The GAAP Discussion

The GAAP Discussion
Are the Reporting Needs of Private Company Constituents Being Met?

By Jay Dismukes

Continued from the Home Page

As reported in our March 15 issue, the American Institute of CPAs (AICPA) over the last year directly addressed this issue through a special task force that recently recommended exploring fundamental changes to GAAP for private company financial reporting. The task force primarily based its recommendation on the responses of a large group of private company participants, including business owners, CPAs, financial managers, lenders, investors and sureties who said that many GAAP-specific requirements lack relevance or decision-usefulness to them. This and other findings led to the task force’s conclusion that “GAAP for private companies should be developed based on concepts and accounting that are appropriate for the distinctly different needs of constituents of that financial reporting,” its Feb. 28 report states.

New York State Society of CPAs member George Victor said he generally supports the idea of more distinction between GAAP reporting for private and public companies. Citing both complexity and relevance issues, he said certain pronouncements of the FASB, such as Statement No. 132-R, “Employers’ Disclosures About Pension and Other Postretirement Benefits,” can be especially “onerous” to a small company.

“There is a significant amount of disclosure that needs to be included in there—disclosure that most companies more than likely just aren’t going to care about,” said Victor, director of quality control with Holtz Rubenstein Reminick LLP and chair of the NYSSCPA’s SEC Practice Committee. “It’s not going to affect anyone’s investment decisions, particularly in a closely held company, and to have a footnote that goes anywhere from three to six pages long is ridiculous for a private company.”

A CPA who asked not to be identified echoed Victor’s remarks, stating that compliance with certain GAAP requirements can be overwhelming to a private company from both a cost and a time consideration. The NYSSCPA member said the task force’s recommendations to modify GAAP are a good idea.

While Victor said private company stakeholders such as owners and lenders are going to be more concerned about the company’s cash flow than detailed disclosure on a pension plan, he recognizes the significance of the information to the institutional investors of a public company. He also noted that the FASB periodically makes accommodations to private companies such as not requiring them to include earnings per share in their financial reports, but, in his view, these exceptions have been few and far between.

Peggy Wood, vice chair of the NYSSCPA’s Financial Accounting Standards Committee, took a slightly different view.

“I think there are issues that have to be addressed, but I don’t think big GAAP, little GAAP as a stand-alone is a good thing,” Wood said.

For Wood, one of these issues concerns Statement No. 150, “Accounting for Certain Financial Instruments with Characteristics of Both Liability and Equity,” which currently applies only to public companies and is being reviewed by the FASB for its applicability to private companies.

“If they put 150 in as originally designed, partnerships would have no equity or an LLC would have no equity, yet you’ve got a state requirement that it has to have equity,” said Wood, of Grant Thornton LLP. “Or you have a bank requirement that you have to be in accordance with GAAP, but how do you report that you have no equity? So to that extent, there needs to be certain modification.”

Wood said the gradual shift toward the fair value model could also create problems. Requirements that call for more fair value of assets and inventory could prove to be very difficult for really small entities with only a handful of employees, she said.

However, Wood pointed out that just because $25 million to $100 million private companies have entered into certain types of complex transactions doesn’t necessarily mean there should be a change to GAAP reporting.

“I’m not as concerned about them, because they have a choice…There is no need for some of these entities to have things such as interest swaps,” Wood said. “If they don’t think they’ve got the ability to account for it, then why are they entering into the instrument?”

Financial Accounting Standards Committee member Barry Wexler noted that the costs and complexity of complying with Statement No. 107, “Disclosures About Fair Value of Financial Instruments,” can be very prohibitive. He added that a lot of small companies have had to get rid of their defined benefit plans, for example, or issue a qualified report on them because they lacked the complete information called for under GAAP. He also alluded to the problems raised by Statement No. 150 and the equity difficulties that shareholder agreements can present to small companies. On these issues in particular, Wexler, who has his own firm in Manhattan, said the GAAP requirements for public companies make sense, while for smaller ones they don’t necessarily.

Like all the CPAs interviewed, though, Wexler said the FASB has shown it will periodically draw bright lines between private company and public company financial reporting, and, in general, believes the GAAP issue for the two types of entities should be taken on a case-by-case basis.

“Well, you have to look again at each of the pronouncements as they come down the line and see what really makes sense,” said Wexler, adding that a closer examination of what is considered a big and a small company is also warranted.

Another member of the Financial Accounting Standards Committee, Stephan R. Mueller, advocates a cautious approach to any proposed changes to GAAP for private companies.

“The idea of big GAAP, little GAAP is real attractive, but I also like the idea of one set of GAAP measurement and recognition and rules,” Mueller, partner with Whalen Davey & Looney CPAs LLP, said.

Still, Mueller said he supports greater recognition of industry specialization for reporting purposes and increased effort by the FASB to make its statements easier to understand and implement.

In a related press release, the AICPA said the FASB has neither endorsed nor rejected the task force’s conclusions, but has “agreed to work further to collaboratively explore an appropriate course of action to improve the usefulness of private company reporting.”

The FASB declined to comment for this story.