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Why the AICPA Supports FAF’s Creation of Private Company Council

Solve_maze_puzzle_optMany of you have seen news reports and AICPA communications about the Financial Accounting Foundation’s recent decision to create a Private Company Council. Given the serious concerns the AICPA had with FAF’s original proposal released in October 2011, I am providing additional detail as to the structural and process improvements FAF made with the new Private Company Council that enable us to support it.  

The AICPA’s issue with FAF’s proposal centered on the extent of the Financial Accounting Standards Board’s influence on the planned private company body and ratification of its decisions. We and more than 7,000 stakeholders urged FAF to strengthen the original council’s independence and they responded. The final plan is more about collaboration between the PCC and the Financial Accounting Standards Board than the approach outlined in the exposure draft. Now, FASB will be asked to endorse the PCC’s recommendations rather than ratify them and generally will have a limited time frame of 60 days to do so. I would describe the process as one of negative clearance, with a high threshold for a FASB veto. And if FASB does veto the PCC’s decision, the FASB chairman has to explain why in writing – and provide suggestions for obtaining approval – and it will be made public for stakeholders to evaluate.

While this approach is not what the Blue Ribbon Panel on Standard Setting for Private Companies recommended, or what we believed was the best long-term solution (we supported the panel’s recommendation for a new independent board), FAF empowered the PCC to facilitate changes in U.S. GAAP to recognize differences for private company financial reporting. Such a mechanism is long overdue and much needed in the private company environment and we are committed to making it work, along with continuing our advocacy for GAAP modifications on behalf of private companies and the users of their financial statements. The millions of private businesses that use GAAP financial statements deserve a concerted effort to make meaningful differences in GAAP a reality. FAF and the AICPA share that goal.

FAF made other improvements in the PCC that will contribute to a better chance of success. Specifically:

  • A FASB board member will not be serving as chairman of the PCC, further increasing the PCC’s independence.
  • With fewer members, 9 – 12 instead of 11-15, the PCC will be more nimble.
  • At least 5 meetings each year versus 4 in the proposal means the PCC will be able to address issues on a timely basis.
  • A three-year sunset review will occur on the PCC’s progress and the effectiveness of the process, in addition to FAF’s continual oversight.

I reiterate, however, that FAF’s actions relate to private companies that need or are required to have U.S. GAAP financial statements. But not all do. For owner-managed, small- and medium-sized, for-profit entities that do not use GAAP, the AICPA is working on a self-contained financial reporting framework for release in the first half of 2013. It will blend accrual income tax methods and other traditional methods of accounting. While its use will be completely voluntary, it promises to be less complex and less costly than following GAAP. FAF publicly supported this project, calling it “important and complementary.” It is a top priority for us. Watch for an exposure draft this fall. More information is available in this FAQ.

Efforts to improve private company financial reporting date back at least to the 1970s. We can now see a path toward real change, which is good news for private companies, their financial statement users and the CPAs who serve them. Follow developments on the PCC and the financial reporting framework for smaller enterprises on the AICPA’s private company financial reporting webpage.

Barry C. Melancon, CPA, President and CEO, American Institute of CPAs.

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