needs of the financial statement users and cost-benefit considerations. Accounting principles in the FRF for SMEs will be responsive to the well-documented issues and concerns stakeholders currently encounter when preparing financial statements for SMEs.
Where does this project fit in with overall standard setting in the U.S. and with the work of FAF’s new PCC?
The AICPA and FAF are both committed to a private company financial reporting constituency; however, the objectives of these two efforts are different. The new Private Company Council will focus on modifications to U.S. GAAP for private companies when GAAP financial statements are required or necessary. Alternatively, the FRF for SMEs promises to be a straightforward, concise framework for management and other users of small- and medium-sized private company financial statements where U.S. GAAP financial statements are not required or necessary.
The AICPA expects to expose the FRF-SME for public comment in fall of 2012 and to issue the final framework in the first half of 2013.