PwC strongly supports FAF's plan to create the Private Company Standards Improvement Council and to maintain FASB as the sole authoritative standard-setting board for public and private companies. The Foundation's plan is the appropriate response to the private company financial reporting community's concerns about the relevance, growing complexity, and costs of compliance associated with U.S. GAAP.
December 21, 2011
Financial Accounting Foundation
401 Merritt 7
Norwalk, Connecticut 06856-5116
To the Board of Trustees of the Financial Accounting Foundation (the ''Foundation''):
PricewaterhouseCoopers LLP1 appreciates the opportunity to comment on the "Plan to Establish the Private Company Standards Improvement Council.'' We support the goal of giving private companies a greater voice in standard-setting and commend the Foundation for its focus on the needs of the private company financial reporting community.
We agree with the Foundation's plan to create a new body, the Private Company Standards Improvement Council (the "Council"), that will have the appropriate authority and scope, while leaving the Financial Accounting Standards Board (the ''Board'') as the single authoritative standard-setter. This proposed structure should facilitate the Foundation addressing the needs of private companies in the accounting standard-setting process. We believe that it will also avoid the creation of a separate set of accounting standards, dramatically different from public company standards, which would likely result from a separate, private company-only, accounting standard-setter. We believe that putting in place a structure that would result in a dramatically different set of accounting standards for private companies would increase financial reporting complexity and costs across the financial reporting system.
We also agree with the Foundation's plan to use a framework with specific criteria, to be developed jointly by the Council and the Board, to determine when exceptions or modifications to U.S. generally accepted accounting principles (U.S. GAAP) for private companies are warranted. The use of such framework, originally a recommendation of the Blue-Ribbon Panel, would bring greater consistency and transparency to how private company reporting issues are handled in the standard-setting process.
We acknowledge the recent actions that the Board has taken to address the concerns of private company constituents. The addition of a private company preparer to the Board, a significant increase in staff time devoted to private company reporting, the willingness to add private company complexity related projects to the Board's agenda, and efforts to preliminarily develop the framework for determining exceptions or modifications to U.S. GAAP for private companies, are all signs of increased attentiveness by the Board to the concerns of private companies. These actions demonstrate to us the Foundation's and the Board's commitments to successfully addressing the needs of the private company financial reporting community.
In summary, we strongly support the Foundation's proposal as the appropriate response to the private company financial reporting community's concerns about the relevance, growing complexity, and costs of compliance associated with U.S. GAAP. Additional insights into our perspectives can be found in the Appendix to this letter. If you have any questions please contact Dave Kaplan, U.S. Accounting Services Group Co-Leader, 973-236-7219, or Bill Schramm, Private Company Services Partner, 973-236-4586.
1 PricewaterhouseCoopers LLP is one of the largest providers of private company audit and professional services in the U.S. It employs 29,000 professionals of which approximately one third are members of the American Institute of Certified Public Accountants.
The foundation of our view
Our profession has a unique role in facilitating capital formation and the effective operation of the capital markets. We take very seriously our responsibility to advocate high-quality, operational, cost-effective, and transparent financial reporting standards that facilitate a cohesive and efficient financial reporting system. Our focus is on maintaining a high-quality financial reporting environment and supply chain for the benefit of all investors and other stakeholders, not solely on the cost of preparation by one group of companies as opposed to others. We acknowledge that cost is an important consideration but believe that quality reporting is the foundation for the usefulness of the financial statements and thus is of paramount importance. As professionals involved in financial reporting every day, we believe there also are opportunities to reduce costs and complexity for all companies, public and private, while maintaining the quality and the decision-usefulness of financial statements for all investors and other stakeholders. This is the lens through which we evaluated the Foundation's plan.
The importance of a single standard setter
The Foundation's Plan calls for the creation of the Private Company Standards Improvements Council (the ''Council''). The Council, working under the Foundation's oversight, would be in charge of identifying, deliberating, and voting on exceptions or modifications to U.S. GAAP for private companies. However, the Council would not have final authority; decisions would be subject to ratification by the Board.
