Private company.

• Author: Schofield, Kirsten

As accounting standards have become increasingly costly and complex, private companies have been more vocal that they need some form of relief. They maintain that many recently issued standards are too challenging to apply, and offer little perceived benefit to the users of private company financial statements (generally company lenders and equity holders that typically include individuals and private equity firms).

Lenders are concerned most often with covenant compliance, which many times focuses on measures such as earnings before interest, taxes, depreciation and amortization (EBITDA), coverage ratios and tangible net worth. Private company equity holders, on the other hand, focus mainly on EBITDA and operating cash flows.

In response to this concern, the Blue Ribbon Panel on Standard Setting for Private Companies was formed in 2009 as a collaboration between the Financial Accounting Foundation (FAF), which is the oversight body of the Financial Accounting Standards Board (FASB), the American Institute of Certified Public Accountants (AICPA). and the National Association of State Boards of Accountancy (NASBA). The panel was charged with studying the needs of users of private company financial statements and recommending how the standard-setting process can best meet those needs.

As a result of the panel's recommendation to the FAF, the Private Company Council (PCC) was established in 2012. The PCC was set up under the authority of the FAF as a 10-member panel and tasked with two primary responsibilities:

* Determine when modifications to U.S. generally accepted accounting principles (GAAP) should be considered/or private companies: and

* Act as the primary advisory body to the FASB for private company matters on its current technical agenda.

The PCC comprises financial statement preparers, users and practitioners, all of whom have a back-ground in private company financial statements or offer a unique perspective on the subject. The council will meet at least five times a year, and the FASB members will be present at each of those meetings.

By Kirsten Schofield

Creation of the Private Company Decision-Making Framework

The Private Company Decision-Making Framework was the first collaborative project of the FASB and the PCC. Both will use the framework to assess potential private company accounting and reporting alternatives. The framework is meant to be a guide when assessing a modification to GAAP for private companies. It is not, however, intended to create a new conceptual framework that could lead to fundamentally different reporting between public and private companies.

The framework identifies five key differences between public and private companies for financial reporting purposes. These factors should be considered by the PCC and FASB when deliberating a potential accounting alternative for private companies. The factors are:

1] Number of primary financial statement their users and access to management: Private companies often have fewer users of their financial statements than public companies do. But those users typically have continuous access to management, while public company financial statement users do not.

2] Investment strategies of primary financial statement users: Generally, private company equity holders have a longer-term investment strategy than public company equity holders, and a greater focus on the cash that can be realized from their investments versus the value of the entity as a whole.

3] Ownership and capital structures: Many private companies are structured as pass-through entities for tax planning purposes. This is not typically the case with public companies.

4] Accounting resources: Private companies generally have fewer and less specialized accounting personnel than public...