In 2012, standard setters recognized the need for accounting standards that are specifically designed for private companies.
The Beginning of Private Company Accounting
For decades there has been an ongoing debate about whether it was appropriate to apply generally accepted accounting principles (GAAP) for public companies to private companies. This year, the creation of the Private Company Council (PCC) by the Financial Accounting Foundation (FAF), demonstrates that standard setters have recognized the need for accounting standards that are specifically designed for private companies.
The PCC is replacing the Private Company Financial Reporting Committee (PCFRC), but the role of the PCC will be significantly different. The PCC will actually propose changes in standards, while the PCFRC only made recommendations. In addition, the PCC will be well supported by dedicated FASB staff.
Evolution, not revolution
The changes in GAAP may proceed slowly. The process of identifying and articulating differences will be time consuming. In addition, the PCC will be an entirely voluntary organization made up of 10 members. It will have the support of FASB staff and set its own agenda, but because of the limited resources, the number of topics it can address will be limited.
It will also take time to incorporate any changes into the Financial Accounting Standards Board (FASB) codification of accounting standards. Unlike the International Accounting Standards Board, the PCC was not given the option of creating an entirely distinct and separate GAAP for private companies. So the incremental GAAP changes will be a slow evolution rather than a revolution.
The PCC will also go through a formal due process. Each proposal will receive constituent feedback, and writing the exposure document and adopting the final standard will likely take many meetings.
While the PCC is having its initial meetings, the FASB is not standing on the sideline. They are developing a framework to expose the nature of private company differences. The framework will likely allow changes in measurement, disclosure, presentation, effective dates, and transition. Implementation guidance is also a possibility. One of the most significant factors will be whether to require all private company differences to be adopted or to allow adoption on a standard by standard basis. Final adoption will wait until the PCC is fully formed.
What is a private company?
The FASB is also working on the definition of a private company. While the definition of a public company exists, the definition of “private” is unlikely to be “not public.” For instance, the scope of the PCC is not expected to include nonprofit entities. For a private business owner, it will be important to follow how your business will be defined going forward.
Speed of change is clearly not as hoped by many. In response, a separate basis of accounting for private companies (Financial Reporting Framework for Small to Medium-Sized Entities) is also being exposed through a task force of the AICPA. This proposed document hopes to define a special purpose framework designed to simplify accounting rules. It is based largely on the income tax basis of accounting.
While 2012 may not be considered the year of the change, it will be seen as the start. So, let it begin.
Steve Bodine, Audit and Assurance Partner
steve.bodine@cliftonlarsonallen.com or 612-376-4791