The Panel has concluded that there is an urgent and systemic issue with respect to the current system of financial reporting for the over 28 million private companies in the U.S. that needs to be addressed. The Panel believes that currently accounting standards generally accepted in the United States ("GAAP") do not understand what private companies consider to be decision-useful information in financial statements. The Panel believes the result has been over complexity of GAAP for private companies due to current standards, for example, on variable interest entities, uncertain tax positions, fair value measurements and goodwill impairment – resulting in a lack of correlation between the costs of producing GAAP financial statements (compliance costs and external attestation costs) versus the benefits associated with GAAP financial statements. Some Panel members believe that several private companies have chosen to accept exceptions in their GAAP financial statements, or abandon GAAP altogether as the primary language of financial reporting, and have adopted less complex languages such as the income tax basis, or the cash/modified cash basis in the production of their financial information.
The principal recommendations proposed by the Panel are:
- The proposed creation of a separate accounting standards board for private companies (the "New Board") under the oversight of the FAF.
- Use of the current U.S. GAAP model at least in the near term – but with modifications and exceptions for private companies. The exceptions and modifications are expected to result in different measurement, recognition, disclosure and presentation standards for private companies and could be significant depending on the topic.
- The exceptions and modifications set forth by the proposed New Board would be based on a set of decision criteria depending on the circumstances of the topic and not just for the sake of having differences. The Panel does believe, however, that it is critical that all differences reside in one GAAP codification.
- The proposed New Board would work closely with the current Financial Accounting Standards Board ("FASB") to achieve a coordinated and efficient standard setting process; however, final authority for accounting standards over private companies will reside with the proposed New Board.
- The proposed New Board will also be able to initiate accounting standard setting projects for private companies on its own.
The FAF will consider the Panel's report and is expected to release its proposals for public comment in the spring of 2011. Other details, such as determining funding of the proposed New Board, its composition, etc., will also need to be addressed.
The firm will continue to monitor these developments and keep you informed as they arise.
For additional information regarding private company financial reporting, please feel free to contact: