Private Company Council Tackles Accounting Complexity with Four Key Projects

The Private Company Council (PCC), a body that advises the Financial Accounting Standards Board, has identified four key areas where accounting rules can be simplified to ease the burden on private companies.

In a meeting on June 24, 2024, the council agreed to prioritize projects aimed at streamlining credit-loss accounting, debt modifications, conditional repayments and overbillings, and lease accounting. By doing so, the panel will ultimately focus on pursuing targeted amendments that reduce complexity and costs in US GAAP for private companies in areas where they need it most.

“Part of what we need to think about is what’s the problem we want to solve…as the most important part of this is not the pain, it’s the fix,” PCC Chair Jere Shawver said.

The PCC’s efforts come at a critical juncture, as private companies struggle to navigate the increasingly complex and costly financial reporting landscape. Frustrated with the intricate accounting rules and regulations that govern their industry, some private companies have considered ditching GAAP in favor of tax-basis accounting – a move that could simplify their reporting requirements but may also limit the usefulness of their financial statements.

Credit-Loss Accounting: A Simpler Approach

A key simplification issue the PCC identified is with implementing the CECL model under Topic 326 for trade accounts receivable and contract assets is a significant challenge for private companies. The model is complex and costly, especially for short-term assets with limited loss history. To address this, the council is exploring possible solutions to simplify credit-loss accounting, including a more straightforward way to estimate losses based on past experience, without needing to make extra adjustments.

Debt Accounting: Simplifying Modifications and Extinguishments

The PCC has also agreed to tackle the complex issue of debt accounting, focusing on changes to term loans and lines of credit. The council plans to put aside discussions on more complex debt problems, like troubled debt restructurings, for now. One potential solution is to treat all loan changes as if the old loan was paid off and a new one was created. The staff will reach out to users to gather feedback, which will help define the scope and develop practical solutions to debt accounting challenges.

Conditional Repayments and Overbillings: A Construction Industry Focus

The council has decided to address specific accounting problems related to conditional repayment and overbillings, particularly in the construction industry. The goal is to find a practical solution that helps construction companies work with sureties (companies that guarantee contracts). To achieve this, the focus is on keeping the scope small to get a solution quickly, with plans to release a draft proposal and gather feedback from industry experts.

Lease Accounting: Reducing Complexity and Cost

Finally, the PCC will continue to explore ways to make lease accounting (Topic 842) easier and less expensive for private companies. Despite current simplifications, companies say they need more help. The panel plans to discuss this issue further and might create a special team to focus on the right areas and set realistic deadlines. The goal would be to simplify lease accounting without losing important financial information, making it easier for private companies to comply.

For in-depth analysis of the FASB’s guidance for credit losses, please see Catalyst: US GAAP—Financial Instruments-Impairment, also on Checkpoint.

For in-depth analysis of the FASB’s standard for lease accounting, please see Catalyst: US GAAP — Leases, also on Checkpoint.