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Businesses Push for Narrow Definition of Public Company

Oct 1, 2013

If the FASB follows through with a recent proposal, some businesses that consider themselves privately held companies would have to follow the full set of accounting standards used by companies that trade on the New York Stock Exchange and the NASDAQ Stock Market.

Proposed Accounting Standards Update (ASU) No. 2013-310, Definition of a Public Business Entity: An Amendment to the Master Glossary, which was released August 7, 2013, seeks to clarify the differences between public and private companies in U.S. GAAP. The comment deadline was September 20.

The proposal defines a public company as any business that can’t be classified as a not-for-profit organization or an employee benefit plan. If the business has to file public financial reports, submit its financial statements to the SEC or another regulatory body, or issues securities that trade on a public market, it won’t be considered a private company.

Businesses and partnerships that issue bonds backed by state or local governments will also be considered public companies for the purposes of financial statements prepared in U.S. GAAP.

The distinction has taken on added weight in recent years as the FASB has made a common practice of granting private companies extra time to adopt new standards. In some instances privately held businesses are given scaled back requirements for the footnote disclosures in financial statements.

Led by the AICPA, some accounting groups have pushed the FASB to expand the reporting and disclosure exemptions available to private companies. Proposed ASU No. 2013-310 was published to help draw up clear guidelines for companies that are eligible for the exemptions.

The FASB started the project to establish a single definition of a private company, but in July the board decided to instead set parameters around the types of businesses that explicitly wouldn’t be considered private companies. The businesses wouldn’t be eligible for accounting breaks as prescribed in the Private Company Decision- Making Framework: A Guide for Evaluating Financial Accounting and Reporting for Private Companies, which has not yet been finalized.

Proposed ASU No. 2013-310 is worded in such a way to classify as public, companies that wouldn’t typically consider themselves public, some businesses and auditors wrote to the board.

Koch Industries Inc., a multinational corporation with $115 billion in annual sales, said the proposal promotes “complexity and ambiguity” and criticized the decision to exclude businesses that issue bonds backed by state or local governments from consideration as private companies. Private companies often issued municipal bonds that are only available to qualified institutional investors or sophisticated investors in a secondary market and sold by financial intermediaries, Koch wrote.

“Since the sophisticated investors of conduit bonds use other meaningful financial information besides the financial statements, it would be hard to argue that obligors should be subjected to regulatory demands of a public entity, particularly when financial statements are not necessarily provided to investors,” Koch wrote.

Ernst & Young LLP also said it considered the proposal complex and challenging to apply. It called on the FASB to specifically exclude several types of organizations, such as subsidiaries and investment holdings of private companies and parents of private companies.

More companies would be considered public under the FASB proposal, the audit firm wrote.

“It also appears that some of these entities would continue to be considered nonpublic under existing SEC guidance,” E&Y wrote. “Consequently, the benefits of reducing the overall cost and complexity of accounting and financial reporting for nonpublic entities by applying alternatives provided by the PCC and the FASB for those entities would reach a much smaller group of entities than might be anticipated by some constituents.”

PricewaterhouseCoopers LLP said it agreed with most of the proposed criteria except for the part of the proposal that exempts “other entities whose financial statements or financial information are required to be or are included in a filing.”

“Based on that criterion, a private company could be considered a public business entity as a result of an acquisition or investment by a public company, in which case the private company’s historical financial statements would be required to be prepared pursuant to the requirements of a public business entity,” PwC wrote.

Almost all the written responses to Proposed ASU No. 2013-310, said they agreed with the mission of setting boundaries between private and public companies for financial reporting purposes. But many expressed concerns about clarity.

The U.S. Chamber of Commerce asked the board to change the stipulation that a public company is an entity where “its securities are unrestricted, and it is required to provide U.S. GAAP financial statements to be made publicly available on a periodic basis pursuant to a legal or regulatory requirement.”

Community banks or registered investment advisors may be participants in the public company capital markets, but don’t meet any of the other criteria, the Chamber wrote.

“Given the broad nature of the criterion, we envision there may be unintended consequences since the users of financial statements of those nonpublic entities may have differing needs than the users of financial reports for public entities,” the Chamber wrote. “It would be better for those public capital market participants, that are otherwise private entities, to be excluded from the proposed business definition unless FASB can demonstrate justifications for keeping those entities in the proposed business definition.”

The Independent Community Bankers of America expressed similar concerns. The group wants the FASB to clarify that financial institutions that submit required financial data to a banking regulator wouldn’t automatically be designated public companies. Community banks are required to periodically file selected financial information with the Federal Deposit Insurance Corp. The information doesn’t constitute a full set of U.S. GAAP financial statements, but the information doesn’t deviate significantly from U.S. GAAP, the group wrote.

“A local, state, or federal regulator or other government agency could reach a conclusion that periodic filings, while not technically complete in form, substantially present enough financial information to qualify the entity as submitting financial statements based on a regulatory requirement for meeting the definition of a public business entity under the listed criteria,” the ICBA wrote.

Deloitte & Touche LLP called on the FASB to make the definition more principles-based, as “an entity whose U.S. GAAP financial statements are made readily available to the public to provide financial information to holders, and potential holders, of debt or equity interests that are traded in a public market.”