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Lisa Openshaw, CPA

Our Perspective on the Private vs. Public Company GAAP Debate


In August 2012, the Financial Accounting Standards Board (FASB) issued a discussion paper soliciting input on its preliminary recommendations regarding a private company financial statement decisionmaking framework.

The comment period closed October 31, 2012, and a proposed rule change could be issued in 2013.

Should there be separate standards for public and private companies?

The debate on whether there should be a separate set of standards for private versus public company U.S. generally accepted accounting principles (GAAP) has been long and hard-fought. The Financial Accounting Foundation (FAF), which oversees FASB, first issued a request for comment in October 2011. The comment request focused on whether GAAP needed exceptions or modifications to better address the needs of users of private company financial statements. FAF outlined a plan to establish a new group to work with FASB to conduct a review of existing GAAP, identify standards that require reconsideration, and vote on possible exceptions or modifications for private companies. Any proposed changes to existing GAAP would undergo thorough due process, including public comment, and be subject to ratification by FASB. The proposed group, now known as the Private Company Council (PCC), would be overseen by the FAF Board of Trustees.

They’re asking the wrong question

BerryDunn issued a response to the request for comment in January 2012, making the argument that the focus of the debate was misguided. We recommended that changes to GAAP should be based on the needs of the users of the financial statements, rather than the nature of the entity issuing the financial statements. Using a GAAP conceptual framework that focuses on fair value and cash flow information—or a hybrid of those depending on the needs of the users—would be, in our view, a more logical approach. Companies currently have flexibility based on the needs of the users: private company entities have the option of preparing financial statements using GAAP, or they can use a variety of other comprehensive bases of accounting, such as the cash basis or income tax basis.

FAF’s proposed changes in the discussion paper do not give consideration to exploring these fair value/cash flow bases of accounting if doing so would be more useful, but instead tie the accounting method to the nature of the company.

FASB gives guidance, but doesn’t go far enough

FASB’s 2012 discussion paper outlined that FAF established the PCC as a separate body with the purpose to improve the process of setting accounting standards for private (i.e., nonpublic) companies. FASB staff issued recommendations in the discussion paper to assist FASB and PCC in developing the decision-making framework to be used for circumstances under which recognition, measurement, disclosure, presentation, effective date, and transition requirements should be adjusted for private companies under GAAP.

The discussion paper proposes that FASB and PCC would jointly determine whether the recognition or measurement guidance being evaluated provides relevant information to users of private company financial statements at a reasonable cost, using a predetermined list of factors to consider in assessing reasonable cost.

But no consideration to the development of two separate conceptual bases of accounting based on the needs of financial statement users in a particular circumstance is currently on the table.

What is a private company? Our approach solves the definition issue

One of the million-dollar questions continues to be: What is a private company? FASB has issued tentative decisions as to how to define a private company, but stay tuned on that. Answering this question has been a real struggle for FASB, while our recommended approach neatly sidesteps the need to develop a (necessarily somewhat arbitrary) definition. The full discussion paper can be found here. BerryDunn issued a comment letter on the discussion paper reinforcing initial recommendations in the January 2012 response, which can be found here.