FASB Findings On Differences Between Private, Public Co. User Needs; FAF Update
July 12, 2011
FEI Summary
On July 11, 2011, the Financial Accounting Standards Board published a document entitled, "FASB in FOCUS: The Path to a Differential Standard-Setting.” The document provides the FASB staff's initial assessment of factors relevant to any potential differential accounting framework for private companies versus public companies, or for other potential reference/use in standard setting (such as issuing exceptions or differential disclosures) for private versus public companies.
The document discusses the six "significant differences" identified by FASB staff, with respect to the needs of users of private company financial reporting versus users of public company financial reporting:
- Types of users;
- Access to management;
- Investment strategies;
- Ownership structures;
- Accounting resources; and
- Education;
In related news, the Financial Accounting Foundation (which oversees FASB) published a FAF Mid-Year Update on its consideration of standard setting for private companies, including FAF's consideration of the recommendation of a Blue-Ribbon Panel on Standard Setting for Private Companies (a group that was co-sponsored by FAF, the American Institute of Certified Public Accountants and NASBA), which recommended that a separate accounting standard-setting board be formed, under FAF, to focus on private company accounting.
FAF's Mid-Year Update notes that a Working Group of FAF Trustees formed earlier this year to gather feedback from constituents on this issue has conducted outreach with preparers and users of private company financial statements and others,will continue to gather addtional feedback and that FAF expects to release its findings and conclusions this fall.
More Than 1,100 Comment Letters Received
FAF reports it has received more than 1,100 comment letters on this subject. A very quick scan of the comment letter file reveals at least three types of positions.
A substantial number of the comment letters, following a form-letter type format (e.g, see Comment Letter 5, and Comment Letter 1105), call for adoption of the Blue-Ribbon Panel's recommendation to form a new standard setting board for private companies. For example, those letters state in part:
I believe a systemic problem exists. The current standard-setting process does not adequately take into account the needs of the private company sector. Further, the panel was correct in that there is not a proper weighing of costs and benefits when it comes to setting standards for private companies ... [A] new, separate body with standard-setting authority must be established directly under FAF and not subject to FASB approval. Given the public company reporting pressures placed upon FASB, the board cannot adequately respond to the competing needs of the private company sector."
Other comment letters, however, while sympathetic to the need to provide more relief to private companies, particularly given that the users of private company financial statements do not have the same needs as users of public company financial statements (such as analysts), are not supportive of the wholesale creation of a new standard-setting board for private companies, preferring instead other approaches, including formation of a new advisory group to FASB regarding private company accounting.
For example, the comment letter filed by Richard Avril, Shareholder, Burr, Pilger Mayer states:
Although I believe it is appropriate to focus on meaningful as well as practical standards for private companies, I also believe that the underlying principles for both public and private entities should be essentially the same for the basic recognition and measurement principles. However, they could include simplifying shortcut or default methods for private companies, in addition to differential disclosure requirements.
There are currently differential disclosure requirements for private and public entities but other than delay in implementation and certain exclusions, often the requirements are quite labor intensive for many smaller private entities. In this regard, I believe there may be a need for the Financial Accounting Standards Board (FASB) to modify its approach and have a process that focuses as much on the needs of private industry as on the analyst and creditor community requests for more layers of information on public enterprises.
Accordingly, I would be supportive of creating a strong advisory body with significant influence to lobby the interests of the private sector with an ongoing FASB rather than the creation of a separate autonomous principal setting body as proposed by the Blue Ribbon Committee.
I think the possibility of having big and little IFRS, U.S. GAAP and many other country specific GAAP may add complexity to comparability and variations in reporting rather than having similar economic transactions reflected consistently in financial reporting by various types of entities. Additionally, these differences could result in additional complexity in the valuation by the respective enterprises for accounting or other purposes.
In the same vein, the comment letter filed by FEI's Committee on Private Company Standards on April 15, 2011 called for the formation of a Private Company Task Force, with standard-setting powers similar to that of FASB's Emerging Issues Task Force, whose consensus positions are released for public comment and subject to FASB approval; certain pervasive or controversial issues are sometimes moved from the EITF's agenda directly to the FASB's agenda.
Prepared July 12, 2011 by Edith Orenstein, director, Accounting Policy Analysis and Communications. This summary does not represent FEI opinion unless specifically noted above.