State Board Report

May 2010

The need for private company accounting standards has been an issue for many years, Financial Accounting Foundation (FAF) President Teresa Polley observed as the AICPA/FAF/NASBA Blue Ribbon Panel on Standard Setting for Private Companies (BRP) kicked off their discussions on April 12 in New York City. “A confluence of events,” including the financial crisis, regulatory changes and a more activist FAF Board of Trustees, were cited by Ms. Polley as the reason for the new jointly‐sponsored group’s work. Rick Anderson, BRP Chairman, said that what will make this panel different from the numerous previous panels who addressed this issue is “the most influential bodies are at the table together trying to come to a solution.”

NASBA Chair Billy Atkinson, a BRP member, quickly summarized for the Panel the role of the State Boards of Accountancy, by way of explaining why they are interested in standard setting and what this new group may ultimately recommend. He emphasized that the Boards regulate over 650,000 CPAs.

Judy O’Dell, chair of the FASB’s Private Company Financial Reporting Committee (PCFRC), told the BRP that on November 2, 2009 the PCRC wrote to the Financial Accounting Foundation asking them to take a leading role in ensuring the establishment of private company standards. She said the PCFRC is calling for “rethinking, not bashing, the current process.” Ms. O’Dell said the PCRC has been following what other countries are doing: Canada has set its own private company standards; Japan is involved in a similar research project; and some have adopted International Financial Reporting Standards (IFRS) for Small and Medium Entities or rejected them. A representative from Canada is scheduled to address the May 14 meeting of BRP to update them on how their new standards are being implemented.

Representatives from federal regulatory groups, banks, insurance companies and other lenders and federal regulators attended the April meeting. Several of the bankers stressed the need for consistent standards, noting the “gold standard” of GAAP, but they were not opposed to changing to international standards. Kewsong Lee, managing director of Warburg Pincus, said the global private equity firm uses financial statements as part of their due diligence in assessing the historical performance of companies. “At the end of the day, we are looking for truth: We don’t really differentiate between private and public companies,” he said. Asked to explain, he continued, ”There is no one metric we tap in on. The truth for a small company may be how well the R&D is going, which may not show up in the financial statements.”

Paul Beswick, Deputy Chief Accountant in the office of the SEC’s Chief Accountant, cautioned that the BRP should not try to forecast what the SEC is going to do about adoption of IFRS. He advised the panel to “focus on private companies.” He noted that Canada has decided to maintain its national standard setter for private companies.

No new research was called for at the first meeting of the BRP. Five years ago the AICPA issued its Private Company Financial Reporting Task Force’s Report, which included the findings from a random survey of over 1,000 people and of an outreach survey of over 2,700 people. James G. Castellano, who chaired that Task Force, reviewed its findings with the BRP. While the study found all groups of constituents rated certain attributes of GAAP as being high value, some GAAP concepts were found to have low relevance and decision usefulness for private companies, Mr. Castellano said. The Task Force had concluded GAAP standard setting needs to be different for private companies. In response, the FASB created the committee headed by Ms. O’Dell.

Professor Teri Yohn told the BRP that the American Accounting Association had commented that the AICPA Task Force’s survey over‐represented practitioners, not including enough representation of users. Mr. Atkinson asked if a new survey five years later would be helpful and Mr. Castellano replied that the topic had been researched for decades, but it was up to the BRP to determine if more is needed.

An argument often posed for a single set of standards is that private companies can more easily transition into being public companies with a single set of standards, but Mr. Anderson said most companies that decide to go public discover they need to make restatements to get into compliance with the SEC’s requirements for public companies. Mr. Beswick said he would put together information on the number of restatements companies had to make in their initial public offering process, as well as other financial reporting challenges they encountered. The SEC will also prepare information on companies that are not necessarily SEC registrants, but who need to prepare GAAP financial statements, such as those private companies that are equity method investees in a public company.

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