And one more thing: What body should develop the standards? The FASB as it currently stands, or a new entity focused on private companies?
It's hardly a new are of debate. Indeed, while it's captured more attention the last year or two, the issue has provoked of discussion for about four decades, says Barry Melancon, president and chief executive officer with the American Institute of Certified Public Accountants. "Every time we've debated it," he says, "there have been roadblocks and nothing happened."
Since its formation in 2007, has met with, and made several recommendations to, the Financial Accounting Standards Board. Key proposals from the commission -- a FASB-sponsored technical advisory group made up of accountants, bankers as well as financial professionals with private companies -- included one to exempt private companies from FIN-48, which covers accounting for uncertainty in income taxes, have been rejected.
Then, in late 2009, the AICPA; the , which provides oversight to FASB; and the National Association of State Boards of Accountancy established a on Standard Setting for Private Companies. The goal of the panel, formed to look at the issue of standards from a policy level, has been to address how U.S. accounting standards can best meet the needs of users of private company financial statements.
In January, the panel issued , containing two primary recommendations: the development of differential standards for private companies, and a separate accounting standards board for private companies.
Melancon notes that the U.S. is home to about 28 million private companies, about eight million of which file financial statements with bankers and sureties. These eight million private companies, along with about 15,000 public companies, account for almost the entire U.S. economy. However, GAAP mostly addresses just the public 15,000. "Shouldn't we have a system set up to focus on the other half?" Melancon asks.
As it is now, many private company CFOs go through the exercise of re-stating their GAAP-compliant financial statements in order to meet the needs of bankers, says John Hepp, a partner in the accounting principals consultation group with Grant Thornton. While traditionally the goal of financial reporting has been to report the results of transactions, over the last 15 to 20 years, FASB has focused on capital allocation, which is a measure of greatest use for public companies. "Private companies look to bank loans. There is a difference in the amount and type of information they need."
"The complexities and nature of reporting for large (public) companies has so far outpaced what the average commercial lender may want for a company that's less than about $30 to $40 million in revenue," says Darrin Abernathy, chief financial officer with Entec Services Inc. an environmental testing company based in Pelham, Ala.In most cases, the loans are secured with an asset -- say, inventory or accounts receivable -- and the lender's greatest concern is the quality of the collateral.
Forcing smaller companies with relatively simple corporate structures to comply with GAAP makes the financial reporting process less efficient, Abernathy adds. "I'm not advocating a lesser standard, but ones that are focused on what the average banker needs."
As proposed, the private company standards could be used by companies of all sizes, Melancon says. Moreover, the standards would be considered GAAP, so private companies that have to meet a debt covenant requiring financial statements in accordance with GAAP would comply.
Judging by that the FAF has received, public opinion heavily favors having a separate set of standards for private companies.
Opinions also seemed to favor, on balance, a separate standard setting board, which would work with the FASB, for private companies. However, this issue hasn't seemed to generate the same intensity as the desire for a separate set of standards itself. "It's tough to say if a separate board is needed," Abernathy says. If one is, the two boards would need to work together, he adds.
Some in the industry worry that a separate board would lengthen the standard-setting process even more, because both groups would need to weigh in on potential standards, says Meredith Vogel, an audit senior manager with Grant Thornton and former staff member of the Blue Ribbon Panel.
In response to concerns about a separate board, Melancon notes that FASB has had many opportunities to address the issue of private company standards, but has chosen not to. "We believe that if you really want to effect change, you need a separate board," he says. In addition, the time commitment required of FASB, due to its convergence projects with the International Accounting Standards Board, makes the need for a separate board even more critical.
Even so, in early October the FAF issued a proposed plan that would establish a Private Company Standards Improvement Council, or PCSIC. The PCSIC would determine whether exceptions or modifications to U.S. GAAP are required to for private companies. The Council would have "the authority to identify, propose and vote on specific improvements to U.S. accounting standards for private companies," according to a release by the FAF.
Changes approved by a two-thirds majority of the Council would move to the FASB for ratification. They would become final following public comment, further deliberation by the PCSIC, and final ratification by the FASB.
The AICPA, for one, was "profoundly disappointed"in the outcome, according to a release. "We don't think the concerns of smaller private companies can be fully appreciated until there is an independent board dedicated and focused solely on the needs of private companies," the release said.
"It falls short because an independent board was not created," said Melancon, separately. "This is not any different than what we now have with the PCFRC, since FASB still has veto power. In addition, FASB is not representative enough of the private company constituency."
The solution recognizes the competing objectives the FAF is trying to meet, Hepp says. While some want a strong, independent group with the ability to ratify standards, the FAF also wants to avoid developing a two-GAAP system.
"There was some fear that a new board would drift off to "little GAAP," Vogel says.
While the FAF is accepting comments on its proposal by January 14, 2012, it's likely that a Council will be put in place for at least a few years, Vogel adds.
Down the road, two sets of GAAP may be inevitable, given the differing needs for financial information between public and private companies, Hepp says. "We run the risk, if we don't do something, that GAAP will become irrelevant for private companies."
"We need to step back and ask, 'Are we really servicing the users of financial statements?'" Abernathy adds. "Right now, it seems like it's become almost an academic exercise, versus a practical one."
Earlier this month, the Securities and Exchange Commission announced formation of the .
"The committee is intended to provide a formal mechanism through which the Commission can receive advice and recommendations specifically related to privately held small businesses and publicly traded companies with less than $250 million in public market capitalization," the SEC says in its release.
The committee likely will focus on the issues of raising capital and SEC reporting by small public companies or small companies looking to go public, rather than accounting standards, according to an AICPA spokesperson.