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The Private Company Council was formed in September 2012, and it is making good progress on a new process designed to work collaboratively with the FASB in carving out exceptions or modifications of US generally accepted accounting principles (US GAAP) for private companies. Most notably, the Council has discussed a number of areas of accounting that may involve unnecessary costs and complexities for private companies, and it has agreed to proceed with several projects that may result in improvements in the near future. The Council has also tentatively agreed to revise and re-expose the draft of the private company decision-making framework. This Messenger summarizes the initial projects, reasoning and next steps.
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MAYER HOFFMAN MCCANN P.C. – AN INDEPENDENT CPA FIRM
A publication of the Professional Standards Group
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The Private Company Council was formed in September 2012, and it is making good progress on a new process designed to work collaboratively with the FASB in carving out exceptions or modifications of US generally accepted accounting principles (US GAAP) for private companies. Most notably, the Council has discussed a number of areas of accounting that may involve unnecessary costs and complexities for private companies, and it has agreed to proceed with several projects that may result in improvements in the near future. The Council has also tentatively agreed to revise and re-expose the draft of the private company decision-making framework. This Messenger summarizes the initial projects, reasoning, and next steps.
Initial projects
Four areas of focus were considered as potential areas in which fast improvements might be possible, and the Council agreed to proceed with three of them. The three approved areas are as follows:
1. Accounting for identifiable intangible assets acquired in business combinations
2. Consolidating variable interest entities
March 2013
Progress on Standard-Setting for Private Companies
3. Accounting for certain interest rate swaps with single counterparties
The fourth area was accounting for uncertain tax positions. The Council decided not to consider exceptions or modifications at this time, primarily because the staff was unable to identify any alternatives to the current requirements or any dissatisfaction on the part of the users of the financial statements. But the Council said it is not closing the door on this topic. The members of both the Council and the FASB recognize the need to develop a process under which participants in the private company financial reporting process can submit input and suggestions, and they said they will consider the accounting for uncertain tax positions if additional feedback provides grounds for doing so.
Reasoning
The key factors that persuaded the Council to take on the first three projects were unnecessary cost and complexity and/or limited relevance for users of private company financial statements. Specifically:
• Unnecessary costs associated with accountingfor intangibles. The staff’s research indicates the accounting for identifiable intangible assets acquired in business combinations is an area involving considerable cost and limited value. The cost reflects the required reporting of these assets at their fair values. This typically entails the need for difficult valuations and audits of those valuations. The limited value refers to the facts that: (a) it is difficult to make a precise valuation of
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an intangible, and (b) users of financial statements often disregard the reported values or find the reported values are not critical for their purposes. The potential solutions involve exceptions under which private companies would not need to recognize some or all of these intangibles; instead they would allocate more of the purchase price to goodwill.
• Unnecessary complexities associated with VIEconsolidation. The staff’s research highlighted consolidations of variable interest entities (VIEs) as an area of accounting that adds complexity and may not provide sufficient value to users of financial statements to justify the complexity. This is especially true of the requirements involving consolidation of related-party leasing companies. Lenders and other users of financial statements have indicated that: (a) they do not find these consolidations useful, (b) they do not object to a GAAP exception report, or (c) they feel disclosures would suffice in lieu of consolidation. It is not clear yet whether this project might lead solely to an exception for this one narrow area or whether there is a broader need to simplify all requirements for consolidation of variable interest entities. The Council will likely solicit feedback on the issues as the project evolves.
• Limitedrelevanceofaccountingforcertaininterestrateswaps. The area of accounting for interest rate swaps with single counterparties was selected mainly for reasons related to its limited relevance to users, rather than its cost and complexity. Although the scope of the project is still evolving, the initial focus is likely to be on exceptions or modifications for private companies that have financing arrangements under which they borrow at variable interest rates and repay the amount(s)
due at a fixed rate. Often, the lender provides the fair value of the loan. A key question to be addressed is: When should interest rate swaps be considered in-substance fixed-rate debt?
As these projects evolve, the focus may expand. For example, the focus on intangibles may expand to include accounting for goodwill, and the focus on interest rate swaps may expand to include some aspects of hedge accounting that are troublesome for private companies. But the criteria seem clear for reviewing these and other potential areas for improvement in the future. The Council and the FASB are prioritizing areas of GAAP where there is evidence of unnecessary cost and complexity for private companies and/or a lack of relevance to users of private company financial statements.
Next steps
In addition to proceeding with the three projects described above, the Council has asked the staff to do research into the private company accounting issues related to development-stage enterprises and stock-based compensation. The Council also continues to discuss the decision-making framework and the definition of a nonpublic entity, and its members have begun to provide the private company perspective on projects already on the FASB’s agenda. To help carry out these new responsibilities, the Council expects to put in place more formal processes for obtaining feedback from participants in the private company financial reporting framework, and the revised decision-making framework should be released for public comment very soon. A preliminary prototype of the framework is discussed in our MHM Messenger issued in June 2012 on the New Standard-Setting Process for Private Companies.
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TheinformationinthisMHMMessengerisabriefsummaryandmaynotincludeallthedetailsrelevanttoyoursituation.PleasecontactyourMHMserviceprovidertofurtherdiscusstheimpactonyourfinancialstatements.
For more information
MHM’s Professional Standards Group will continue to monitor progress on private company standard-setting. Our comment letter is available on the FASB’s website.
If you have any specific questions, comments or concerns, please share them with Ernie Baugh, Keith Peterka, or James Comito of MHM’s Professional Standards Group or your MHM service professional.
Ernie Baugh: [email protected], 423-870-0511 Keith Peterka: [email protected], 610-862-2744 James Comito: [email protected], 858-795-2029
