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Private Company Financial Reporting, By Grant Thornton

[print version]

Private Company Financial Reporting
March 17, 2010
FEI Summary

On March 17, 2010, Grant Thornton released a paper entitled, "Private Company Financial Reporting." The paper, authored by Grant Thornton Partners John Hepp and Gary Illiano, outlines major developments over the years with respect to discussions about whether there should be "differential' standards, or a set of different set of accounting standards, for private versus public companies, including the November 2009 recommendation of the Private Company Financial Reporting Committee (PCFRC), which was formed jointly by the Financial Accounting Standards Board and the American Institute of Certified Public Accountants, that:

The committee believes that a separate, stand-alone set of accounting standards for U.S. private companies tailored to the needs of the users of those statements is the preferred approach. However, the committee realizes there could be other major alternatives for private company accounting that should be explored. In establishing standards for private company financial reporting, the needs of financial statement users balanced against the costs of complying with the standards must be an overriding principle.

Hepp and Illiano notes that PCFRC's recommendation, addressed to the Financial Accounting Foundation (which oversees the Financial Accounting Standards Board), led to the formation this year of the Blue Ribbon Panel on Private Company Accounting. The Blue Ribbon Panel, sponsored jointly by FASB, the AICPA and NASBA, is scheduled to hold its first meeting on April 12.  

The Grant Thornton paper provides extensive background on the issue of differential reporting, in sections of the paper headed: 

  • What Is Different This Time?
  • A Changing Landscape For Accounting And Financial Reporting;
  • Dueling Paradigms of Financial Reporting;
  • Implications for Preparing and Auditing Financial Statements;
  • PCFRC Roadmap: Possible Future Models; and
  • Grant Thornton Views.

The Grant Thornton paper concludes:

On the issue of separate accounting for private companies, Grant Thornton LLP and Grant Thornton International Ltd agree with the FASB and the IASB that the objective of general purpose external financial reporting should be the same for all entities, but has expressed concerns that overemphasis of the needs of investors and creditors for capital allocation is not consistent with that determination. In the 2006 response to the Preliminary Views, Grant Thornton LLP and Grant Thornton International Ltd commented that the proposed changes in the objective of financial reporting would encourage calls for a separate financial reporting framework for non-publicly accountable entities and that on balance we believe that the proposed financial reporting objective is unsuitable for smaller, privately held entities.

The objective of capital allocation could be viewed as a special case that is a subset of a more general objective of financial reporting that is common to public entities, private entities, not-for-profit organizations and government. A different approach, therefore, to developing an objective of financial reporting would be to look first at the general case and the objectives held in common and then address the specific information needs of investors and creditors. As the FASB and the IASB have acknowledged, those needs may extend beyond the boundaries of financial reporting. Therefore, Grant Thornton LLP welcomes the establishment of the blue-ribbon panel to study the issues facing private companies and urges that the scope be expanded, if possible, to include the interests of not-forprofit organizations. While the best outcome perhaps would be a single objective and a single set of standards for all entities, the unique needs of the global capital markets and their importance may indicate that a different set of standards for investors and creditors in those markets may be the best solution to meet their needs. Other standards, more reflective of accountability and local legal considerations, may better address the needs of private companies and not-for-profit organizations.

FEI's Committee on Private Companies - Standards is monitoring developments with respect to the Blue Ribbon Panel on Private Company Accounting, and responds to proposals that impact private company accounting. For related information about the upcoming meeting of the Blue Ribbon Panel on Private Company Accounting, see the FEI blog.




 

 

 

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