Yesterday, the Blue Ribbon Panel on Standard-Setting for Private Companies (BRP) issued its report and recommendations to the Financial Accounting Foundation. See BRP on Private Co's Report.
Recommendations for 'Near-Term' Relief
In the near-term, the BRP ( co-sponsored by the FAF, the AICPA and the National Association of State Boards of Accountancy ) recommends "certain short-term and transitional actions by the FAF and the FASB to provide near-term relief for private companies."
Such relief would include more exceptions and modifications to FASB standards, with respect to their use by private companies, and would be guided by a private company framework, which the BRP notes could be drafted by the FASB board and staff, focused on the needs of users of private company financial statements, to provide a consistent framework for such exception/modification decisions. This recommendation would not require a separate standard-setting board or a separate set of private company GAAP.
Long-Term Recommendations
However, in the longer term, the BRP report states that a 'supermajority' of the panel's members recommend that a separate standard-setting board be set up alongside FASB and GASB, under the oversight of the FAF, to provide even more focus on the needs of private companies and the users of their finanical statements, in developing the 'exceptions and modifications' needed to the standard U.S. GAAP model, as called for by the BRP.
Additional Highlights From BRP Report
Read some additional highlights from the BRP Report.
Other Models Considered by BRP
Among models considered by the BRP, were IFRS for SMEs (IFRS for Small and Medium Sized Entities) a self-contained (230 page) set of GAAP applicable to private companies (other than those with 'fiduciary duties' such as banks, insurance companies, and certain other entities) released by the IASB in July, 2009. Separately, as Canada's public companies switch to adopt IFRS, Canada released a set of GAAP for its private companies to use.
The BRP notes in its report that the panel considered such models, and others, during its deliberations, but ultimately rejected establishing a completely separate set of GAAP, sometimes referred to as 'dual GAAP' or 'big GAAP/little GAAP,' in favor of establishing a separate framework on which to base private company exceptions to GAAP, and in favor of the 'supermajority' recommendation to form a separate board to focus on this.
Pros and Cons of Separate Board Considered
The BRP report, describing its recommendation for a new standard-setting board under the FAF as the 'supermajority' view of the panel, also lists the 'pros' and 'cons' considered by the panel with respect to that recommendation.
Additionally, a glimpse into the diversity of views among panel members is evident in the statements made by leaders of the three sponsoring organizations of the BRP, as noted in their joint press release (note: the quotes below are taken from the press release, but not the additional descriptive material around the quotes):
- AICPA President and CEO Barry Melancon was supportive of the supermajority recommendation, saying: "This was an overwhelming recommendation from the diverse panel members to establish a separate private company board with urgency." He added: “This issue has been discussed for 30-plus years and the time for FAF to act is now. While some changes have been made to the process to be more responsive to private companies, the panel concluded those were insufficient. This is an important day for the 50 percent of the U.S. economy in private business.”
- NASBA Chairman Billy Atkinson voiced concern with the supermajority recommendation, saying: "In our view, a separate accounting standard-setting body for private companies would lead to differential standards and result in other unintended consequences. We urge the FAF to carefully consider the potential effect on the financial reporting system.” He added: " “We share the panel’s concerns regarding the relevance, complexity, and cost of today’s accounting standards. As this is a significant public policy issue that is not unique to private companies, we believe the best approach for needed change is through the existing FAF-governed FASB, which should be more strategically aligned to continuously address these concerns."
- FAF President and CEO Teri Polley, taking a middle ground as the FAF prepares to study the BRP's report and recommendations, said: "The FAF applauds the efforts of the blue-ribbon panel and will thoughtfully and thoroughly consider the issues raised by the panel, as well as the recommended solutions. The panel’s report, along with further analysis and constituent input, will be valuable in reaching sound decisions that improve standard setting and financial reporting for private companies.”
As noted in their report, the BRP acknowledged that one of its members, Daryl Buck (also a member of FEI, and a former member of the Private Co. Financial Reporting Committee or PCFRC, formed jointly by FASB and the AICPA) was appointed to the FASB board, along with Hal Schroeder, as announced by the FAF earlier this month. See our prior post: FASB, PCAOB Board Members Named. The appointment of Buck, who has significant private company experience, addresses one of the recommendations made by the BRP. (Separately, the other new board member, Hal Schroeder's most recent experience, is as a professional investor.)
FEI CPC-S, FERF Cited as Resources
The BRP report cites within one of the models that had been considered (Model 5) recommendations made by FEI’s Committee on Private Company Standards (CPC-S).
Additionally, the BRP report cites in its bibliography a report previously issued by FEI’s research affiliate, the Financial Executives Research Foundation (FERF), entitled, What Do Users of Private Company Financial Statements Want?
FASB Chairman's Initial Reaction to BRP Report
For FASB Chairman Leslie F. Seidman's initial reaction to seeing a draft of the BRP report earlier this week, see our post: FASB Chairman on Being Responsive to Needs of Private Co's.
Next Steps
As noted in this article by Alexandra DeFelice, FAF, FASB's Parent Organization, Names Its First CEO, published in the Nov. 2010 AICPA Journal of Accountancy:
[The] FAF is likely to discuss these recommendations at its February meeting
but may need to deliberate further.
Many speculate that FAF trustees will expose any proposed structural or process changes for public comment, consider that feedback and finalize a set of changes. Timing of the decisions around those changes and potentially creating a private company board would be tied to how quickly FAF can take action.
In addition to potentially seeking public comment on structural or strategic issues relating to private companies, it is possible (in my view, see disclaimer posted on the right side of this blog) that the FAF may include other recommendations in a document issued for public comment, pertaining to all of its constituents, or FASB or GASB constituents, based on broader input received by members of the FAF including Polley, FAF Chairman Jack Brennan, and others during their 2009 'listening tour' which is also referenced in the JofA article cited above, and in the article "FASB Overseers To Seek Input On New Strategic Plan," published June 23, 2009 by Reuters' Emily Chasan.
FAF's Polley recently launched an online interactive forum, "From the President's Desk," on the FAF website, to provide updates on the FAF to constituents; constituents may also direct questions to the FAF via email as noted in Polley's January, 2011 communication linked above.
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