cost-benefitAt a meeting of its revamped small public company advisory group in December, the Financial Accounting Standards Board received input on how to provide relief for smaller public companies.

The FASB – the standard-setter for Generally Accepted Accounting Principles in the U.S., delegated and designated that authority by the U.S. Securities and Exchange Commission – reconstituted its SBAC in 2016 to focus exclusively on small public company issues.

Previously, the SBAC considered commonalities between private companies and small public companies in making recommendations for exceptions or less burdensome alternatives to GAAP for those constituencies. Following the success of FASB’s 3-year-old Private Company Council, the standard-setter decided in 2016 to narrow the scope and related membership of the SBAC to focus exclusively on small public companies.

More time, less complex standards wanted

During an informal discussion about how FASB should go about offering relief to smaller public companies and still maintain high quality financial reporting for investors and other users of small public company financial statements, suggestions from SBAC members at their December meeting included:

  1. Simplification: Continue and expand current simplification efforts, building on the success of the Private Company Council’s simplifications for private companies, and broader simplifications offered to public and private b. Costs and Public to Private Considerations. Backing up this recommendation were comments of SBAC members on resource constraint issues that small public companies face. As noted in the meeting minutes, “SBAC members discussed specific instances in which companies went private because of the excess costs of being a public entity. An SBAC member stated if private company alternatives have not received substantial negative feedback from investors, then the same concept could be applied to small public companies. “
  1. Staggered effective dates: Offer delayed/staggered effective dates (implementation dates) for small pubic companies, similar to the delayed implementation dates required of private companies. One SBAC member explained that a staggered approach that gives more time for small public companies and private companies to implement new accounting standards would save resources in those constituencies by allowing them to benefit from the learning curve experienced by larger public companies’ initial adoption of new accounting standards.
  1. Definition of ‘small public company’: One SBAC member suggested defining a ‘small public company’ based on market capitalization (i.e., similar in nature to the approach used by the SEC); another SBAC member suggested using other measures to define a small public company, such as revenue or number of employees.

Potential tie-in with SEC definitions

Rick Brounstein, Managing CFO Director, [CTRL] CFO and an expert on small public company issues, shared his thoughts on the recommendations listed above. His observations reflect his experience working working for public and private companies and in public accounting, as well as serving as a member of the SEC Advisory Committee on Smaller Public Companies (a precursor to the SEC’s current Advisory Committee on Small and Emerging Companies), as a board member of Financial Executives International’s Silicon Valley Chapter, and as an advisory member to COSO’s project on monitoring internal control (a project preceding COSO’s updated 2013 Internal Control-Integrated Framework),

From a practical point of view, Brounstein suggests that FASB consider adopting the SEC’s definitions relating to smaller public companies, observing, “We have clear cut definitions of Smaller Public Companies (‘SPC’) as defined by the SEC, and Emerging Growth Companies (‘EGC’) as defined in the JOBS Act.” SPCs have below $75 million in market capitalization; ECGs are up to 5-years IPO and less than $1 billion in revenues.

Once FASB has a working definition for smaller public companies, Brounstein suggests offering those companies the private company accounting alternatives developed by the accounting standard-setter in collaboration with its Private Company Council. These PCC alternatives include simplifications to GAAP such as less complex requirements for recognition and measurement of financial transactions, less extensive disclosures, or both.

Cost-benefit, value, flexibility

The cost-benefit equation and value of the accounting treatment/disclosures for smaller public companies should determine what the ongoing requirements should be, rather than just defaulting to giving smaller companies more time to implement the standards, says Brounstein. However, if simplified, alternative approaches are not offered, then more time helps smaller companies have less burdensome adoption by benefiting from the lessons learned from larger companies adopting new standards first.

“Much of the US GAAP big company information is of lessor value to smaller, simpler companies,” observes Brounstein, adding, “I would not make this an all or none scenario.”  He notes that small companies meeting the SEC’s definition of SPCs and EGCs can selectively apply some of the SEC’s larger company standards that are not required, and suggests the FASB could offer a similar model.

Public companies compete for investors against every other public company, regardless of size, observes Brounstein, However, he adds, “There is a different risk profile of course and there are those investors that will go to the riskier investments, just like there are those investing in AAA debt and those in Junk Bonds.  We saw this logic in the SEC Advisory Committee for Smaller Public Companies, and that logic is powerful.”

Brounstein has advised private companies going public as EGCs and has worked with companies in the biotech sector . “We are moving to ‘personalized medicine’,” he observes, adding that it may be time to fit accounting standards to individual companies with less regulation, more choice and room for professional judgement. He suggests FASB set sensible minimum requirements at each level (e.g. company size), with companies having the flexibility to offer more when it will help maximize shareholder value.

Some of the tension in accounting standard-setting and the regulatory regime for smaller public companies has been over this concept of ‘shareholder value’ vs. ‘investor protection’ and defining who the ‘users’ of public company financial reporting are: e.g., investors or third parties such as analysts or mutual funds who serve in ‘proxy’ roles providing analysis to, or voting shares on behalf of, investors. It will be interesting to follow further developments of FASB’s Small Business Advisory Committee; learn more about the FASB’s SBAC; see other issues discussed in the SBAC December, 2016 meeting minutes.

 

 

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