• Accounting
  • CFO.com | US

Needed: Guidance on FASB Private Company Rules

When private firms that use the new standards are acquired by public companies, they're “going to have to undo those elections,” SEC accounting chief says.

Just what is that cost?

Consider the following situation. A private company elects the goodwill accounting alternative in an attempt to reduce the costs related to hiring valuation specialists. Three years later, that company is acquired by a public company with the intention of expanding sales areas and product lines. As a result of the acquisition, the acquirer must include the private company’s historical financial statements in one filing with the SEC.

Under the current provisions, those financial statements must reflect public company accounting. Therefore the private company (and, ultimately, the public company) must incur the costs of undoing the goodwill accounting alternative in its historical financial statements, even though that goodwill will not ever be recorded in the public company’s financial statements.

Worst-case scenario? The cost-savings originally achieved are erased and surpassed by the costs incurred to retrospectively adjust the financial statements for a single filing. Further, the mere potential of incurring costs to retrospectively adjust financial statements could keep other similar private companies from taking advantage of the reduced complexity and financial reporting costs provided by the accounting alternatives.

Does it make sense to require a private company that has applied the accounting alternatives to retrospectively apply the existing guidance in these situations? In the case of the goodwill alternative or the FASB’s ongoing PCC project on identifiable intangible assets in a business combination, I don’t think it does. One of the primary arguments for requiring retrospective restatement is to provide for comparability among public business entities. In such cases, there isn’t comparability under the existing standards for two otherwise identical companies, one of which grew organically and the other through acquisitions.

The United States has taken some positive steps to spur the growth of private companies, including making it easier for them to access the public markets through legislation, such as the JOBS Act. I encourage the standard-setters and regulators to provide transitional relief for private companies that adopt the new accounting alternatives to alleviate an unnecessary burden they would otherwise have to bear in trying to access the public markets in the future.

Joe Adams is CEO and Managing Partner of McGladrey LLP, a leading provider of assurance, tax and consulting services focused on the middle market.

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