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Tracy Harding, CPA

The Great Debate

GAAP: Public vs Private

We think they're asking the wrong question.

2011-12-01

Tracy Harding

Should there be a single set of accounting rules for all companies, public or private? Or one set for each?

Many private companies (as well as users of their financial statements, such as lenders), have long complained that some of the more arcane accounting rules issued over the years — such as those dealing with derivatives, goodwill impairment, and stock options — are extremely difficult and costly to implement yet yield little if any value to the users of the financial statements.

We submit that it would be more productive to shift the focus to the needs of the financial statement users. Looked at this way, two largely distinct user groups emerge:

  1. Some users are primarily interested in what a company is worth. That’s because they are considering buying or selling shares in the company. They have an interest in the fair value of certain assets of the company, as well as its cash flows, because they view this information as relevant to their investment decisions. The companies they're interested in knowing this information about are mostly public companies.
  2. Other users (such as lenders and certain regulatory bodies in regulated industries) are mostly interested in information about a company’s cash flows to help them understand how the company uses the resources provided and whether it has the ability to pay them back and continue operating.

We believe that shifting the focus clarifies the solution: financial information should be presented using an accounting basis that is responsive to the users’ needs — resulting in two bases of accounting under GAAP, one for users primarily interested in assessing what a company is worth, and another for users primarily interested in its cash flows.

The Financial Accounting Foundation (FAF), which oversees the Financial Accounting Standards Board (the rule maker for accounting standards), has asked for input on the “public vs. private company” question.

Click here to read our comment letter to the FAF, which lays out the alternative approach described above. Meanwhile, to learn more, please contact Tracy Harding or your BerryDunn advisor.