IFRS- What About Private Companies?

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IFRS- What AboutPrivate Companies?

• Judith H. ODell, Chair
• Private Company Financial Reporting Committee
• October 28, 2008

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Outline

• About the Private Companies Financial Reporting
  Committee
• IFRS for Private Entities
• Possibilities for U.S. private companies

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PCFRC

• Funded by FASB
• Committee consists of 4 users (bankers, VC and
  surety), 4 preparers and 4 practitioners from
  various size companies/firms
• Makes formal recommendations to FASB
• Filter is user needs and cost/benefits

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Perspective

• There are about 17,000 public companies in the
  U.S.
• There are about 22,000,000 private entities in
  the U.S. ranging from sole proprietorships to
  billion dollar plus companies
• Accounting standard setting focuses on public
  companies and needs of investors

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Forces Affecting Private Company Accounting

• Convergence with international standards
• Changes in size of FASB Board
• FASB emphasis on public co-investor needs
• SEC plans for U.S. Issuers to report using IFRS
  in 2014 if milestones met
• AICPA recognition of IFRS as GAAP
• Increasing acceptance by users of reports with
  GAAP exceptions

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IFRS for Private Entities

• An IFRS expressly designed to meet the financial
  reporting needs of entities that (a) do not have
  public accountability and (b) publish general
  purpose financial statements for external users.
• Users include owners who are not involved in
  managing the business, existing and potential
  creditors, and credit rating agencies.
• Derived from full IFRSs with appropriate
  modifications based on the needs of users of
  private entity financial statements and
  cost-benefit considerations.

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Timeline

• 2/07- Exposure draft issued- 7 languages
• 6/07- Field tested- 116 companies in 20 countries
• 11/07- Comment deadline- 162 letters
• 1st QTR 2009- Final document with educational
  materials
• See www.iasb.org for document and updates on
  project

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Updating and Training

• Document will only be updated every two years-
  users will not have to monitor changes in
  standards
• Document is only 250-pages self-contained
• Has disclosure checklists and sample statements
• Training materials ready to go

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Effect of Private Entities Document in the U.S.

• AICPA has recognized IASB as body authorized to
  promulgate GAAP
• Once Private Entities Document is approved by
  IASB, private companies in the U.S. could report
  using it and it would be GAAP
• May be applicable to private companies who are
  U.S. subsidiaries of foreign companies
• Would it be more widely adopted?

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Possibilities for U.S. Privates When Public
Companies Go IFRS

• Assume Public Companies are on IFRS
• IFRS with Private Entities Option
• U.S. Adapted version of Private Entities
• IFRS with differential reporting
• Separate U.S. Private Co GAAP- Revised
• Separate U.S. GAAP- Maintained and Updated for
  Private Companies

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Model 1 IFRS with Private Entities Option

• IFRS is already recognized by AICPA as GAAP in
  the U.S.
• U.S. private companies have the option of
  following IFRS for Private Entities when adopted
  by IASB
• If not, then they may elect to follow IFRS or
  another comprehensive basis of accounting (e.g.,
  cash-basis, tax-basis.)

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Model 1 in Operation

• IFRS for Private Entities is set by the IASB and
  updated only periodically
• FASB exists to provide input into the IASB
  standard setting process
• U.S. private company constituents would influence
  the standard setting process through the channels
  established by the IASB and FASB

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Model 1- Pros

• Simplified, self-contained set of accounting
  principles developed for private companies
• Based on IFRS, possesses a level of comparability
  with U.S. public company financial statements and
  international companies
• Allows for comparability of private company
  financial statements across borders

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Model 1- Pros Cont.

• Time and effort to prepare private company
  financial statements reduced
• No effort required to develop differential
  standards for private companies in the U.S.
• Greater emphasis on principle-based standards and
  the need for professional judgment, less reliance
  on detailed rules
• Certain differential standards, thought to be
  needed for private companies in the U.S., may
  already be addressed in the IFRS for Private
  Entities

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Model 1- Cons

• IFRS-based accounting provides little benefit to
  private companies and is mostly useful to public
  companies that need to operate internationally
• Positions taken on some important technical
  issues in IFRS for Private Entities may not find
  general acceptance in the U.S. private company
  marketplace
• Conversion to IFRS for Private Entities would
  cause significant increases in costs and workload
• Conversion costs outweigh benefits

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Model 1- Cons Cont.

• Preparers, users and practitioners who work with
  private company financial statements are
  unfamiliar with IFRS. The learning curve would be
  difficult-- this will change
• Considered a dumb-downed approach and second
  class
• More principles-based -- may not be adequate in
  the litigious U.S. marketplace
• When a private company has an issue that is not
  addressed under IFRS for Private Entities,
  inconsistent accounting can occur, reducing
  comparability
• Loss of industry-specific accounting guidance

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Model 2-U.S. Adapted Version of Private Entities
Document

• The IFRS Private Entities Document is
• tailored to suit the needs of private
• company financial reporting constituents
• in the U.S.

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Model 2 in Operation

• An accounting board in the U.S. would need to
  exist to adapt the IFRS Private Entities standard
  to suit the needs of U.S. private company
  constituents and develop changes to the
  literature to reflect needs and circumstances in
  the U.S. private company marketplace.
• A funding mechanism would need to be identified
  for this board and effort.
• Private company constituents would influence the
  standard setting process by commenting to this
  board and to the IASB on proposed standards.

