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The Time is Now for Private Company Financial Reporting

Posted 7:32 PM by

The majority of manufacturing companies provide their financial statements on a Generally Accepted Accounting Principles (GAAP). However, GAAP has primarily been designed to fit the needs of large publicly trade companies. Most manufacturers would not fall into this category, and at times find that applying GAAP to their financial statements is both time consuming and costly. 

In December 2009, the American Institute of Certified Public Accountants (AICPA) and the Financial Accounting Foundation (FAF) established the Blue Ribbon Panel to determine how U.S accounting standards can meet the needs of privately held companies. The Blue Ribbon Panel meets on numerous occasions throughout 2010 and provided its recommendation to the FAF in January 2011. The FAF is currently debating the merits and the costs of the Blue Ribbon Panel's recommendations.

You can find a full version of the Blue Ribbon Panel's report here.  The two most significant recommendations from this report at as follows:

  • A new, separate board with standard-setting authority would be established under the oversight of FAF.  The Board could coordinate its activities with the Financial Accounting Standards Board (FASB), but would not require FASB's approve to issue/amend accounting standards for privately held companies.
  • The separate board would start with current US. GAAP as its foundation and would make changes or modifications to it that would recognize the unique needs of private company financial reporting reporting.

The argument for a separate standard setter for privately held companies is driven by the fact private companies play such a vital role to the overall US economy (both in terms of job creation and economic development). There are approximately 17,000 publicly traded companies according to the U.S Chamber of Commerce, but there are an estimated 29 million private and not-for-profit companies in the US.  The typically users of a private companies financial statement are banks (not an investors), who need straightforward, understandable information that addresses the questions that they have and nothing more.

The final argument for a separate standard setting body relates to the cost of implementing current US GAAP. GAAP changes on a regular basis as the FASB issues new accounting standards and accounting standards updates.  Most of these new standards are driven by the ever complex transactions that publicly trade companies are entering into. However, the small privately held business is also having to try and implement the new standard or go through a possibly time consuming process to determine that the new standard does not apply. Too many of the current requirements under GAAP do not provide useful, relevant data for a privately held company financial statement user. As a result, the unnecessary reporting is not cost beneficial and can stand in the way of good business decision making by over complicating the reporting process.

The FAF is currently looking for as much feedback from owners, investors and financial statement users of privately held companies. They have not set a deadline for making a firm decision but have stated that they will continue efforts through the third quarter of 2011 and will share their findings and conclusions in the fall of 2011. Take time to let them know what you think. The AICPA has set up a website to help with your feedback, Letter to the Financial Accounting Foundation.

About the Author

Justin Hayes is a director in Katz, Sapper & Miller’s Audit and Assurance Services Group as well as being a member of the Not-for-Profit and Governmental Services Groups. Justin works with clients to help them avoid risk and maximize efficiencies by keeping an eye on their bottom line and helping ensure accurate financial reporting. Connect with him on LinkedIn.

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