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Public Company Definition Is Added to U.S. GAAP

December 24, 2013

The addition of a definition for a public business entity to the master glossary in the Accounting Standards Codification marks a major milestone in the FASB’s efforts to carve out exemptions in U.S. GAAP for private companies.The amendment is meant to be used by the FASB, the Private Company Council (PCC), and the Emerging Issues Task Force (EITF) in specifying the scope of future standards as they apply to public and private companies.

The FASB amended the master glossary in the Accounting Standards Codification on December 23, 2013, to include a definition of a public business entity.

The changes were made in Accounting Standards Update (ASU) No. 2013-12,Definition of a Public Business Entity.The update was also issued to identify the types of organizations that will be excluded from the FASB’s upcomingPrivate Company Decision-Making Framework: A Guide for Evaluating Financial Accounting and Reporting for Private Companies,the accounting board said.In a move related to the release of ASU No. 2013-12, the FASB publishedPrivate Company Decision-Making Framework: A Guide for Evaluating Financial Accounting and Reporting for Private Companies.

Among other criteria, the definition says a public business is one that meets at least one of the following criteria:

 

  • A requirement to submit financial statements to the SEC or voluntarily files statements with agency;
  • A requirement by the Securities Exchange Act of 1934 to provide financial statements to another regulatory agency;
  • Provides financial statements to a regulatory agency in preparation for a sale of securities;
  • Issues or acts as a conduit for a state or local government issuing securities for sale on an exchange or an over-the-counter market; or
  • Has securities that aren’t covered by contractual restrictions and is legally required to prepare financial statements that follow U.S. GAAP.

 

The FASB gave no specific effective date for the changes in ASU No. 2013-12 but said the term “public business entity” will be incorporated into two amendments it plans to publish early in 2014: ASU No. 2014-01,Intangibles—Goodwill and Other (Topic 350): Accounting for Goodwill,and ASU No. 2014-02,Derivatives and Hedging (Topic 815): Accounting for Certain Receive-Variable, Pay-Fixed Interest Rate Swaps—Simplified Hedge Accounting Approach.

The FASB said the definition will be used by itself and the Private Company Council (PCC) and the Emerging Issues Task Force (EITF) in specifying the scope of future standards as they apply to public and private companies.

ASU No. 2013-12 was issued over the dissenting vote of FASB member Lawrence Smith, who felt the criteria were written too loosely and would let some public companies qualify for reporting and disclosure exemptions that were intended for private companies.

“Potential users of financial statements of entities whose securities are not subject to contractual restrictions on transfer may not be granted access to management of the company and therefore may be deprived of the ability to access the information necessary to make an informed decision,” said an explanation of Smith’s dissent.