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Public Company Definition May Be Ready by Year-End

The FASB on October 30, 2013, put the finishing touches on its definition of a public business entity, an effort the board pursued to draw a sharper distinction between public and private companies.

The decision puts the FASB on track to finalize the definition by the end of the year.

The board agreed to retain most of the criteria outlined in the August Proposed Accounting Standards Update (ASU) No. 2013-310,Definition of a Public Business Entity: An Amendment to the Master Glossary, but it tweaked several parts to respond to concerns from auditors, businesses, and other groups that many privately held businesses would get swept up in the definition and not qualify for breaks the FASB often offers to private companies. The FASB in recent years has given extra time to private companies to adopt new accounting standards or has offered reduced disclosure requirements.

The board agreed that businesses that are required by the SEC to submit financial statements to the agency or covered by the reporting requirements in the Securities Exchange Act of 1934 would be considered public.

A business that’s required to submit financial statements with a foreign or domestic regulatory agency to sell securities also would fall under the definition, as would a business that issues bonds into a public market.

Finally, if a business’s securities aren’t subject to contractual restrictions on transfer, and the business is required to prepare U.S. GAAP financial statements and make them publicly available on a periodic basis because of a legal, contractual, or regulatory requirement, it would be considered a public business.

A business would have to meet only one of the criterion to be considered public, the board said.

Setting more parameters around a public versus a private company is part of the FASB’s response to years of criticism that it ignored the accounting needs of privately held businesses by writing complex standards for publicly traded companies. In recent years, the FASB has simplified some aspects of its standards for private companies, but it hasn’t set a definition for the types of businesses that qualify for this flexibility.

The board initially wanted to come up with a single definition of private company but instead decided to set parameters around the types of businesses that explicitly wouldn’t be considered private. More recently, the board has been working on a guide for writing standards for private companies. That guide, the Private Company Decision-Making Framework: A Guide for Evaluating Financial Accounting and Reporting for Private Companies, is expected to be finalized by the end of the year.

The definition will be used to amend the master glossary of the FASB’s Accounting Standards Codification. The amendment will be published at the same time as the private-company framework, FASB research staff members said, and it will become official once the definition is used in a new accounting standards update.

Six of the seven FASB members indicated they would support the final document. Lawrence Smith said he would dissent, but didn’t explain why. Dissenting board members typically provide written explanations about their disagreement with a proposal or final standard when the documents are published.

The board held off on pursuing a separate project to define a private company, in part because it doesn’t have space on its agenda. In addition, board members want to wait until they learn more about how private companies are implementing the more flexible application of U.S. GAAP that’s been given to them.