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Journal entry — FASB defines a public business entity

Published on: Dec 24, 2013

Yesterday, the FASB issued a final ASU1 that defines a public business entity (PBE). Under the ASU, entities that meet the definition of a PBE are not eligible to elect certain accounting and reporting alternatives in U.S. GAAP, including those developed by the Private Company Council (PCC) and subsequently endorsed by the FASB.2 At least two alternatives are expected to be available to entities in their current reporting cycle.3 

According to the final ASU:

A public business entity is a business entity meeting any one of the criteria below. Neither a not-for-profit entity nor an employee benefit plan is a business entity.

a. It is required by the U.S. Securities and Exchange Commission (SEC) to file or furnish financial statements, or does file or furnish financial statements (including voluntary filers), with the SEC (including other entities whose financial statements or financial information are required to be or are included in a filing).

b. It is required by the Securities Exchange Act of 1934 (the Act), as amended, or rules or regulations promulgated under the Act, to file or furnish financial statements with a regulatory agency other than the SEC.

c. It is required to file or furnish financial statements with a foreign or domestic regulatory agency in preparation for the sale of or for purposes of issuing securities that are not subject to contractual restrictions on transfer.

d. It has issued, or is a conduit bond obligor for, securities that are traded, listed, or quoted on an exchange or an over-the-counter market.

e. It has one or more securities that are not subject to contractual restrictions on transfer, and it is required by law, contract, or regulation to prepare U.S. GAAP financial statements (including footnotes) and make them publicly available on a periodic basis (for example, interim or annual periods).

An entity must meet both of these conditions to meet this criterion. An entity may meet the definition of a public business entity solely because its financial statements or financial information is included in another entity’s filing with the SEC. In that case, the entity is only a public business entity for purposes of financial statements that are filed or furnished with the SEC.

The ASU does not contain an effective date. However, an entity would apply the definition of a PBE in connection with its adoption of the first ASU that uses the term.

Editor’s Note: While the criteria contained in the definition of a PBE are largely drawn from similar existing definitions in the Codification (e.g., “public entity” or “publicly traded company”), criterion (a) is not included in certain existing definitions and criterion (e) is not included in any existing definitions. As a result, there may be limited cases in which entities previously viewed as nonpublic will qualify as a PBE. Conversely, because a subsidiary of a public company is not automatically by extension a PBE under the final ASU, there may be instances in which an entity previously viewed as public will not qualify as a PBE for purposes of its stand-alone financial statements.

This change to what constitutes a nonpublic company for financial reporting purposes is prospective thus far4 and accordingly will not affect an entity’s treatment under existing accounting guidance when the reporting requirements vary between public and private companies (e.g., segment reporting). However, such change will affect an entity’s (1) ability to adopt existing and future PCC alternatives and (2) eligibility for other relief in general FASB standard setting (e.g., transition and effective date exceptions).

Private companies that are preparing to go public — or that may consider going public in the future — should be cautious about electing the alternatives developed by the PCC until the SEC clarifies what, if any, transition guidance there would be for entities that become a PBE. Also, on the basis of the first criterion, an entity that may otherwise not qualify as a PBE would become a PBE for purposes of including its financial statements in another entity’s SEC filing (e.g., as a result of an investor’s applying Regulation S-X, Rule 3-055 or 3-096). Thus, the entity would potentially need to eliminate any previously elected PCC alternatives from its historical financial statements before including them in another entity’s SEC filing. The SEC staff recently indicated that it would consider whether to allow any transition relief in these circumstances.7


1 FASB Accounting Standards Update No. 2013-12, Definition of a Public Business Entity — An Addition to the Master Glossary.

2 In conjunction with the release of ASU 2013-12, the FASB and PCC also issued a final version of the Private Company Decision-Making Framework: A Guide for Evaluating Financial Accounting and Reporting for Private Companies, which helps the FASB and PCC determine whether and when to provide alternatives to private companies.

3 See Deloitte’s December 17, 2013, journal entry.

4 The FASB is expected to consider adding a project to its technical agenda that would replace similar existing definitions.

5 SEC Regulation S-X, Rule 3-05, “Financial Statements of Businesses Acquired or To Be Acquired.”

6 SEC Regulation S-X, Rule 3-09, “Separate Financial Statements of Subsidiaries Not Consolidated and 50 Percent or Less Owned Persons.”

7 At the September 25, 2013, CAQ SEC Regulations Committee joint meeting with the SEC staff, the SEC staff discussed “what transition alternatives might be available” to an entity that previously applied PCC alternatives and becomes a PBE, acknowledging that the changes could be extensive. However, the SEC staff noted that emerging growth companies, while permitted to follow nonpublic effective dates related to new or revised standards, are considered public entities and are not able to use PCC alternatives in their filings.

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