An Update on the Rise and Quick Effectiveness of FASB’s Private Company Council
Background: To simply the financial reporting requirements of small and medium-sized companies, the Financial Accounting Standards Board (FASB) commissioned an advisory Private Company Council (PCC) in May 2012. This PCC was tasked with improving how accounting standards are established for and apply to private companies. Decisions in its first three years both simplified some challenging financial accounting treatments and reduced reporting requirements, offering much-appreciated relief for small and medium-sized companies.
Part II – The Team Tasked with Simplifying
Private company financial statement users tend to be closely associated to those private companies, such as owners, lenders, regulators and investors. Presuming these parties’ familiarity with the United States’ extensive Generally Accepted Accounting Principles (GAAP) is messy at best. The rule makers, the Financial Accounting Standards Board (FASB), have established about 16 new accounting standards each year since 2009, with nine already in 2016.
New accounting standards often address weighty issues in modern business. Therefore, many spread deep into intricate concepts and conditions to clarify proper accounting treatment. Outright instructions on recording and pointed disclosures usually result – ultimately tweaking (and often lengthening) financial statements prepared in accordance with GAAP. Private companies felt boxed-in, forced to implement the constant change if continuing to prepare GAAP-compliant financial statements. Users not regularly attuned to the 16 annual developments from the FASB finally found assistance in May 2012 with the announced formation of its Private Company Council (PCC).
Formalizing the Council
FASB wished to retain its current conceptual framework of accounting standards, but tasked the PCC with identifying critical relief for private companies set on using the GAAP framework. The two bodies considered relevance and cost-benefits for private companies under the existing conceptual framework. To accomplish relief, PCC’s principle responsibilities were spotlighting exceptions and modifications to GAAP available for private companies and advising the FASB on treatment for private companies for items on the FASB’s agenda.
One early project jointly performed by the FASB and PCC was mutually agreeing on criteria for determining whether and when alternatives to GAAP are warranted for private companies. Their resulting framework was finalized in December 2013.
The Private Council Company is currently chaired by Candace Wright. Nine other members comprise the council, and they are selected and appointed to three-year terms by Trustees of the Financial Accounting Foundation (FAF). Members may be re-appointed twice. Individuals pursued for membership have backgrounds and experience using, preparing and auditing (including reviewing and compiling) private company financial statements.
Five meetings each of the first three years were required of the PCC. Additional meetings could be called by the PCC Chairman. To date, all meetings have taken place in Norwalk, Connecticut. The council does travel nationwide for outreach and discussion with interested stakeholders.
At least a two-thirds vote of the attending council is required for proposed GAAP alternatives to progress for the FASB’s consideration. Proposals only need a majority vote of FASB members to advance to exposure for public comment. Once public comments have been gathered and considered, FASB holds a second vote. If approved, the PCC alternative is incorporated into GAAP. Recommended changes can be documented and relayed to the PCC by the FASB Chairman, if its second vote is unsuccessful. A different FASB member is appointed the liaison and simply tasked with facilitating communication and aligning efforts of the FASB and PCC.
Assistance from Others
Current Private Company Council members are mostly executives with various finance, insurance and accounting firms around the country. So, they are not necessarily responsible for conducting some of the more tedious activities at the onset of new issues, like researching, referencing, participating in inquiries and discussions, and organizing public comments. Instead, the technical director and chairman of the FASB together recognize where the PCC needs help and delegates such tasks to individuals within their technical staff.
Because this technical staff performs the fundamental work (research, discussions, reviewing public comments, etc.), the Private Company Council members are able to balance time spent in their primary professions and evaluating sound GAAP alternatives. FASB also lends its staff to the PCC for handling various administrative tasks, like planning future meetings and communicating developments. FASB members are even encouraged to attend and participate in PCC’s regular, public meetings, in order to better understand issues from the council’s perspective and expedite the approval process.
The Reviewers are Reviewed
In 2015, the FAF’s Board of Trustees followed-through on a measure it established early – evaluating the first three years of PCC operations. The FAF Trustees sought to check whether the PCC was accomplishing its primary mission, gauge if efforts were effective, and recommend changes to raise its capabilities. Little doubt existed that overall message from stakeholders was positive. Nonetheless, FAF Trustees posed ten questions to stakeholders.
Fifty-two individuals or organizations wrote back, and their comments are included in the FAF’s public file (on the FASB website). The majority noted the PCC had successfully addressed various users’ needs of private company financial statements by reducing costs and complexities.
Criticism was also received, some identical to ideas written at the PCC’s formation. Organizations and individuals again expressed concern for comparability limitations and preferred a comprehensive set of standards instead of individually-released alternatives.
As result, the FAF Trustees revised a few key measures, to increase the PCC’s effectiveness without greatly altering its responsibilities and practices. First, it honed the PCC’s focus on delivering private company perspectives to FASB on its active project agenda. Next, a technical agenda consultation group was formed. Third, efforts would be made to improve the transparency of PCC’s discussions and views.
Setting accounting standards involves significant organization and communication. Smartly, the FASB did not hastily or oddly arrange the body it charged with developing simpler alternatives to those standards. The PCC’s mission, responsibilities, ongoing projects, accomplishments, composition, meeting minutes and new developments are transparent and quickly available on the FASB website. By largely hearing praise after its first three years of existence, FASB’s commitment to provide relief for users of private company financial statements has been well received.