US FAF outlines new body to simplify US GAAP for private companies
May 24, 2012
The United States Financial Accounting Foundation (FAF) Board of Trustees have announced the establishment of a new body to improve the process of setting accounting standards for private companies. The new Private Company Council (PCC) will determine whether exceptions or modifications to existing US GAAP are necessary to address the needs of users of private company financial statements. The AICPA has supported the PCC and announced plans to develop an “other comprehensive basis of accounting” (OCBOA) financial reporting framework for companies which are not required to comply with US GAAP.
In making its determinations on exceptions or modifications, the PCC will apply criteria mutually developed, and agreed to, with the Financial Accounting Standards Board (FASB). Proposals for exceptions or modifications will be subject to FASB endorsement and exposed for public comment. The PCC will then redeliberate the proposals and forward them to the FASB for a final decision (with a written explanation provided if endorsement is rejected).
The FAF Board of Trustees will create a special-purpose committee of Trustees, the Private Company Review Committee, which will have primary oversight responsibilities for the PCC. The Review Committee will hold both the PCC and the FASB accountable for achieving the objective of ensuring adequate consideration of private company issues in the standard-setting process. The PCC will prepare quarterly reports to the FAF Trustees and a review of the operation of the PCC will be conducted after a three-year period.
The PCC will have between nine and 12 uncompensated members, and will meet at least five times a year in its first three years of existence. The FAF Board of Trustees will issue a call for nominations for members of the PCC via the FAF website in the next few weeks and also publish a complete report on the establishment of the PCC on its website.
The establishment of the PCC is the culmination of a long consultative process. There has been long term calls in the United States for relief from listed company requirements for private sector entities, with many noting the complexity of accounting under US GAAP is not useful to users of private company reports.
In more recent times, the AICPA/FAF/NASBA "Blue-Ribbon Panel" on Standard Setting for Private Companies started a consultation process in 2010, which lead to its published recommendations in January 2011 for the creation of a new board, to be overseen by the FAF, that would focus on making exceptions and modifications to US GAAP for private companies.
In early 2011, the FAF Trustees subsequently formed a Trustee Working Group to address the accounting standard setting for non-public entities. In October 2011, the Trustees concluded that creating a separate standard-setting board for private companies would likely lead to the establishment of two separate sets of US accounting standards, a result that seemed undesirable. Instead, the to create a "Private Company Standards Improvement Council" which would have the authority to identify, propose and vote on specific improvements to US accounting standards for private companies. The announced PCC is largely consistent with these proposals.
The consultative process also confirmed that mandating the use of the IFRS for SMEs in the United States is not appropriate at the current time. However, because the AICPA now recognises the IASB as an authoritative standard setter, in many instances private companies (other than financial institutions) may also report under IFRS or the IFRS for SMEs.
Reaction from the AICPA
The AICPA has released a press release in response to the FAF's announcement, in which it states "we recognize and appreciate that the FAF has taken solid steps in the right direction regarding the Private Company Council."
The AICPA was a strong advocate for a separate private company board and was disappointed that the FAF Trustees rejected the Blue-Ribbon Panel's recommendations to this effect.
The AICPA's press release announces its plans to develop an “other comprehensive basis of accounting” (OCBOA) financial reporting framework to meet the needs of some privately held small- and medium-sized enterprises (SMEs), as well as the users of the financial statements of these entities. The AICPA envisages that the SME OCBOA framework will be a less complicated and a less costly alternative system of accounting to US GAAP for SMEs that do not need US GAAP financial statements.