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Debate About Private Company Council’s Future Intensifies

Three years after establishing the Private Company Council (PCC), the FASB’s parent organization wants feedback about the group’s work and its future agenda. The AICPA and the National Association of State Boards of Accountancy (NASBA) say the PCC’s work has just begun. Others say the group should be scaled back to minimize differences in accounting between public and private companies.

When the FASB’s parent group in February released a three-year review of the board’s Private Company Council (PCC), it suggested that the group could transition from advocating for accounting changes for private companies to primarily advising the FASB.

Comment letters on the proposal, “Three Year Review of the Private Company Council,” reveal mixed opinions on this plan. In one corner, the AICPA and the National Association of State Boards of Accountancy (NASBA) say the PCC’s power must not be curtailed. In the other, some trade groups, audit firms, and investors caution the Financial Accounting Foundation (FAF) against encouraging further accounting differences between public and private companies.

FAF trustees are scheduled to review the feedback at their quarterly meeting on May 20, 2015, in Washington. The FAF then is expected to issue an official plan on how the PCC should move forward.

Private company standard-setting has been a contentious issue for the FAF and the FASB, which for years had been criticized for setting accounting standards that were too complex for smaller private companies and their accountants. In response to these complaints, the FAF in 2012 established the PCC to pick particularly difficult areas of U.S. GAAP for private companies and advise the FASB on how to make them simpler. The FAF said it would conduct a formal review once the PCC had been in operation for three years.

The council’s work has just begun and must not be hindered, both the AICPA and NASBA wrote to the FAF.

“The tone of the request suggests to us that FASB’s and PCC’s work on existing GAAP is largely done. If that tone was FAF’s intent, we do not agree,” the AICPA wrote. “Our sense from that continuing outreach, and some of our own in developing this letter, is that FASB and PCC have more work to do on existing GAAP.”

NASBA wrote to say it was troubled by the assumption that the PCC would be relegated to an advisory panel to the FASB going forward.

“We believe limiting the PCC’s role to that of an adviser would seriously hamstring the PCC and undermine the FAF’s PCC commitment,” NASBA wrote. “In that respect, the PCC’s agenda should not be defined solely by the FASB’s active agenda.”

NASBA noted that critics of the PCC have asked that the group exclude recognition and measurement issues. NASBA said it disagrees.

“We are not in favor of putting a stake in the ground and proclaiming the look-back phase is complete. The PCC should not be limited to the FASB’s active agenda, and should continue to have the latitude to consider additional private company-related alternatives to GAAP, following the existing endorsement process,” NASBA wrote.

Judith O’Dell, former chairman of the Private Company Financial Reporting Committee, the PCC’s predecessor, also cautioned against the idea that the PCC was finished reviewing existing GAAP.

“I don’t believe the ‘look back’ phase will ever be complete. As new standards are issued, even those where the PCC has been involved, there will be unforeseen private company implementation or user needs issues that may arise that may necessitate a ‘look back,'” O’Dell wrote, naming the FASB’s revenue standard and its planned lease accounting standard as places where private companies might need help.

In contrast, large audit firms, the Institute of Management Accountants (IMA), and four regulators said they believed the bulk of the PCC’s work was done and that the council and the FASB should work to minimize differences in accounting between public and private companies going forward.

Deloitte & Touche LLP said it generally has supported the work of the PCC, particularly for situations where the needs of readers of private-company financial statements differ from those who typically analyze public company statements.

“However, we remain concerned about the potential for unnecessary divergence between public and private companies, particularly with respect to recognition and measurement, since such divergence creates unwarranted complexity,” the audit firm wrote. “For example, we have reservations about simplifying standards for only private companies when the U.S. GAAP topics addressed are also complex” for public businesses.

The IMA said the FASB should strive to reduce cost and complexity for all companies, not just private companies.

“Notwithstanding our urging, much of the initial work of the Private Company Council (PCC) has focused on recognition and measurement exceptions for private companies rather than disclosure exceptions,” IMA wrote.

IMA said differences in core recognition and measurement underpinnings “dilute” GAAP, and private and public companies should have the same accounting for the same economic transactions. Furthermore, the group said it was not convinced the needs of private versus public company investors and analysts were all that different.

Four regulatory agencies — the National Credit Union Administration, the Federal Reserve, the Federal Deposit Insurance Corp. (FDIC), and the Office of the Comptroller of the Currency — agreed with the idea of the PCC transitioning from a body that develops alternatives to existing GAAP to a role that provides input to the FASB’s active agenda projects.

“Our support for the proposed transition of the PCC from a body that develops alternatives to existing GAAP to one that provides input to active agenda projects of the FASB can also be understood as our support for a single set of standards that provide common principles to all companies for recognition and measurement,” the agencies wrote. “We would be concerned if private company alternatives resulted in materially different recognition and measurement principles for public and private companies. Although a dichotomy in the accounting standards between private and public companies has not emerged thus far, the changing role of the PCC into a source of input should reduce the likelihood of such a development.”

The PCC is made up of investors, accountants, and people who work in financial reporting roles at private companies. The group meets several times a year with the FASB, reviews questions about private company accounting, suggests answers, and forwards proposals to the FASB for final amendments to U.S. GAAP. The PCC’s work has resulted so far in four updates to U.S. GAAP.

The CFA Institute in May released a survey about complexities in financial reporting that dealt, in part, with differences between accounting standards for public and private companies.

“You really need to hear from the investors, and the investors are basically saying, ‘Please cease and desist,'” said Mohini Singh, director of financial reporting policy at the CFA Institute.

Investors may hold positions in a mix of private and publicly traded businesses, and the differences the FASB and PCC are creating between public company and private company financial reporting are making it more difficult to compare results among the companies.

“While they may be making life easier for corporate managers, they’re actually making life more difficult for the investors,” Singh said in reference to the FASB and PCC.

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