Private Company Financial Reporting

1
Private Company Financial Reporting

• Brief History of Efforts in U.S.

2
1974 AICPA

• Titled Committee on GAAP for Smaller and/or
  Closely Held Businesses.
• CPA focused - Discussion Paper (138 responses)
  extensive member forums.
• DP Question 1 Are any differences in the
  application of GAAP appropriate?
• Direct contact with users?
• CPAs said user needs not met and financials too
  complex for users.
• Said statistical summary of responses not
  helpful.

3
1974 AICPA (cont)

• RECOMMENDATIONS
• FASB provide differential disclosures.
• No differential recognition and measurement.
• RESULTS
• FASB complied in certain standards (e.g.,
  earnings per share).

4
1981 - AICPA

• Titled Special Committee on Accounting Standards
  Overload.
• Offshoot of broader 1978 study by AICPA Special
  Committee on SMEs.
• Formed to study alternate means of providing
  additional relief from accounting standards which
  are not cost-effective for small businesses.

5
1981- AICPA (cont)

• Discussion Paper proposed conclusions and
  recommendations.
• Basis was from SME Committee conversations with
  AICPA members.
• Direct contact with users?
• FASB and AcSEC wrote comment letters.
• Final Overload Committee report differed in some
  aspects from its DP.

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1981 AICPA (cont)

• RECOMMENDATIONS
• FASB reconsider certain standards.
• FASB simplify standards by avoiding complex and
  detailed rules (principles-based in todays
  lingo?).
• Promote/elevate income tax basis as a substitute
  for GAAP.
• Differential recognition and measurement.
• FASB study user needs.
• Others.

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1981 AICPA (cont)

• RESULTS
• FASB research effort see next slide.
• Otherwise..

8
1983 - FASB

• Titled Invitation to Comment Financial Reporting
  by Private and Small Public Companies.
• IC developed with advisory group that included
  AICPA-related committee members.
• 800 responses 193 users (including 154 lending
  officers and analysts in commercial banks).

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1983 FASB (cont)

• IC had different sections for various
  constituents.
• Good questions posed to users and others
  dialogue and push-back missing though.
• Related efforts around this time included Lou
  Harris surveys and a research study with over 70
  interviews and use of questionnaires.

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1983 FASB (cont)

• FINDINGS
• CPAs perceive lenders needs differently than
  lenders do.
• Creditors needs and decision-making processes are
  basically the same for private and public
  companies.
• Users need complete GAAP financials that are
  audited or reviewed.
• Cost/benefit equation differs based on company
  size.

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1983 FASB (cont)

• FINDINGS (cont)
• 60 of practitioners supported different
  measurement in certain instances financial
  managers split only 9 of users supported.
• GAAP financials important tool for banks even
  though they can get info directly from companies.
• Not clear if 70 interviews supported these.

12
1983 FASB (cont)

• RESULTS
• FASB formed small business advisory group as
  sounding board for each standard-setting effort.
• Others.

13
1996 AICPA

• Titled Special Task Force on Standards Overload
• Focus groups of CPAs
• Report made to PCP Executive Committee
• Concluded there is an accounting standards
  overload problem
• Relied on previous studies
• Cited reasons why problem not solved

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1996 AICPA (cont)

• RECOMMENDATIONS
• Solution rests in existing GAAP framework
• Increase small firm input in standard-setting
  process (including representation on FAF and
  FASB)
• Literature simplification and codification
• Disclosure guidance for OCBOA financials
• Others

15
1996 AICPA (cont)

• RESULTS
• Principle-based standards should result in
  simplified standards?
• Codification improvements original
  pronouncements identify related AICPA and EITF
  literature FASB-AICPA agreement on CD-ROM
  licensing.

16
2005 Report of the PCFR Task Force

• Broad-based statistical and non-statistical
  outreach to over 3,700 key constituents,
  including to over 650 users.
• Archived web site http//www.aicpa.org/Professiona
  lResources/AccountingandAuditing/AccountingSta
  ndards/PrivateCompanyFinancialReporting.htm

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2005 Report Findings

• Attributes of GAAP reporting have high value
  according to all constituents (e.g., common
  language, consistency, etc)
• Too many GAAP-specific requirements lack
  relevance or decision usefulness according to all
  constituents
• A majority of each of the constituent groups who
  had an opinion believe it would be useful if
  underlying accounting in GAAP reporting were
  different, in certain instances, for public vs.
  non-public companies

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2005 Report Conclusions

• GAAP for private companies should be developed
  based on concepts and accounting that are
  appropriate for the distinctly different needs of
  constituents of that financial reporting
• Fundamental changes should be made in the current
  GAAP standard setting process to ensure that the
  financial reporting needs of private company
  constituents are met