Part 1: Separate Private Company GAAP - an argument in favor
August 31st, 2010 by Mike PiessensGAAP for private companies is a hot issue that can be looked at from varying perspectives. With that in mind, we offer this first entry of a two part blog series presenting both sides of the issue; be sure to check back next week for “the argument against!”
The Blue Ribbon Panel of the Financial Accounting Foundation (FAF) met on July 19th to encapsulate the problems that private companies have with U.S. GAAP, how accounting standards are set, and to shorten the list of viable proposed accounting model choices. Also in July, the International Accounting Standards Board (IASB) released a condensed (230 pages, from 2,500 pages originally) International Financial Reporting Standards (IFRS) for small and medium entities (SMEs). This set of rules could in theory become the standard for private companies in the U.S.
Most would agree that a fundamental goal of GAAP reporting is to provide relevant information useful for the decision-making needs of its users; it is encouraging to see some effort to distinguish the needs of private companies from publics. Financial reporting for private companies should be driven by the need for them to have access to capital and key information for their banks and creditors. On the other hand, that drive for public companies is influenced by needs of investors and stockholders and the general legal and regulatory environment.
Because GAAP is not truly geared to the private company model, under current accounting standards such companies encounter issues surrounding relevance, consistency, and perceived unnecessary complexity in presenting financial statement information.
With this in mind, it is not fair to penalize and burden private companies with excessive and sometimes irrelevant accounting and financial reporting requirements, given that their banks and creditors in reality are concerned with a much narrower scope of matters. Keeping apprised of and in compliance with these additional requirements unnecessarily divert private company resources and capital, robbing them of the ability to deploy them in other areas of opportunity.
On top of these issues, private companies are often forced to circumvent the requirements by issuing GAAP exceptions with audit opinions and blaming noncompliance on “unnecessary” GAAP requirements. These frequent actions can result in confusion, consternation and dissatisfaction on behalf of the private company financial statement users – for whom it was the original intent to provide relevant information for decision-making!
FASB Chairman Robert Herz once commented the following, which remains true today: “Private companies are a vital force in the nation’s economy and it is, therefore, critical that their financial reporting be conceptually sound, cost effective, and provide relevant, reliable and useful information.”
To stay on course with that sentiment – I say let’s take the GAPs out of GAAP for private companies!
