While there have been a number of healthy and spirited debates recently over the proper approach to aiding small and mid-sized businesses, there is no disagreement over the importance of creating an environment that is conducive to their growth.
It is in this spirit that on January 16, 2014, the Financial Accounting Standards Board (FASB) issued the first accounting standards with simplified alternatives for the way private companies account for goodwill and certain interest rate swaps. These are steps in the right direction that can help many private companies save both money and time without compromising the relevance and usefulness of the information included in their financial statements – thus lowering the cost of compliance so private companies can invest more in job creation and other activities that will spur economic growth.
But electing those accounting alternatives may come with a catch. Going public or being acquired by a public company is a strategy for many private companies. However, a transition plan has not yet been provided for private companies that adopt these simplified alternatives and are subsequently required to file their financial statements with the Securities and Exchange Commission as a result of executing these strategies. Absent any specific transitional guidance, Paul Beswick, the SEC’s chief accountant, has said, “If you elected the alternatives under the PCC [Private Company Council] and then try to go public, from our perspective you’re going to have to undo those elections.”
This complicates the decision around whether the accounting alternatives are viable options for private companies, including family-owned businesses that may want to tap into the public markets in the future to expand operations or provide liquidity in transitioning the ownership of the business. Such companies must decide to either continue using the existing guidance with its known costs and complexity or elect the accounting alternatives, in the latter case knowing that any future filings with the SEC will come with the incurred cost of retrospectively applying the existing guidance.