Private Company Council and FASB: Partners in an Innovative Collaboration

By:
Chris Gaetano
Published Date:
Mar 1, 2019

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Seven years after the formation of the Private Company Council (PCC), the body has found itself transitioning into a new role, with less emphasis on its original purpose of developing private-company alternatives to U.S. generally accepted accounting principles (GAAP), in favor of a more integrated involvement with the overall standards-setting process in support of the Financial Accounting Standards Board (FASB).

Neville Grusd, president of Merchant Financial Corporation and one of the council’s founding members, said that this was a natural evolution, as the process of looking through GAAP and finding alternatives suitable for private companies is inherently a backward-looking one, with a finite number of tasks.

“It’s natural that you run out of the lookback projects, but there’s always going to be new stuff going on and coming up all the time, and getting the input of the PCC helps the FASB [make] a decision,” he said.

Beth van Bladel, director of CFO for Hire LLC and a current member of the council, added that, over the years, the FASB has come to better understand the value that a private-company perspective brings to the standards-setting process, strengthening the two bodies’ collaborative relationship even further. 

“I have found it to be an incredibly rewarding experience, working with the PCC to identify practical expedients and collaborating with the FASB to consider simplification measures or develop new standards,” she said.

The origins of the PCC

This change is reflective of an overall cultural shift within the FASB that has been taking place since the formation of the PCC in 2012, which saw an expansion of the board’s understanding of its constituents and their particular needs, according to Russell G. Golden, the current chair of the FASB. The council itself formed after the publication of a 2010 joint study by the Financial Accounting Foundation (FAF), the American Institute of CPAs (AICPA) and the National Association of State Boards of Accountancy (NASBA), he said. That study found that there were systemic problems with the standards-setting process as it related to private companies, especially in terms of the relevance of certain rules, such as goodwill impairment. It recommended creating modifications and alternatives to current GAAP rules, as well as a new board to oversee their development.

At the time, the FASB was in the middle of developing several major standards, such as those covering leases and revenue recognition, as part of its convergence project with the International Accounting Standards Board (IASB), which had a heavy focus on public companies. This reflected a larger overall focus on public companies that, Golden said, needed to be overcome.

“We had to first recognize that private companies were different from public companies,” he said. “This doesn’t mean that every transaction will be accounted for differently, but we should recognize that access to management is a substantial difference between public and private companies, and therefore we should always consider if there should be different disclosures.”

FAF President and CEO Teresa S. Polley said that this focus on convergence led certain private company stakeholders to believe that they weren’t being considered and that their needs were secondary to those of public companies, a sentiment that she said came out during their community outreach efforts.

“I think there was a bit of a perception that this whole international convergence effort didn’t have a lot to do with private companies; it was more to do with public companies, which are more cross-border registrants, so I think at the time, the private companies were feeling disenfranchised,” she said.

While the joint report recommended that the new private company board be its own separate body, ultimately, the FAF chose to make it an advisory council to the FASB—a decision that Polley said was motivated largely by a desire to avoid bifurcating GAAP between private and public company standards.

“We just really thought that if we go down a path where we create a whole separate body with a whole separate GAAP, it would create additional complexity in the system, so that was our working premise when we went out with the initial proposal of a body that would be created under the purview of the FAF working closely with the FASB,” she said.

The beginning of the collaboration

Golden said that the first collaboration between the two bodies was in developing the new PCC’s decision-making framework, which was the first time that there was an acknowledgment on the FASB’s part that there should be different effective dates and disclosure considerations for private companies. Participants in the collaborative effort outlined how the PCC would determine whether there needed to be a private company alternative to current standards, he said, and they talked about the characteristics that differentiate the needs of private company financial statement users from those of public companies. For example, they discussed how investors in private companies are likely to have greater access to management, and, as a result, certain disclosures aren’t as necessary as they would be in public companies.

Grusd conceded that he came into the PCC with “a very simplistic view of what I thought we should be changing.” He said that on the day of his very first meeting, he was initially worried about the very different approaches that PCC members had versus FASB members—a concern that was borne out of coming to the standards-setting world largely as an outsider.

“To me, the FASB was a mythical entity that was up in the clouds, and those were the people who made the rules for the country’s accounting. I was in awe,” he said. “[But] there was Russ Golden, and he was really a regular guy, and I got to know the people on the FASB.”

Grusd changed his perspective over the course of working on private-company GAAP alternatives, saying that he came away from his experience with a respect for the “depth to which the FASB board members drilled down into an issue.”

Changes within the FASB

As the PCC undertook this work, the FASB came to understand that the issues with GAAP were not limited to just private companies, and that it needed to expand its understanding of exactly who its constituents were and how it had fallen short in meeting their needs over the years. In time, this understanding has turned into what Golden said was a cultural change at the FASB, which now talked about “how we need to serve all stakeholders equally,” not just public companies but private companies, not-for-profits, employee benefit plans and other entities.

He noted that this process also got the FASB thinking about how even public companies could benefit from the changes made with nonpublic companies in mind, namely in terms of toning down some of the complexity that had built up in GAAP over the years. It was this thinking that led to the FASB’s simplification initiative, which made narrow-scope simplifications to accounting standards through a series of short-term projects.

“What the PCC, at the broad level, was talking about was how we can make GAAP simpler without losing the relevance to the user,” Golden said. “We made quite a number of improvements there, and a lot of those ideas came from PCC members and stakeholders, as well as public company stakeholders.”

The FASB’s changes have, in turn, reflected back to the PCC: The current chair, Candace E. Wright, a director with Postlethwaite & Netterville, said that the FASB has enabled collaboration of the sort that she did not believe would have been possible 10 years ago.

 Consequently, rather than wait for the PCC to develop a GAAP alternative for a new standard, the FASB is increasingly opting to involve the PCC in the process from the start. Van Bladel noted, for example, that the PCC had a great deal of input in helping to shape ASU 2018-15, which concerned accounting for the implementation costs of cloud-computing contracts. She said that since she already had operational experience in this area, she was able to provide the FASB staff with greater insight into how cloud-computing implementation costs affect private companies and how the FASB might analogize their costs to those associated with internal-use software.

“It can be very challenging to balance the needs of users, auditors and preparers of financial statements,” Van Bladel said. “Fortunately, we have the Private Company Decision-Making Framework, which provides an objective guide to facilitate our deliberation process. I am confident the PCC will continue to be a resource to the FASB as it continues its efforts to balance the needs of users and auditors with the cost and complexity for preparers.”

 

 

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