Private companies comprise the largest business demographic in the United States. For the last ten years, the Private Company Council (PCC) has been working with the Financial Accounting Standards Board (FASB) to develop simpler rules for private companies.
History lesson
The PCC was established in 2012. At that time, a blue-ribbon panel ruled that it was unfair to force private companies, especially smaller ones, to apply the same level of U.S. Generally Accepted Accounting Principles (GAAP) as large public companies. Many private companies lack dedicated resources and funds to allocate to financial reporting. A Private Company Decision-Making Framework (PCDMF) was also later established as a simplification guide, including added time for private companies to apply new standards.
Recently, some in the accounting profession have floated the idea that the FASB should develop the GAAP version of the International Financial Reporting Standards for Small and Mid-Sized Entities (IFRS for SMEs). This is a package of simplified rules developed by the International Accounting Standards Board from full IFRS.
Those asking for “GAAP for SMEs” have said that the FASB can make broader strides for private companies beyond the one-offs that have been done for targeted topics. In contrast, others have been skeptical about carving out separate rules for private companies, viewing them as tough to unwind for initial public offerings (IPOs) and a possible deterrent to equity investors.
Areas of achievement
In addition to making GAAP stronger for everyone, PCC’s successes include its outreach initiatives and “the full slate of PCC alternatives that are available to private company stakeholders and also the differences for private companies that have been embedded into the standards in the codification,” said PCC Chair Candace Wright during a recent FASB webcast.
Targeted amendments the PCC helped to develop over the years include:
- Accounting Standards Update (ASU) No. 2014-02, Intangibles — Goodwill and Other (Topic 350): Accounting for Goodwill,
- ASU No. 2014-03, Derivatives and Hedging (Topic 815): Accounting for Certain Receive-Variable, Pay-Fixed Interest Rate Swaps — Simplified Hedge Accounting Approach,
- ASU No. 2014-07, Consolidation (Topic 810): Applying Variable Interest Entities Guidance to Common Control Leasing Arrangements,
- ASU No. 2014-18, Business Combinations (Topic 805): Accounting for Identifiable Intangible Assets in a Business Combination,
- ASU No. 2016-03, Intangibles — Goodwill and Other (Topic 350), Business Combinations (Topic 805), Consolidation (Topic 810), Derivatives and Hedging (Topic 815): Effective Date and Transition Guidance,
- ASU No. 2017-04, Intangibles — Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment,
- ASU No. 2021-02, Franchisors — Revenue from Contracts with Customers (Subtopic 952-606): Practical Expedient,
- ASU No. 2021-07, Compensation-Stock Compensation (Topic 718): Determining the Current Price of an Underlying Share for Equity-Classified Share-Based Awards, and
- ASU No. 2021-09, Leases (Topic 842): Discount Rate for Lessees That Are Not Public Business Entities.
When deciding which areas to target for simplified reporting alternatives, the PCC considers the needs of private companies’ lenders and other stakeholders, as well as the cost of implementing the updated guidance vs. the benefits. The PCC strives to make certain accounting rules simpler, without compromising the reliability or relevance of information provided to financial statement users.
Looking to the future
“As I think about the future, I believe the PCC will continue to build on these successes and continue to work with the FASB to deliver high-quality financial accounting and reporting standards for both private and public companies across the country for many years to come,” said Chair Wright. However, her remarks didn’t hint at a future move toward the development of an GAAP for SMEs standard.
Before electing any alternate reporting options, private companies should check with their CPAs. Regulators, lenders and other stakeholders may require a private company to continue to apply traditional GAAP standards. Moreover, the use of an alternate reporting method could create future headaches for companies that are large enough to consider going public or merging with a public company.
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