GAAP 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 19^th 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!

If procrastination is an art, the Museum of Fine Arts should set aside a wing for IFRS.  I’ve written before about skepticism around adoption — specifically about whether it will happen and whether it will be in the best interests of U.S. companies.  That was many months and several SEC announcements ago, and all the posturing and planning to date brings us to the same spot in which we stood in 2008: at a crossroads, with a pair of binoculars, a compass calibrated for GAAP, and some beef jerky for the trip.

Almost exactly one year ago, I noted that the SEC’s apparent shrug of the shoulders with regard to previous IFRS discussions was a big indicator that there would be no sprint to the convergence finish line.  On the contrary, we’re looking at a slow crawl at best.  The latest word from the SEC comes in the form of an extension to 2015 from 2014 and the elimination of the option for public companies to move to IFRS this year.  Journal of Accountancy reports that “the SEC is not excluding the possibility that issuers may be permitted to choose between the use of IFRS or U.S. GAAP,” and that it is targeting 2011 to issue a recommendation.

So whatever the spin, the bare bones of it is that the SEC has yet to fully commit to requiring companies to change from GAAP to IFRS. The Accounting Onion does an even deeper, more cynical dive in this recent post, calling out the SEC for a lackadaisical approach to vetting IFRS, among other things.

I think it’s all well and good, per my original sentiment way back when- the more time companies have to adjust, the better.  The key is developing an understanding of international standards over the course of the next few years so as to minimize any fire drills, although there will undoubtedly be plenty of those.

So getting back to the title, are finance execs out there starting to prepare by seeking education for their financial staff?  Or is the entire country locked into “wait and see” mode?

Excellent write-up in the Wall Street Journal on the saga surrounding the tax code for multinational companies.  The article [subscription required] follows the White House assertion that companies with overseas operations are avoiding proper taxation by employing their right to defer taxes on out-of-country sales until revenues are brought back into the U.S.  As the article states:

Critics long have complained that the [deferral] provision encourages companies to avoid U.S. taxes by expanding production on foreign soil. On the campaign trail last year, President Barack Obama promised repeatedly to “end tax breaks for companies that ship jobs overseas.”

U.S. businesses counter that the deferral provision allows them to better compete globally, which in turn allows them to expand their U.S. operations, too. If the deferral were eliminated, they contend, the financial damage to their businesses would require them to cut jobs in the U.S.

According to the article, CEOs of multinationals mobilized to engage the White House in direct dialogue in order to ensure their viewpoint was heard.  The Administration has taken a step back in response and seems to be considering both sides of the argument with a clearer focus.

The issue is far from resolved, though, and just as we touched on the topic in a blog post in May, we will continue to keep you apprised of further developments.