Big GAAP/Little GAAP: A 'Big Deal'

The FAF's consideration of whether and how to establish differential accounting standards for public vs. private companies, referred to colloquially as Big GAAP/Little GAAP, has great import for private companies and the users of their financial statements in particular, and is of interest to public companies and the U.S. Securities and Exchange Commission as well, as noted in SEC Chief Accountant Jim Kroeker's June 5 speech at USC.

Before continuing, please note the disclaimer posted on the right side of this blog.

When we last covered this subject in July, we noted that over 1,100 comment letters had been filed with the FAF, a majority of which constituted variations of a form letter with points said by some to have been circulated by the AICPA, backing the recommendation of a broad-based Blue Ribbon Panel on private co. standard-setting (a panel co-sponsored by the FAF, AICPA and NASBA), which concluded that a new standards board should be established under the FAF to focus on private company standard-setting.

We also noted that not all comment letters held that view, in fact the letter filed by FEI's Committee on Private Company Standards, in an April comment letter, took the recommendation of the Blue Ribbon Panel and modified it to some extent, by suggesting that the FAF form a Private Company Task Force (PCTF), structured and empowered to participate in the standard-setting process in a similar manner to FASB's Emerging Issues Task Force (EITF).

During the last few weeks in July, another 500 comment letters were filed with the FAF on this topic. (See all comment letters filed to date.)

In an article published earlier this week, Private Co. GAAP Heats Up, (subtitled: An intense lobbying effort to keep new standards for private companies out of FASB's grasp is under way), CFO.com's Alix Stuart writes:

At least 15 state CPA societies, including those in Alabama, Illinois, New Jersey, and New York, have sent letters to the FAF urging a separate board, according to Maryland Association of CPAs CEO Tom Hood, who also penned a letter. ...“This issue has been around for 30 years, and this is a once-in-a-lifetime chance to get it right,” says Hood. “If it doesn’t happen now, it will never happen.”

Stuart observed that of the over 1,500 comment letters so far, there were "multiple submissions from many CPA firms and predominantly in boilerplate language. Most appear to be in favor of a separate board, for various reasons. ... the AICPA provides a Mad Libs–style letter template with phrases and sentences for commenters to plug in... Notably, however, Finance Executives International's Committee on Private Company Standards submitted the first letter, in April, opposing the idea. 'Working within. . .the FASB would avoid some of the implementation issues that would require state recognition of a new standard setting body' and would also be less expensive, the letter noted."

NVCA, NYSSCPA, MACPA, NCCPAP Letters
Of the more recent comment letters filed, some have very powerful arguments, and are very instructive as to how, in some cases, certain constituencies (such as the National Venture Capital Association) have strongly held views calling for a separate standards board for private companies. NVCA's letter, signed by its President, Mark Heesen, included 76 additional venture cap member signatories, and states:

As an asset class committed to investing in America’s most promising private companies, the venture capital industry understands the importance of
accurate, transparent and meaningful financial reporting practices. While
tremendous advances in information technology have been made in the last
decade, the same can not be said for private company accounting standards
which have been wrongly based on public company practices for too long. Private company standards have become both burdensome and irrelevant, rendering them costly for preparers and meaningless for users. As investors in these companies we assert that the situation has become untenable and must be addressed.

On behalf of our firms and portfolio companies, we support the creation of a separate private company board with standard-setting authority under the Financial Accounting Foundation’s oversight. Through this independent board, appropriate modifications to existing U.S. GAAP (generally accepted accounting principles) for private companies would be driven to reflect their financial statement users’ unique needs.

It has become clear that the Financial Accounting Standards Board (FASB), despite past efforts, is not able to adequately address the issues faced by private companies... Applying accounting standards designed for public entities diverts precious private company resources to meet standards which result in statements which are not relevant, reliable, nor comparable. A private company board comprised of members with constituent experience would be best positioned to recognize the important needs of private company reporting. Such a group would also be able to ensure an effective and useful path to public company accounting
principles as a company moves toward becoming public. If left unaddressed, current private company accounting practices will continue to negatively
impact our country’s emerging growth companies. At a time when economic recovery is paramount, we must be do all we can to ensure that financial reporting is efficient, effective and relevant for all stakeholders. ...

We applaud the FAF’s recognition of these issues and its wisdom in forming the Blue Ribbon Panel and strongly encourage the adoption of the panel’s recommendations. Anything short of adoption would be at the expense of US private companies.

The New York State Society of CPAs struggled with a nearly split view on the question of whether or not there should be an entirely separate standards board for private companies, although a majority of its members and leadership polled agreed there should be differential standards for private companies, by developing more exceptions and modifications of GAAP (vs. developing a new set of private company GAAP), and in the end, following the recommendation of a slight majority of its leadership, recommended forming a separate or 'autonomous' standards board for private company standards, in part because:

there is not a proper weighing of costs and benefits in setting standards for private companies and there is a need for more relevant financial statements for private companies and their financial statement users. Given the public company reporting pressures placed upon the FASB, the Board cannot adequately respond to the competing needs of the private company sector.

Others, such as the Maryland Association of CPAs, supported their call for a new standard-setting board for private companies with a white paper prepared by MACPA's Accounting Standards Task Force. The white paper summarized input from discussions held with over 1,500 MACPA members at town hall meetings in which:

More than 90 percent of members polled ... believed GAAP modifications and
exceptions for private companies are the best solution to the problem... [and
that MACPA's] Task Force agreed that a separate board for private companies
is warranted

MACPA's white paper also notes that while "A majority of the Task Force wanted the separate board to have ultimate authority over standards decisions for private companies," there was a dissenting opinion in favor of forming a group similar to the EITF instead (a position advocated by FEI's CPC-S in its own letter earlier this year, as noted above).

The National Conference of CPA Practitioners (NCCPAP) also weighs in, stating:

Based on our collective experience and knowledge of the profession, we feel that a separate, autonomous regulatory standard setting body is the only acceptable answer to address these issues. The body should come under the jurisdiction of the FAF without the need for FASB approval.

Short-term actions taking place
As the FAF continues to review comment letters and conduct additional outreach to constituents as it deliberates this issue, as previously reported, FASB committed to taking a number of short-term steps, including some recommended by the Blue Ribbon Panel, to enhance its consideration of private company concerns.

One such step includes convening public roundtables to get input specifically from private companies, such as those announced for October, which we reported on here.

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