Prompted by a proposal earlier this year by a blue-ribbon panel on the future of private-company accounting standards — a proposal that includes giving oversight of those standards to a brand-new board — the Financial Accounting Standards Board has heightened its focus on private-company issues, according to Leslie Seidman, the board’s chairperson.
Seidman chose the prestigious Zicklin Center Financial Reporting Conference at Baruch College in New York on Thursday to respond to the challenge from the panel. Declaring that she hopes the responsibility for private-company financial reporting remains squarely in FASB’s hands, she noted that the decision about how to respond to the panel’s proposal is being deliberated by the Financial Accounting Foundation, FASB’s parent organization. (Ironically, the FAF, along with the American Institute of Certified Public Accountants and the National Association of State Boards of Accountancy, established the panel.)
In January the panel recommended that the FAF “create a separate accounting standards board . . . with the ultimate standard-setting authority to determine and set exceptions and modifications in [generally accepted accounting principles] for private companies.” Rather than proposing the creation of a separate version of GAAP for private companies, however, the panel recommended that accounting standards for nonpublic companies be based on existing U.S. GAAP “but with exceptions and modifications that would result in financial statements that provide relevant, decision-useful information that meets the needs of users of private company financial statements in a cost-effective manner.”
Seidman acknowledged hearing concerns about the relevance of GAAP to private companies and complaints that current accounting standards are “overly complex for [private company] stakeholders.” The FASB chair said she “strongly support[s]” the panel’s short-term recommendations related to process changes, including considering a delay for private companies of the effective date of major new standards. In fact, Seidman noted, FASB has implemented or is in the process of implementing practically all of the short-term recommendations.
For instance, the panel recommended that FASB fill at least one of its then-open board positions “with individuals who have primarily private company background and experience.” In a footnote, the panel acknowledged that FASB had done that and more. On January 14, the board named two board members: Daryl Buck, who spent 18 years as CFO of Reasor’s Holding Co., a private company with $400 million in annual sales, and R. Harold Schroeder, who “has substantial experience as a user of financial statements, including financial statements of private companies,” in the words of the panel’s proposal.
Another of the recommendations was that the differences in GAAP for private companies be based on a framework, or set of decision criteria. Seidman noted that FASB’s staff has begun developing such a “differential framework” in the form of a white paper on the unique needs of the users of private-company financial statements.
Noting that she “strongly hopes” FASB ends up being the governing body, Seidman said that any standard-setter must come to grips with the question of how much of GAAP should be altered to meet the needs of private-company stakeholders. If that doesn’t happen, “any effort is doomed to fail because there will be an ongoing expectation gap,” she warned.
In developing the framework, FASB’s staff is looking primarily at potential differences in the disclosure needs of financial-statement users of public and private companies. “If you accept the premise that the investors in a private company have ready access to management,” said Seidman, “maybe they don’t need as much disclosure.” The staff is also considering the unique needs of preparers of private-company financials and is mulling cost-benefit analyses in that context, according to Seidman.
Also speaking at the conference was James Kroeker, chief accountant of the Securities and Exchange Commission. “A number of areas of additional research, study, and outreach — particularly to investors — would be warranted prior to implementing any significant structural change” in financial reporting for private companies, he said.