Public vs. Private Companies: When Should Different Accounting Rules Apply?

Small private companies frequently disparage the Financial Accounting Standards Board (FASB) because of the overly complex standards they create, revolving around the needs of stakeholders in large public companies instead of “Main Street” businesses. Below are ways FASB has handled these concerns in recent years.

A shifting mindset

The FASB formed the Private Company Council (PCC) in 2012. This committee includes auditors, private company accountants and analysts of private company financial statements; they keep the FASB informed of the financial reporting needs of private companies.

Due to advice offered by the PCC, the FASB has limited certain disclosure requirements for private companies and regularly extends additional time to comply with new accounting standards.

Limited exceptions

The FASB is less amenable to permitting differences in the recognition and measurement of an asset, transaction, instrument or liability. The FASB typically prefers keeping one set of rules for all businesses, thus enabling stakeholders to compare financial statements from an assortment of organizations.

With that being said, the FASB has granted some concessions along the way. Look at these four alternative reporting options:

1. Accounting Standards Update (ASU) No. 2014-02, Intangibles — Goodwill and Other (Topic 350): Accounting for Goodwill. Private companies can choose to amortize goodwill over a period of up to 10 years, instead of testing annually for impairment.
2. ASU No. 2014-03, Derivatives and Hedging (Topic 815): Accounting for Certain Receive-Variable, Pay-Fixed Interest Rate Swaps — Simplified Hedge Accounting Approach. Nonfinancial institution private companies can choose a simpler form of hedge accounting if they use simple interest rate swaps to secure fixed-rate loans.
3. ASU No. 2014-07, Consolidation (Topic 810): Applying Variable Interest Entities Guidance to Common Control Leasing Arrangements. This alternative eases the consolidation reporting requirements of lessors in certain private company leasing transactions.
4. ASU No. 2014-18, Business Combinations (Topic 805): Accounting for Identifiable Intangible Assets in a Business Combination. When they buy or merge with another company, private companies are exempt from recognizing certain hard-to-value intangible assets, like noncompetes or select customer-related intangibles.

In June 2017, the FASB issued Proposed ASU No. 2017-240, Consolidation (Topic 810): Targeted Improvements to Related Party Guidance for Variable Interest Entities. This option would expand ASU 2014-07 by authorizing private companies to bypass the consolidated reporting requirements for a broader range of transactions. Presently, the FASB is redeliberating this proposal; they have yet to release an effective date.

Work in progress

The FASB will continue examining whether privately held businesses require simpler accounting standards compared to public companies. For the most up-to-date developments on the consolidation proposal or other financial reporting options, call us at 949-860-9902 or click here to have someone contact you. Many of these alternatives could simplify financial reporting for your private business.