Tuesday, October 4, 2011

FAF Proposes Private Co Stds Improvement Council To Modify GAAP For Private Cos, PCSIC Rec's Would Be Subject To Public Comment, FASB Ratification

Earlier today, the Financial Accounting Foundation, which oversees the FASB, released its Plan to Establish the Private Company Standards Improvement Council (the ‘Plan’). The PCSIC would review existing U.S. GAAP to recommend modifications and exceptions for private companies; those recommendations would be subject to FASB ratification and public comment (a model similar to that employed by the FASB’s Emerging Issues Task Force. A similar model was suggested in a comment letter to the FAF filed by FEI’s Committee on Private Company Standards earlier this year, noted below). The FAF seeks public comments on its Plan released today; the comment deadline is January 14, 2012.

FAF Recommendation Similar To That Suggested By FEI Committee
George W. Beckwith, Chairman of FEI’s Committee on Private Co. Standards (CPC-S), said: “CPC-S is pleased that the FAF has released a draft for public comment, on how to improve private company standard-setting. This proposal parallels the suggestion made in the comment letter sent by CPC-S in April of this year.”

He added, “I believe the basic theme of the FAF’s proposal, to form a strong private co committee with the ability to propose and vote on private company exceptions to existing standards changes is a big step and shows FAF has been listening to the concerns of its private company constituents. Having the new group report directly to the FAF board shows the importance FAF has given to private company concerns. Our committee appreciates the work of the Blue Ribbon Panel, FAF, the AICPA and NASBA in helping articulate the issues and identify potential solutions. We plan to carefully review the FAF’s proposal, to provide a comment letter by the Jan. 14 deadline.”

Composition and Authority Of PSCIC
The FAF’s proposed PSCIC would be chaired by “a FASB member with substantial experience with and exposure to private companies during his or her career.” In addition to the chair, the PSCIC would include 11 to 15 members, selected and appointed by the FAF Trustees, based on nominations submitted to the FAF. Members of the PSCIC would “include users, preparers, and practitioners who have significant experience using, preparing, and auditing (and/or compiling and reviewing) private company financial statements.”

The PSCIC would review existing U.S. GAAP and – using a set of criteria to be developed jointly with the FASB - develop recommendations for exceptions or modifications to U.S. GAAP, to “address the needs of users of private company financial statements.” As stated in the Plan, “Any proposed changes to existing US GAAP [recommended by the PSCIC] would be subject to ratification by the FASB and undergo thorough due process, including public comment.”

In addition to being called upon to study and make recommendations relating proposed modifications/exceptions to existing U.S. GAAP, the PSCIC would also be called upon in an advisory capacity with respect to items under current deliberation by the FASB. Specifically, the Plan states: “For items under active consideration on the FASB’s technical agenda, the PCSIC would serve as the primary source of advice on appropriate treatment for private companies by working actively and closely with FASB members and staff, and providing advice for consideration by the FASB members in their deliberations. In addition, the PCSIC would have the ability to vote to take a position on the appropriate treatment for private companies related to issues under active consideration by the FASB.”

As we previously reported, a majority of comment letters filed on an ‘unsolicited’ basis (i.e., in advance of release of the FAF’s Plan) providing input to the FAF, particularly with respect to the recommendations released earlier this year by Blue Ribbon Panel (BRP) on Standard Setting For Private Companies) , supported the recommendation of the BRP to form a separate board to set accounting standards for private companies. Many of those letters supporting the BRP recommendations contained similar phrasing, along the lines of a form letter (see July 1 article Turf War Over Private Company GAAP by Alix Stuart of CFO.com).

The FAF, “acknowledge[d] receipt of more than 2,800 unsolicited letters,” [now numbering over 3,000 comment letters] “ most of which made similar points in support of the Blue-Ribbon Panel’s recommendation for a separate standard-setting board for private companies.”

However, the FAF also observed that, based on information provided during its outreach efforts, “While some practitioners and preparers expressed support for the formation of a separate board as recommended by the Blue-Ribbon Panel, the view was not widely held. In fact, many of those who initially spoke in support of the creation of a new authoritative board, moved away from that view after hearing concerns of others. Such concerns included the likelihood of confusion, the lack of acceptance of new standards by banks and sureties who expect to see US GAAP financial statements, the establishment of a bifurcated profession, a recognition that the formation of a new board and the promulgation of new rules would take years, and a fear that financial statements prepared in accordance to “little GAAP” would be viewed as inferior to “big GAAP” financial statements.”

Another reason why the FAF ultimately decided on recommending a PSCIC, vs. a new standard-setting board, as noted in the Plan, is that the FAF Trustees believe that, ‘The FASB should address—and is committed to addressing—complexity, relevance, and cost-benefit issues more broadly, as other constituents, in addition to private companies, have expressed similar concerns.”

Further, the FAF observed that, “The FASB has made recent, substantive changes to how it engages with private company constituents, and has demonstrated a greater operational and structural commitment to further address these issues. The Trustees believe it is appropriate to allow a period of time for those efforts to mature and are monitoring those efforts closely.”

Roundtables Coming; Additional Information
In addition to the Plan itself, related documents and material posted by the FAF include this press release, and Executive Summary. A podcast featuring FAF President and CEO Terri Polley and FAF Chairman Jack Brennan can also be downloaded here. The FAF also notes that, in addition to seeking comment letters by January 14, public roundtables will be convened on the Plan.

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