Do private companies require financial reporting standards that are different, in certain instances, from those used by public companies?

The AICPA and FASB aim to find out and together are considering how the standard-setting process at FASB can be enhanced to accommodate the users of financial information produced by for-profit, nonpublic entities. To that end, the two organizations have published a proposal describing specific process changes, including (1) certain improvements to the FASB’s current processes for determining whether differences are needed in GAAP standards and (2) sponsoring and funding a committee that would enhance the private company financial reporting constituents’ views into the standard-setting process.

The AICPA and FASB believe the end result would improve the consideration of the potential differences between nonpublic and public entities, not by creating a second set of GAAP but by incorporating enhancements into existing accounting standards.

The AICPA and FASB are encouraging everyone who plays a role in private company financial reporting – bank lenders, sureties/bonding companies, owners/preparers, and practitioners – to review the proposal and comment on it. The proposal, released in June, is available at www.PrivateCompanyFinancialReporting.org.

The official comment period ends August 15, 2006. MACPA members are asked to send a copy of submitted comments to jlindley@michcpa.org.

The proposed model evolved partly out of a recommendation by the AICPA’s Private Company Financial Reporting Task Force, which in 2004 and 2005, studied financial reporting by nonpublic entities. Approximately 3,700 lenders, investors, sureties, business owners, financial managers and public accounting practitioners participated.

The survey results identified aspects of GAAP that were useful and others where there should be recognition of
the particular needs of users of private company
financial reporting.

Although it bases standard setting on economic phenomena, FASB understands that there are potential differences in public/nonpublic user needs and cost/benefit decisions. Historically, any differences typically related to disclosures, effective dates and transition methods

Supporters of differential GAAP note that the private company environment is distinct from that of public companies. In addition to different capital structures, they cite these factors:

• the owners of private companies are typically deeply involved in the management of the business;
• investors, creditors and other stakeholders in private companies generally have much greater access to
  the top management and information about the company’s finances;
• certain reporting requirements may not be useful to the private company environment and burdensome
  to implement.

This past spring, the Institute and FASB each reached out to organizations representing private company owners, lenders, sureties and regulators to solicit their support and urge them to inform their membership about the proposal. All the groups were enthusiastic and said they would do their part to spread the word. Clearly, the time for private company financial reporting has arrived.

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