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New Council to Address Private Company Accounting Concerns

Tammy Whitehouse | May 23, 2012

Private companies will get a new council that will recommend modifications to accounting rules for their benefit, but it's not the independent standard setting body they were demanding.

The Financial Accounting Foundation has formed a new body, the Private Company Council, to recommend modifications to accounting rules to the Financial Accounting Standards Board and to serve as an advisory group to FASB. The PCC will not have independent authority to set accounting standards for private companies. Instead, it will propose exceptions or modifications to U.S. Generally Accepted Accounting Principles to FASB for its consideration, based on criteria that FASB and PCC will establish jointly. If FASB endorses the proposal, it will then route the PCC proposals through FASB's usual due process, including exposing a proposal for public comment, before issuing any final update to accounting standards.

FAF's original plan to create a “private company standards improvement council” met heavy resistance driven primarily by the American Institute of Certified Public Accountants, who called on FAF to create an independent standard setting body for the benefit of private companies. The AICPA criticized FAF for making the proposed council's decisions subject to FASB ratification.

FAF says the new plan just adopted makes some changes from the original proposal intended to address the concerns raised, including calling on FASB to endorse rather than ratify the PCC's proposals. The plan also requires FASB to respond to PCC proposals within 60 days and to explain any non-endorsement decision with recommendations for how a proposal could be modified to win FASB endorsement. FAF made some other changes to its original plan to make the council more autonomous from FASB, most notably letting go of its original plan to place a FASB member as chair of the council and giving the council authority to set its own technical agenda.

Teresa S. Polley, president and CEO of FAF, said the final plan is meant to strike a balance. “On one hand, the plan recognizes that the needs of public and private company financial statement users, preparers, and auditors are not always aligned,” she said in a statement. “But at the same time, the plan ensures comparability of financial reporting among disparate companies by putting in place a system for recognizing differences that will avoid creation of a ‘two-GAAP' system.”

Although it was highly critical of FAF's original plan, the AICPA said in a statement it supports the creation of the PCC as FAF has structured it but also plans to develop a framework for financial reporting for smaller companies that do not need to produce GAAP financial statements. The “other comprehensive basis of accounting” framework would provide a less complicated and less costly alternative system of accounting for entities that do not need GAAP financial statements, AICPA said. Barry Melancon, president and CEO of the AICPA, said the AICPA will become an advocate for appropriate differences in U.S. GAAP to recognize the unique circumstances of the private company environments.