FASB update on the path to a differential standard-setting framework for private companies
11 July 2011
The article describes the staff's findings, which will assist the FASB in developing a new framework for deciding when and how to modify specific US GAAP accounting standards for private company use.
In its initial assessment, the FASB staff identified six significant factors that differentiate the financial reporting considerations of private companies from public companies. They are: types of users; access to management; investment strategies; ownership structures; accounting resources; and education.
The staff assessment is the first stage in an effort by the FASB to develop a so-called “differential framework” for deciding whether and when to adjust the requirements for recognition, measurement, presentation, disclosure, effective dates and transition methods for financial accounting standards that apply to private companies. Creation of the differential framework was one of the key recommendations of a study by the Blue-Ribbon Panel on Standard Setting for Private Companies released last January to the Board of Trustees of the FAF, the FASB's parent organisation. In another recommendation, a majority of the Blue-Ribbon Panel called for the creation of a separate board to set or modify accounting standards for private companies, but also recommended that the FASB, in the short-term, develop a differential framework.
As part of its initial assessment, the FASB staff determined that the special needs of private companies today are often addressed by lenders that permit private companies to submit financial statements accompanied by a qualified accountant's report because of permitted exceptions to US GAAP reporting. These exceptions typically are limited to accounting standards that are deemed to be very costly to implement and that are not relevant to the user, such as a bank’s lending decision or monitoring of covenant compliance. These agreements between some preparers and users of private company financial statements have been effective in addressing some cost-benefit considerations of select accounting standards. However, concerns have been raised that qualifications are only a short-term solution, and if they become pervasive or if multiple qualifications are allowed in one set of financial statements, comparability will become compromised because private company financial statements will begin to deviate significantly from financial statements prepared in accordance with US GAAP.
The FASB staff will continue to work with the Private Company Resource Group in developing a differential framework for the Board’s consideration. During this time, the FASB will continue to solicit input from those using, preparing, and auditing the financial statements of private companies. As part of its due process, the Board will expose for public comment a draft of the proposed differential framework to solicit input from all interested parties.
In the absence of a formal differential framework, the Board has been taking into consideration the key differences identified in the staff’s initial assessment during its standard-setting deliberations. In recent months, this has resulted in the Board providing a practicability exception for non-public entities relating to the accounting for non-marketable equity securities, an exemption from certain revenue recognition disclosure requirements, and a deferral of the effective dates of various standards, including the statement of comprehensive income standard.
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