AICPA NATIONAL ISSUES

Change to Private Company Reporting Standards on Horizon

The Financial Accounting Foundation is poised to shake up the standard-setting model for privately held companies in 2011, as it moves toward adopting an advisory board recommendation to create a separate board to oversee U.S. GAAP (Generally Accepted Accounting Principles) that include exemptions for private firms.

Streamlining U.S. GAAP to better serve private companies and users of their financial statements has been long discussed. However, the proposal to create a separate board – not the Financial Accounting Standards Board – has some in the industry skeptical.

The FAF is expected to get the full recommendation of the 18-member panel early this year. The panel includes lenders, investors, and owners as well as preparers, auditors, and regulators. Its other recommendations will address how the new board would work with the FASB throughout the standard-setting process, what would the board’s mission and structure look like, and how it would be funded.

“We believe these proposed changes to the U.S. accounting system would be widely supported by private company financial statement constituents,” said Barry Melancon, AICPA president and CEO, who also sat on the panel.

In October, the governing Council of the AICPA adopted a resolution supporting the work of the panel, including the creation of a separate accounting standards board.

The “blue ribbon panel” was formed in 2009 by the AICPA, the FAF, and the National Association of State Boards of Accountancy (NASBA). The group was charged with helping chart a course for setting accounting standards that meet the needs for private companies.

After studying the panel’s recommendations, the FAF Board of Trustees will seek input from constituents, including allowing public comment prior to its being implemented.

“As part of our Trustees’ strategic initiative, the FAF looks forward to further exploration of the ideas and issues surfaced by the panel as we carefully deliberate improvements in standard setting,” said FAF President and CEO Teresa S. Polley.  

Reaction from CPAs is mixed.

Kathryn J. Jervis, associate professor of accounting at the University of Rhode Island, thinks -- generally speaking -- smaller CPA firms that serve privately held companies are applauding the effort to make the financial reporting standards less burdensome.

She said private companies have been asking for a voice in the standard-setting process. They believe exceptions needed to be made to GAAP considering private companies are usually submitting financial statements to lenders, not filing to sell public stock, for instance.

“This could be a relief to many accounting firms because it will help them better serve the smaller private companies,” Jervis said. However, she questioned the need for a second, separate board.

“One standard-setting board would be cleaner, easier,” Jervis explained. “I think another board means another level of complexity.”

During a panel discussion of the blue ribbon group, Melancon addressed concerns about creating a new board and not handing the task over to FASFB. He said the majority of the panel believed the process needed to be more focused on private companies in order to initiate change in a timely manner.

“I believe very strongly you have to have a different set of people who come to the table only with the point of view (of) a private company user,” he said.