FASB’s New Council Helps Simplify Reporting Requirements for Private Companies
While walking the halls of the Financial Accounting Standards Board (FASB) in 2000, one thing was clear — I was out of place. As one of the two members of the Emerging Issues Task Force principally representing privately held businesses, our voices were seldom heard at the FASB.
Unfortunately, a number of the topics being discussed directly impacted private companies, such as shipping and handling fees and website costs. However, the discussion was generally from the public company perspective; the FASB had limited staff with a private company experience.
During the next six years, a number of complex accounting standards were issued, including guarantees and asset retirement obligations and variable interest entities. Unfortunately, the costs and effort involved in financial reporting under these standards often fell disproportionately on small and private entities.
New committees for private companies
The FASB started addressing this issue in 2004 and created the Small Business Advisory Committee, and then the Private Company Financial Reporting Committee in 2007. However, both groups were only advisory and did not develop standards. By the end of the decade, the FASB was becoming more attentive to private companies, and initiated the Private Company Council (PCC) in December 2012.
The FASB took a new approach to addressing private companies with the PCC. It included FASB staff on the PCC, and could therefore draft accounting standards updates, which can ultimately become part of U.S. GAAP.
The PCC has accomplished a lot in a year, and has issued four proposals:
- Simplifying identified intangibles acquired in a business combination, including eliminating an auditors’ report modification for a GAAP departure for those that previously elected not to consolidate
- Amortizing goodwill over 10 years (unless a shorter period can be justified)
- Developing an alternative to use a simplified hedge accounting for regular interest rate swaps
- Exempting variable interest entities from leasing arrangements between those under common control
These proposals are unique because they impact accounting measurements rather than merely changes in disclosures. And FASB is fully supporting these proposals.
I believe that two of these proposals have a good chance of being codified — amortizing goodwill and simplified hedge accounting. However, even the variable interest accounting proposal has a chance of becoming a standard, and it is the most controversial policy and would have the biggest impact on businesses.
If codified, private companies will have the option to adopt these alternatives, but should carefully assess the impact of these on their business. For instance, adopting a goodwill amortization accounting policy can affect debt to equity ratios, among other financial covenants.
A steady advocate
Although it took a while for the PCC to form, now that it is here it will continue to advocate for standards that help relieve private companies of excessive reporting requirements. As the initial efforts of the PCC continue to unfold, private companies should continue to examine the alternatives they propose. Private businesses understand that the key to remaining viable is being open to change. With the PCC, private companies can evolve with — and benefit from — more reporting alternatives.