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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