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Model 2- Pros

• Needs of U.S. private company financial reporting
  constituents are prioritized and incorporated
• Linkage to IFRS for Private Entities, resulting
  in some comparability
• Simplified, self-contained set of accounting
  principles developed for private companies
• Avoid current problem of GAAP requirements that
  lack relevance/decision usefulness for users

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Model 2- Pros Cont.

• Condensation and simplification would provide a
  more manageable reference
• Advanced starting point
• Places greater emphasis on principle-based
  standards and the need for professional judgment,
  with less reliance on detailed rules
• Maintain certain industry-specific accounting
  guidance

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Model 2- Cons

• Same as Model 1 but
• Confusion will result trying to incorporate U.S.
  differential standards into the IFRS for Private
  Entities
• Diminished ability to compare U.S. private
  companies with those in other countries,
  especially if a large number of differences are
  allowed

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Model 3- IFRS with Differences for Private
Companies

• IFRS is modified to suit the needs of private
  company financial reporting constituents by
  deleting some requirements or embedding different
  treatments in the standards.

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Model 3 in Operation

• An accounting board in the U.S. would need to
  exist to rule on differential standards for
  private companies
• Board would continue to maintain the literature,
  modifying IFRS as necessary to reflect the needs
  of users of U.S. private companies
• A mechanism would need to be identified to fund
  this board and their work
• Private company constituents would influence the
  standard setting process by commenting on
  proposed IFRS standards and proposed differential
  standards

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Model 3- Pros

• Strong linkage to IFRS- so a level of
  comparability with U.S. public company financial
  statements and international companies
• Applies an approach already undertaken with U.S.
  GAAP- some differences for privates
• Minimizes possible confusion stemming from two
  sets of GAAP in the U.S.
• Places greater emphasis on principle-based
  standards and the need for professional judgment,
  with less reliance on detailed rules

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Model 3- Pros Cont.

• Reduces the risk of different interpretations of
  IFRS that apply equally to public companies and
  private companies
• Needs of private company constituents would be
  accommodated within a single set of accounting
  standards
• Time and effort to prepare private company
  financial statements reduced, compared to pubic
  companies complying with full IFRS

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Model 3- Cons

• Considered a dumb-downed approach and second
  class to full IFRS
• Confusion will result trying to incorporate U.S.
  differential standards into IFRS
• Diminished comparability with companies abroad
• Would be considered IFRS with a local flavor

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Model 4-Separate US Private Company GAAP- Revised

• Current U.S. GAAP is reviewed, modified, and
• developed into a comprehensive and self
• contained set of accounting standards for
• private companies. This GAAP would be for
• private companies with and without significant
• external financial statement users, and would
• be sensitive to the needs of owner managed
• enterprises.

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Model 4 in Operation

• An accounting board would need to exist to review
  and modify current U.S. GAAP
• Would need to be maintained and updated, similar
  to the current process for setting U.S. GAAP
• Private company constituents would influence the
  standard setting process by commenting on
  proposed standards
• Identify a mechanism for funding the standard
  setting board and its work

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Model 4 Pros

• The needs of U.S. private company financial
  reporting constituents are prioritized
• Simplified, self-contained set of accounting
  principles developed for private companies
• Avoid current problem of GAAP requirements for
  public companies that lack relevance/decision
  usefulness for private company financial
  reporting constituents

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Model 4- Pros Cont.

• Eliminate needless accounting complexities and
  costs for private companies
• Private company constituents already know U.S.
  GAAP and therefore, intensive education or
  training efforts would not be necessary
• No conversion costs
• Maintain industry-specific accounting guidance
• Time and effort to prepare private company
  financial statements reduced

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Model 4- Cons

• Not based on IFRS-makes comparability with U.S.
  public company and international company
  financial statements more difficult
• Hampers credit rating agencies and lenders trying
  develop cross border ratings
• Comparability with suppliers and other business
  relationships overseas

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Model 4- Cons Cont.

• May not be helpful to equity investors
• Adds confusion to the marketplace
• Private companies wishing to go public, would
  need to convert to IFRS
• More rules-based and less principles-based
• Second class compared to IFRS
• Students would have to learn two standards

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Model 5- Separate U.S. GAAP - Maintained and
Updated in Future

• Current U.S. GAAP would be maintained, as is, for
  use by private companies
• Periodically literature updates for needed
  changes and improvements specific to private
  companies
• No initial review and modification of current
  U.S. GAAP, as in Model 4

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Model 5 in Operation

• An accounting board exists to monitor current
  U.S. GAAP and update it in the future
• Private company constituents would influence the
  updating process by commenting on proposed
  revisions
• A mechanism for funding the board to be
  identified

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Model 5 Pros

• Needs of U.S. private company financial reporting
  constituents are prioritized
• Avoid requirements that lack relevance/decision
  usefulness
• Avoid any further needless accounting
  complexities and costs
• No intensive education or training efforts would
  be necessary
• No conversion costs
• Maintain industry-specific accounting guidance

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Model 5 Cons

• Same as Model 4 except maintaining current U.S.
  GAAP, as is, does not allow for modifications
  that would eliminate current standards that lack
  relevancy and decision usefulness for private
  company constituents
• Accounting students will be learning IFRS

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What do you think??????
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How Can You Participate?

• Become a member of our Resource Group- sign-up on
  Web site and receive notification of meetings and
  meeting summaries
• Resource Group will be tapped for special task
  forces and input on projects
• Attend meetings and speak during open-mic session
• Email chair with ideas and opinions

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Questions?

• www.pcfr.org
• judyodell_at_dmv.com