On July 31, the FASB issued an Invitation to Comment on a staff paper, Private Company Decision-Making Framework (the "framework"). The paper contains initial recommendations for criteria to determine whether and when to modify US GAAP for private companies. The FASB is seeking stakeholder input on the staff paper, which the FASB and the newly created Private Company Council (PCC) will consider as they jointly deliberate the criteria the framework will contain. This In brief article provides an overview of the draft framework and how it will be used.
On July 31, 2012, the Financial Accounting Standards Board (FASB) issued an Invitation to Comment on a staff paper, Private Company Decision-Making Framework (the "framework"). The paper contains initial recommendations for criteria to determine whether and when to modify US GAAP for private companies. Refer to the FASB website for more information, including a FASB In Focus.
The FASB is seeking stakeholder input on the staff paper, which the FASB and the newly created Private Company Council (PCC) will consider as they jointly deliberate the criteria the framework will contain.
What is in the staff paper?
The draft framework identifies six differentiating factors between public and private companies for financial reporting purposes: (1) types and number of financial statement users; (2) access to management; (3) investment strategies; (4) ownership and capital structures; (5) accounting resources; and (6) learning about new financial reporting guidance.
Additionally, the draft framework identifies five areas where financial accounting and reporting guidance might differ between public and private companies: (1) recognition and measurement; (2) disclosures; (3) display (presentation); (4) effective dates; and (5) transition methods.
Lastly, the Invitation to Comment includes the tentative decisions made to date by the FASB on the definition of a nonpublic entity, which will determine which entities are within the scope of the framework
How will the framework be used?
The release of the staff paper follows the recent announcement of the establishment of the PCC.1 Under the oversight of the Financial Accounting Foundation (FAF),2 the PCC will determine which elements of US GAAP should be considered for possible exceptions or modifications for private companies. Any changes to US GAAP for private companies proposed by the PCC will be subject to public comment and endorsement by the FASB.
The framework, when finalized, will help the FASB and the PCC identify the unique needs of the users of private company financial statements. It will help them identify opportunities to reduce the cost and complexity of preparing private company financial statements, and improve the relevance of those statements for users.
Will the framework create a new basis of accounting?
The framework is not intended to be a new conceptual framework that would lead to fundamentally different reporting between public and private companies. Both public and private companies reporting under US GAAP will continue to use the current framework of US GAAP standards.
In a separate but related project, the FASB is deliberating the definition of a nonpublic entity for purposes of determining which entities are within the scope of the decision-making framework. However, a company within the scope of the framework may not necessarily be eligible to apply all exceptions and modifications provided for private companies. For example, private companies following industry-specific guidance may not be eligible for certain exceptions or modifications otherwise available to private companies.
Additionally, the FAF believes that the FASB should address complexity and cost-benefit concerns more broadly, as these issues affect all companies. It is possible that certain of the PCC’s proposals that reduce complexity and cost and increase relevancy will be appropriate for all companies, and could be considered by the FASB for broader application.
Stakeholders should provide input on the document by October 31, 2012. After the comment period has ended, the FASB and the PCC will jointly deliberate the criteria to be included in the framework.
The PCC will begin meeting after the completion of the selection process for its members, which is expected to be in the fourth quarter of 2012. Additionally, before finalizing the definition of a nonpublic entity, the FASB intends to obtain PCC input and expose the proposed definition for public comment.
PwC clients who have questions about this In brief should contact their engagement partner. Engagement teams that have questions should contact William Schramm (1-973-236-4586) or Dieter Wulff (1-973-236-4856) in the National Professional Services Group.
2The FAF is the independent, private-sector organization with responsibility for the oversight of the FASB.
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