“No burning issues” stand out that would merit an accounting overhaul for reporting about private credit agreements, but certain disclosures could be improved to provide more transparent information to more investors, a FASB advisory panel of senior finance heads said on June 5, 2025.
As it stands, some investors have more access to management than is publicly disclosed around direct lending—a subgroup of funding to emerge amid a broader U.S. market that has skyrocketed to more than $1 trillion in assets under management, according to discussions by the Financial Accounting Standards Advisory Council (FASAC) aimed at informing change.
“Because these agreements are negotiated on a bilateral basis, everything is very much tailored and so there’s very little disclosure right now outside the direct lender group around what those bespoke arrangements are,” said Jonathan Nus, managing director, global transaction advisory group at Alvarez & Marsal. “It’s not transparent and so oftentimes the liquidity is masked.”
FASAC members pointed to several disclosures that could be improved to require better information such as those around: compliance with covenants and bespoke terms related to credit agreements; changes in the risk profile of investments in private credit funds; and transaction terms such as minority interest or preferred stock.
“The general theme here is striking a balance between having enough disclosure for investors to be able to monitor portfolios but preserving the benefits of private credit to certain borrower types…. where a lot of very formulaic disclosures might be intrusive,” said Saul Martinez, head of US financial research at HSBC. “Preserving those benefits is important because private credit has been a major source of funding for this type of company in the absence of banks who have pulled back for various reasons.”
Loans Up to $65 Million
The FASAC, an operating arm of FASB trustees, the Financial Accounting Foundation, is composed of 36 senior financial professionals who advise the FASB on its projects and agenda. The discussion comes as investment analysts raised concerns over the lack of detailed information being provided by businesses around portfolio performance or credit quality of private credit funds, i.e. direct lending or a form of non-bank financing that’s typically extended to small and mid-sized private companies. These loans, which can run to about $65 million, are not broadly syndicated, are typically originated by private credit funds that are structured similarly to private equity funds, and business development companies (BDCs).
Some reports suggest that private credit is generally extended to businesses with revenues ranging from $10 million to $1 billion, but the market recently expanded to include larger companies, a FASB staff accountant said during the discussions. Industries represented in the space are diverse, but most prominent are commercial services, software, and healthcare services, with an uptick in the life sciences sector.
“There are different types of participants from a borrower perspective in the private credit market…there are large and sophisticated borrowers, but there are also many, many middle-market type borrowers that are interested in private credit because among other things, they want to be able to engage in a negotiation that results in a bespoke arrangement that suits them,” said Antonio Yanez, Jr., partner, Willkie Farr & Gallagher LLP. “And they want to do it in the context of developing a longer-term relationship with a borrower that’s going to hold that debt as opposed to sell it.”
Current Rules Are Adequate
Other than signaling which disclosures could be enhanced, FASAC members didn’t make strong recommendations to the FASB for a project.
On the borrower side, private companies and public companies are subject to different disclosure requirements under Generally Accepted Accounting Principles (GAAP). On the lender side, private credit funds are usually reported under Topic 946, Financial Services—Investment Companies, and investments measured at fair value using the framework established in Topic 820. Because these investments are illiquid and not traded in active markets, they typically fall into level three of the fair value hierarchy, FASB staff explained during the discussion. This means their valuations rely on unobservable inputs.
Under current guidance, an entity that has level three fair value measurements is required to disclose quantitative information about significant unobservable inputs used in its measurements, among other disclosure requirements. Additionally, Topic 946, which is the investment company guidance, has its own disclosure requirements for investment companies, and there are also requirements in SEC rules that would apply to vehicles like BDCs.
This article originally appeared in the June 6, 2025, edition of Accounting & Compliance Alert, available on Checkpoint.
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