Private Company GAAP

• Date: 01 November 2013
• Author: Oscar J. Holzmann
• DOI: http://doi.org/10.1002/jcaf.21911
• Published date: 01 November 2013

73

© 2013 Wiley Periodicals, Inc.

Published online in Wiley Online Library (wileyonlinelibrary.com).

DOI 10.1002/jcaf.21911

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FASB

Private Company GAAP

Oscar J. Holzmann

An earlier edition of this

column1 presented a summary

background and content of the

Financial Accounting Foun-

dation’s (FAF)2 2011 Plan to

Establish the Private Company

Standards Improvement Coun-

cil3 (Plan), which proposed the

creation of a new accounting

and reporting rule-making

body to deal with a continuing

issue: whether a set of account-

ing standards optimized for the

needs of publicly held compa-

nies is also optimal for private

companies. This is not just a

matter of intellectual concern;

it has real practical implica-

tions since it is accepted that

for smaller private companies

the costs of complying with

generally accepted account-

ing principles (GAAP) often

exceeds the benefits of compli-

ance. Given that GAAP issu-

ance has been primarily occur-

ring with a focus on public

company reporting to the U.S.

Securities and Exchange Com-

mission (SEC), and since it is

the primary responsibility of

the Financial Accounting Stan-

dards Board (FASB), a related

and major controversial issue

has been what should be the

FASB’s role (if any) in provid-

ing guidance to the nonpublic

companies.

This issue of the FASB

column summarizes the devel-

opments concerning GAAP for

private companies to date since

the FAF issued its Plan in 2011.

The summary covers private

company–related institutional

developments in the structure

for issuing and/or modifying

GAAP as well as mentioning the

first efforts under the new struc-

ture to actually modify GAAP.

BIRTH OF THE PRIVATE

COMPANY COUNCIL (PCC)

The controversies concern-

ing accounting and financial

reporting for public companies

(“Big GAAP”) versus private

companies (“Little GAAP”) go

back to the days of the Account-

ing Principles Board (APB)4 and

before. At this stage of the game,

there’s little doubt surrounding

the merits of private companies’

concerns about having to live

with GAAP targeted to public

companies. For example, an

FASB staff assessment com-

pleted in July 2011 identified the

following significant differential

factors in the financial reporting

considerations of private com-

pared to public companies:5

Types and number of • financial statement users.

Access to management. • Investment strategies of • equity investors.

Ownership and capital • structures.

Accounting resources. • Learning about new finan-• cial reporting guidance.

These differential factors

were identified by assessing

how and why the needs of users

of private company financial

statements may differ from

those who use public company

financial statements.6 These fac-

tors have recently become a key

element in developing the frame-

work being used by the FASB

and the PCC to make decisions

about private companies’ use of

GAAP alternatives in account-

ing and financial reporting.

An important threshold in

the Big GAAP/Little GAAP

controversy was reached in

December 2009 when the

American Institute of Certified

Public Accountants (AICPA),

the FAF, and the National

Association of State Boards

of Accountancy (NASBA)

established a “blue-ribbon”

panel charged with address-

ing how accounting standards

could best meet the needs of

users of U.S. private com-

pany financial statements.