FAF mulls Blue-Ribbon Panel recommendations on standards.

• Author: Cheney, Glenn A.
• Position: Private companies

The debate's been raging for 30 years as to whether the United States generally accepted accounting principles promulgated by the Financial Accounting Standards Board should apply to private companies and if not, then what standards should apply?

A big step toward resolution has been taken with the issuance of the Blue-Ribbon Panel on Private Company Standard Setting's report to the Financial Accounting Foundation. Citing "urgent and growing systemic issues that need to be addressed in the current system of U.S. accounting standard setting," the report calls for a new board that would set standards for private companies.

"The small business community, the financial reporting community and the preparers and users of financial statements have been hoping for something like this for a long time," says Bill Bal-hoff, managing partner at accounting and business-advisory firm Postlethwaite & Netterville. "It's a great opportunity for cost-benefit to have a stronger consideration in the deliberation process. The concept of a separate board is good because experience has shown that it's very hard for [FASB] to have the background and perspective to consider the users and preparers of the small business community."

FASB is widely perceived as writing standards that most appropriately apply to public companies. Lacking an alternative, private companies are expected to meet the same standards, even though they often produce irrelevant information at onerous expense. The panel report states that the U.S. has approximately 28 million private companies, versus 14,000 public companies that must meet the GAAP-based reporting requirements of the U.S. Securities and Exchange Commission.

If FAF opts to establish a new board, the panel report envisions it making exceptions and modifications to FASB standards and even writing new standards for issues not on the board's agenda. FASB and the new board would work together for the sake of efficiency, and FASB would continue to try to write standards that are best for all companies, but the private company standards board would have ultimate authority over its own standards.

Cost-benefit a Critical Criterion

Further, the panel recommends several other enhancements for private company standards. Comprising 18 members (plus one nonvoting member) from a comprehensive spectrum of constituents, the group was unanimous in embracing a differential framework allowing "appropriate, justifiable exceptions and modifications."...