Coming soon: private company accounting standards.

• Author: Cheney, Glenn Alan
• Position: FINANCIAL REPORTING

After a long and complicated development period, the Financial Accounting Foundation has announced the creation of the Private Company Council (PCC), which, once up and running, should provide non-public companies with some relief from the current burden of public company accounting standards.

For decades, business owners, investors and public accountants have been pointing out that financial reports prepared under generally accepted accounting principles are tailored to the needs of those who analyze or invest in publicly held and typically large companies. They provide a pile of hard-wrought information, but much of it is irrelevant to the needs of privately held companies, which often as not are just trying to get a loan from the bank. But GAAP standards are the only standards around, so GAAP is what banks and others use.

The solution hasn't been simple. A separate set of standards for private companies would seem an obvious (but arduous) solution, but would inevitably result in financial statements that couldn't be readily compared with those of public companies. It would also mean a clunky and expensive shift in accounting for private companies going public. They would inevitably be seen as inferior, second-tier statements.

Another option, a mess of exceptions to GAAP, could result in a mish-mash of financial data of dubious value.

The problem grew even more complicated as the United States began the convergence to International Financial Reporting Standards (IFRS). International standards have a distinct tier of rules for small and medium-sized enterprises. Adopting this so-called SME tier would be a move even more radical than the adoption of the international large-company standards, which are increasingly similar to U.S. standards.

Though the Financial Accounting Standards Board--which promulgates U.S. GAAP--has recognized the problem, it has been reluctant to lower its standards, as it were, to lessen the burden on private companies. In 2006 it established the Private Company Financial Reporting Committee to provide advice to the board on issues related to private companies. The committee provided some, but not much that FASB could live with.

Little happened, and proponents of new standards started to shift from annoyed toward angry.

Last year, a Blue-Ribbon Panel on Standard Setting for Private Companies, set up by some of the accounting profession's leading organizations, recommended that a new body be established to write rules...