[This is Part II in a two-part series on private company accounting and the FASB’s Private Company Council. See also Part I: FASB’s Private Company Council: At a Turning Point?]
In Part I of this series, we raised the question of whether FASB’s Private Company Council may be at a turning point, in light of the changing of some of the guard at the FASB − most specifically, the upcoming retirement of FASB Board Member Daryl Buck, designated as the FASB’s board’s liaison to the PCC. The PCC may also be entering its post-honeymoon period, earning the right to enhanced expectations, with the receipt of a favorable three-year review from the Financial Accounting Foundation, including marching orders to ramp up its communications with constituents and the FASB.
The view of the new PCC chairBesides the two major FASB board transitions taking place this year, the PCC has already effectively transitioned from being led by founding PCC Chair William Atkinson to Candace Wright. Wright, a CPA, CFF and director in Postlewaite & Nettervielle’s Accounting and Assurance Standards Group, took the helm of the PCC on Jan. 1 of this year, at the close of Atkinson’s term.
Wright believes strongly in the ability of the PCC to make a difference for private companies and the users of their financial statements.
“When the FAF formed the PCC,” she notes, “it established a process designed to give the (PCC) adequate autonomy while providing the FASB with an endorsement mechanism for PCC decisions.” She believes the existing structure has been effective “because it allows the PCC to improve accounting standards for private companies while avoiding the creation of a ‘two GAAP’ system — a system that many of our stakeholders told us could result in confusion, increased costs, and reduced quality standards.”
The PCC has not only made recommendations to simplify and improve existing GAAP, but has also provided input on the FASB’s projects in progress. Wright says the impact of this ongoing input may not always be apparent because “PCC alternatives” are not necessarily announced. However, the PCC’s ongoing input “ensures that private company issues are addressed before a standard is finalized,” including how relevant information in a potential standard would be to users of private company financial statements.
Asked to describe the interaction between the FASB and the PCC, Wright says, “I think the strong working relationship between the PCC and the FASB is evident in how much we’ve been able to achieve in three years.” She lauded the qualifications of the PCC’s diverse membership and emphasized that the collaborative effort between the PCC and FASB has benefited public and private companies. Wright describes the PCC’s recommendations as a major “springboard” for the FASB’s broader goal of reducing complexity for all organizations − part of its simplification initiative.
What does Wright think of the Financial Accounting Foundation’s recommendations contained in its three-year review report of the PCC?
“I believe the updated PCC procedures will help us be more effective in how we advise the FASB on its active projects by documenting and clearly communicating our input on those projects,” she said. “We will strive to communicate our views to private company stakeholders, and to ensure they are kept informed in a timely and transparent manner.”
Wright believes the new Technical Agenda Consultation Group “will help define a clear objective at the start of a project to help the PCC be as efficient as possible in our work.”
Some of the PCC’s key accomplishments in its first three years include issuance of PCC alternatives by the FASB in Accounting Standards Updates that simplify goodwill impairment (ASU 2014-02), simplified hedge accounting for certain swaps (ASU 2014-03), and guidance on applying variable interest entity guidance to common control leasing arrangements (ASU 2014-07). We asked Wright what she anticipates to be other key issues on the PCC’s horizon.
“Although I expect that the PCC’s advisory role on the FASB’s active projects will consume more of our time, the PCC will always be monitoring existing areas where revisions may make sense for private companies,” she said. “In the near term, the PCC’s focus will be on the application of variable interest entity guidance to private companies under common control.”
Wright said the focus this year will go beyond what was already covered under ASU 2014-07.
“The PCC recently added a project to its agenda on this and asked the FASB staff to work with private company stakeholders to develop examples to help clarify application of VIE guidance to such situations,” she said.
MACPA member’s view: A turning point?Beginning with a 2010 recommendation by then-MACPA Chair (now AICPA Vice Chair) Kimberly Ellison-Taylor, the MACPA formed a special Accounting Standards Task Force, which deliberated on and issued its report (endorsed by the MACPA board) in 2011. The MACPA agreed with the recommendation of the Blue Ribbon Panel (see Part 1 in this series) that the FAF form a standalone private company standard-setting board.
Liz Gantnier, CPA, CGMA, president and director of quality control at Stegman and Company, was one of the original members of the MACPA’s Accounting Standards Task Force. We asked Gantnier to reflect on the PCC’s accomplishments to date.
“I believe that the PCC members, along with the FASB, have tackled many of the initial accounting issues that dogged the private company community,” said Gantnier. “By retaining the FASB’s involvement, the PCC alternatives are perceived by stakeholders as a natural extension of GAAP and not perceived to be of inferior quality.”
Indeed, the very success of the PCC may be an indicator that use of private company alternatives has reached a turning point, or perhaps even a tipping point.
Asked if she had a wish list of issues for FASB’s PCC to address, Gantnier said, “I would like to see a standard from the FASB or the U.S. Securities and Exchange Commission that provides a more practical method of how to ‘un-ring’ the PCC-alternative bell.”
Under the current construct of the alternative GAAP treatments permitted by the FASB following on the PCC’s recommendations, Gantnier noted, “If a company were to decide that it needed to change back (for example, if it had been purchased by a public company), the only method to un-do the accounting is to go back to day one of the PCC GAAP election and start over. … This could be impossible over time, costly, and a possible hindrance to the election of PCC alternatives for some.
“Preferability is not as easy as it sounds,” Gantnier added. “Thankfully, the PCC dropped the position that to go to a PCC alternative needed a preferability letter.
“Having said that,” she added, “nobody thinks flip-flopping is acceptable. The problem is that the only method of undoing the election is to start back at the day it was elected, which in 15 years might be a herculean effort. What we need is something today that provides assurance that the company won’t seriously regret this decision in ten years, and worse, won’t make a business decision because of a potentially costly accounting maneuver. A practical expedient of any sort, such as limiting the length of time that the company would need to retroactively re-evaluate their accounting, could help solve this issue.”
Will the SEC (as part of its capital formation initiatives) or the FASB (as the designated GAAP standard-setter) take on this issue of taking a new look at transition requirements for private companies that go public or are acquired by public companies? This will be among the issues to watch as the PCC continues to move forward following its three-year review, and through key leadership transitions.