FAF decision falls short of original vision; AICPA developing OCBOA framework By Laura Hay, CPA, CAE
Two steps toward relief for private company accounting might have been achieved on May 23, when the Financial Accounting Foundation (FAF) announced the creation of a Private Company Council (PCC) and the AICPA announced a new other comprehensive basis of accounting (OCBOA) framework project for smaller businesses.
FAF reaches a decision
Under the oversight of FAF, the PCC will be authorized to make decisions on differences in U.S. GAAP for private companies, subject to endorsement by the FASB. “The plan approved by the Trustees strikes an important balance,” said FAF president and CEO Teresa S. Polley. “On one hand, the plan recognizes that the needs of public and private company financial statement users, preparers and auditors are not always aligned. But at the same time, the plan ensures comparability of financial reporting among disparate companies by putting in place a system for recognizing differences that will avoid creation of a ‘two-GAAP’ system.”
Differential private company GAAP
The inception of FAF’s decision was a report from a Blue Ribbon Panel appointed by FAF, the AICPA and the National Association of State Boards of Accountancy in 2009. Including representation from lenders, investors, owners, preparers, auditors and regulators, the panel concluded in its January 2011 report that action was necessary to make private company financial statements more relevant, less complex and more cost-beneficial.
The Blue Ribbon Panel recommended that an independent board be established under FAF with standard setting authority to determine exceptions and modifications in U.S. GAAP for private companies, without ratification by FASB.
FAF, FASB and the profession respond
In a proposal released in October, FAF agreed that differences in GAAP for private companies were justified by the differing needs of financial statement users of public versus private entities. The proposal recommended the creation of a Private Company Standards Improvement Council (PCSIC) to identify differences within GAAP for private companies.
Concerned, however, about creating a “Big GAAP and Little GAAP” scenario with standards that were too divergent, FAF proposed that recommendations of the PCSIC be ratified by FASB.
Members of the profession responded in large numbers to the FAF proposal, in particular questioning whether FASB’s current project load with international convergence efforts would prevent the board from being able to devote sufficient resources to give timely attention to the needs of private companies.
In return, FASB signaled a renewed focus on the needs of private companies, first by adding private company representation to the board, then by moving quickly on simplification of the requirements for goodwill impairment testing.
FAF conducted significant outreach, including a number of public roundtables to gather additional feedback from constituents and stakeholders on the issues in question.
Private Company Council created
On May 23, FAF announced the creation of a new Private Company Council to begin meeting in the fourth quarter of this year. While generally following the outline of the trustees’ October proposal, the structure included some changes to address constituent concerns:
- The name change from the CSIC to the PCC addressed comments that the originally proposed name was unwieldy.
- Differences in U.S. GAAP for private companies identified by the PCC will be subject to “endorsement” rather than “ratification” by the FASB.
- The chair of FASB must provide a public written explanation if a recommendation of the PCC is not endorsed.
- The chair of the PCC will not be a member of FASB.
- The council will meet more frequently than originally proposed (at least 5 meetings per year).
- The size of the council will be smaller than originally proposed (9-12 members).
The PCC and the FASB will jointly work on the criteria for determining when exceptions or modifications to GAAP are warranted for private companies. The PCC will then determine what portions of existing GAAP should be considered for possible exceptions or modifications.
If endorsed by a simple majority of FASB members, PCC recommendations will be exposed for public comment. PCC will redeliberate based upon comments received, and once FASB makes a final decision on endorsement, the exceptions or modifications will be incorporated in U.S. GAAP.
Did FAF go far enough?
The AICPA announced its support of the FAF decision, and of changes made by FAF to be responsive to concerns voiced by constituents. At the same time, the AICPA announced a project to develop a framework for OCBOA to address the needs of small- and medium-sized enterprises (SMEs) and the users of financial statements of SMEs.
“One-size U.S. GAAP does not fit all companies, especially smaller privately held businesses,” said Gregory J. Anton, CPA, CGMA, chair of the board of directors of the AICPA. “We recognize that the FAF has moved in the right direction and the AICPA will continue to be fully engaged with the FAF and the Private Company Council. While doing so, we will also use our resources and expertise to develop an enhanced
OCBOA financial reporting framework that is objective, relevant and responsive to the concerns of preparers and users of small and medium private company financial statements where GAAP financial statements are not required.”
FAF expressed support for the AICPA OCBOA framework project as complimentary to the efforts of the PCC in meeting the needs of smaller private businesses.
OCBOA framework
“AICPA undertook the project to determine what a special purpose framework might look like for SMEs,” said Chuck Landes, CPA, AICPA vice president, Professional Standards Team. “There is currently significant divergence in practice in the use of OCBOA, which is non-authoritative and elective.”
According to Landes, objectives of the project include developing a framework that is simpler, more standardized and more cost-beneficial for small to medium-sized private companies, with more standardized reporting in a way that users of financial statements of these entities would find useful. The project will include a conceptual framework and a comprehensive set of criteria of rules for common accounts. The OCBOA framework will focus on historical costs and cash flows, addressing complications currently confronted by users of smaller entity financial statements, including:
- Fair value.
- Consolidations.
- Deferred taxes.
- Revenue recognition.
- Leases.
- Parent company only financial statements.
- Pension disclosures.
“Users of SME financial statements are often banks, lenders or sureties, who primarily want to know what you own, what you owe, cash flow information, and whether it is sufficient to repay liabilities,” Landes noted.
Additional guidance
AICPA is also working on developing additional guidance for cash basis, tax basis and modified cash basis accounting. Examples of what would be included in the guidance are appropriate modifications to the cash method, and what modifications would be inappropriate.
A second set of guidance will address modified cash basis accounting for governmental entities for jurisdictions in which modified cash basis accounting is permitted.
What about IFRS for SMEs?
Landes noted that while IFRS for SMEs is currently permitted in the U.S., it has not yet gained broad acceptance.
“The OCBOA framework will resemble IFRS for SMEs,” he said, “but will address some matters of practice unique to the U.S., such as LIFO inventory, U.S. income taxes and some more traditional accrual methods.”
Future of OCBOA framework
Once a draft framework is completed, it will be reviewed by a task force of AICPA members and then – likely this summer – exposed for public comment with a 60-90 day comment window.
“I think the OCBOA framework will have broad appeal,” Landes said.
While the OCBOA framework will be exposed for public comment, OSCPA and the AICPA would love to hear any initial thoughts from members on the project. Please send comments to Chuck Landes at
clandes@aicpa.org or Laura Hay at
Lhay@ohio-cpa.com.
Laura Hay, CPA, CAE is COO of The Ohio Society of CPAs and staff liaison to the Accounting & Auditing Committee. She can be reached at lhay@ohio-cpa.com or 800.686.2727, ext. 322.