We continue to support a single set of high-quality accounting standards for all companies because completely separate standards for private and public companies would be too costly and disruptive to a financial reporting environment that is already under significant stress. We believe that the Foundation's proposal contains an appropriate balance whereby it would build an effective structure to address private company standard-setting issues while establishing safeguards to prevent the creation of a dramatically different set of accounting standards for private companies. These safeguards include the real-time involvement in discussions by the Board members and the ratification process. The Foundation's proposal would facilitate the tailoring of U.S. GAAP for private companies, similar to how industry specific standards evolved, while maintaining all standards within the single set of GAAP and helping to ensure that the economics of similar transactions result in reasonably similar accounting. It is our view that two completely separate boards could make very different judgments and therefore end up with two, potentially dramatically different sets of accounting standards.
A single set of accounting standards can only be achieved with a single standard-setting board. In our view, a separate private company standard-setting board created for the purpose of "simplifying" standards would naturally measure its success by how much it accomplishes, leading to separate standards, a so-called "Little GAAP" and "Big GAAP.". Moreover, it is not clear that a separate board would better meet the needs of private company financial statement users. Without evidence that user needs are best met by a separate board, the only supporting argument for a separate board is reduced costs of preparation for private companies. Though that is a worthy goal for private companies and might be accomplished at a specific standard level, in the long-term, we believe that separate standards for private and public companies would be more costly to the financial reporting system. With the FASB expecting to issue multiple new and significant accounting standards in the near term, and the uncertainties surrounding the future convergence of U.S. GAAP with international accounting standards, having separate standards for private companies would put further strain on users, preparers, auditors, academic institutions, and regulators. For example, all stakeholders would need additional training to understand the differences between private company and public company accounting standards. Also users, in many cases, would need to create tracking mechanisms to facilitate the identification of adjustments to their investment analyses to accommodate differences between public and private companies. Otherwise, comparability across companies and industries that many users currently enjoy would be lost.
Separate standards would also create greater barriers for private companies seeking to enter the public capital markets or attempting certain other exit strategies, as they may struggle to adopt public company standards.
Proponents of a second board frequently cite the specific needs of certain private company financial statement users who are willing to accept certain exceptions to U.S. GAAP. Should that be the case, it is most likely that such willingness would be "user specific.". To accommodate these situations, a more effective solution is the use of limited-distribution, special-purpose reporting that reduces preparer costs and better fits the needs of those specific preparers and users of private company reporting. Private companies could work with the users of their financial statements to agree upon alternative forms of reporting.
The broader need for simplification
U.S. accounting standards have become increasingly complex over the past few decades, to the point where many companies, private and public, struggle to stay current with how the standards should be applied. In many cases, we believe that simplifications that make sense for private companies will also make sense for public companies. If there are simpler alternatives to the current accounting standards that are reasonably faithful to the economics of a transaction, these alternatives should be pursued and made available to all companies, public and private, where possible. For example, the recent revisions to the goodwill impairment test, originally intended for private companies only, now apply to all companies, because the related cost-benefit issues equally apply to public companies. The Foundation's plan provides the most effective opportunity for the Board to work closely with the Council to simplify U.S. GAAP for all companies.
Oversight by the Foundation is critical
The Foundation's plan provides for the Council to be overseen by a Private Company Review Committee of the Foundation for the first three years, which would be charged with holding both the Council and the Board accountable for adequately considering private company issues. We agree that such oversight is critical to the coordination and the success of the Council and the Board.
We also believe that the Foundation, and not a different organization, should provide the oversight of any private company standard setting body, whether authoritative or not. Only an organization under the Foundation's oversight would have the objectivity and independence that is critical to the credibility of the standard setting process.
Framework for exceptions or modifications to U.S. GAAP
We agree with the creation of a framework with specific criteria to guide when modifications or exceptions to U.S. GAAP are appropriate for private companies. A sufficiently comprehensive study of the differing information needs of public versus private company financial statement users would provide the basis for the framework. Establishing this framework would bring greater consistency and transparency to how private and public company reporting differences are determined in the standard-setting process.
Use of this framework would also promote clear reasoning for any differences for private companies. Fundamentally, we believe the economics of a transaction should be accounted for in the same manner by all companies, whether public or private. Therefore, recognition and measurement differences for private companies should be rare and reserved for the few cases where the public and private company financial statement users have different information needs. On the other hand, differences in transition, disclosure, and effective date requirements can be appropriate tools to reduce costs for private companies.