Public vs. private companies: When should different accounting rules apply?
Small private companies often criticize the Financial Accounting Standards Board (FASB) for writing overly complex standards that focus on the needs of stakeholders in large public companies rather than “Main Street” businesses. Here’s how the FASB has addressed these criticisms in recent years.
A shifting mindset
In 2012, the FASB formed the Private Company Council (PCC). This panel of private company accountants, auditors and analysts of private company financial statements advises the FASB about the financial reporting needs of private companies.
Thanks to recommendations from the PCC, the FASB has reduced certain disclosure requirements for private companies and often gives them extra time to comply with new accounting standards.
The FASB has been less open to allowing differences in the recognition and measurement of a transaction, asset, liability or instrument. In general, the FASB prefers having one set of rules that all businesses can apply to help stakeholders compare financial statements from various organizations.
However, the FASB has made some concessions over the years, including these four alternative reporting options:
1. Accounting Standards Update (ASU) No. 2014-02, Intangibles — Goodwill and Other (Topic 350): Accounting for Goodwill. Private companies can elect to amortize goodwill over a period not to exceed 10 years, rather than test it annually for impairment.
2. ASU No. 2014-03, Derivatives and Hedging (Topic 815): Accounting for Certain Receive-Variable, Pay-Fixed Interest Rate Swaps — Simplified Hedge Accounting Approach. Nonfinancial institution private companies can elect an easier form of hedge accounting when they use simple interest rate swaps to secure fixed-rate loans.
3. ASU No. 2014-07, Consolidation (Topic 810): Applying Variable Interest Entities Guidance to Common Control Leasing Arrangements. This option simplifies the consolidation reporting requirements of lessors in certain private company leasing transactions.
4. ASU No. 2014-18, Business Combinations (Topic 805): Accounting for Identifiable Intangible Assets in a Business Combination. Private companies are exempt from recognizing certain hard-to-value intangible assets — such as noncompetes and certain customer-related intangibles — when they buy or merge with another company.
In June 2017, the FASB issued Proposed ASU No. 2017-240, Consolidation (Topic 810): Targeted Improvements to Related Party Guidance for Variable Interest Entities. This alternative would expand ASU 2014-07 by allowing private companies to avoid the consolidated reporting requirements for a wider range of transactions. The FASB is currently redeliberating this proposal, and no effective date has yet been announced.
Work in progress
The FASB plans to continue considering whether privately held businesses need simpler accounting standards compared to public companies. Contact us for the latest developments on the consolidation proposal and other financial reporting alternatives that could simplify financial reporting for your private business.