Separate GAAP for Private Companies?

11/11/2010

By David J. Bayens, CPA

Is the U.S. marching toward Generally Accepted Accounting Principles (GAAP) for private companies? Recently, the profession took a big step in that direction.

A “blue-ribbon” panel that was formed by the Financial Accounting Foundation (FAF) recently expressed its consensus view that there is a need for a new standard-setting model that follows GAAP, with exceptions for private companies. It contemplates a separate private company board under the oversight of the FAF. FAF is the parent organization of the Financial Accounting Standards Board (FASB) which currently sets the accounting standards for all U.S. companies.

There were a number of reasons sited for the need to establish a separate rule-making body including:

• The needs of users of financial statements can differ significantly for large companies, with diverse investors and creditors, versus those of smaller companies.
• Many GAAP rules have become complex and may be costly and burdensome for many nonpublic companies to apply. The value of this information to users of private company financial statements is questionable.
• In the future, the gap between what financial statement users of public versus private companies may become wider – examples: the move toward fair value accounting and the convergence of U.S. GAAP with international accounting standards.

A number of banks and banking organizations have weighed in on the issue and Michael Menzies, the Immediate Past Chairman of the ICBA, is a member of the panel. In a letter to the panel, he referenced an ICBA member survey that indicated that 50% of the respondents thought that there should be a different standards-setting body for private companies. Paul Stahlin, the first banker to assume chairmanship of the AICPA pointed out that, while there are about 15,000 companies registered with the SEC, there are more than 29 million private businesses.

What’s next? The panel is meeting again on December 10th. It is expected to issue a report to the Trustees of the FAF in January 2011. After deliberation, the Trustees’ resulting action plan is expected to be subject to further input, including exposing the plan for public comment before it is implemented.