2004 Private Company Financial Reporting Study Broad Outreach Survey Executive Report October 2004.

2004 Private Company Financial Reporting Study Broad Outreach Survey Executive Report October 2004

1 Copyright 2004. All rights reserved. 2004 Private Company Financial Reporting Broad Outreach Study Table of Contents Background, Objectives & Methodology ………………………………………..2 Detailed Findings …………………………………………………………………….10 Adjunct Owner/Manager Study…………………………………………..10 Owner/Manager General Findings……………………………………….17 Practitioners General Findings……………………………………………….32 External Stakeholders General Findings……………………………………40 Specific GAAP Requirement Evaluations…………………………………..56 Value of GAAP Financial Statements………………………………………..70 GAAP Standards…………………………………………………………………82 General Survey Participant Findings……………………………………………87

2 Copyright 2004. All rights reserved. Background, Objectives & Methodology  To assess perceptions of how well financial statements prepared using Generally Accepted Accounting Principles (GAAP) meet the needs of the stakeholders of privately held, for-profit entities and external users of that reporting, The MSR Group was commissioned to accomplish a web-based Broad Outreach Survey in conjunction with a separate quantitative survey employing a random selection methodology.  The MSR Group is one of the oldest and most respected full-service market research firms in the nation. It was founded in Omaha, Nebraska, over 50 years ago as a door-to-door data collection company.  Over the past half-century, the firm has grown into a full service market research firm with a highly respected reputation among clients nationwide from a diverse breadth of industries. The MSR Group has conducted a wide array of consumer and business-to-business research projects, both qualitative and quantitative, from local to national in scope.  As a member of the American Marketing Association (AMA), the Market Research Association (MRA) and the Council for Marketing and Opinion Research (CMOR), The MSR Group adheres to the nationally accepted principles and practices of data collection standards and conducts all projects according to exact specifications.  To ensure the objectivity and validity of research conducted, all functions of the research process are conducted in- house at The MSR Group by a veteran staff of highly trained professionals. 2004 Private Company Financial Reporting Broad Outreach Study

3 Copyright 2004. All rights reserved. Background, Objectives & Methodology  Major objectives of the study included evaluating:  Utilization of GAAP financial statements by privately held, for-profit companies and by lenders, investors and sureties;  The general relevance and usefulness of GAAP financial statements to stakeholders of privately held, for-profit companies;  The relevance/decision usefulness of 12 specific GAAP requirements and the level of challenge to comply among businesses and practitioners or understand or use among external stakeholders; and,  The value and benefit of GAAP financial statements compared to the cost of preparing them.  The Broad Outreach Survey was conducted online from July 12 through September 15, 2004, and contained the same questions that were asked in the separate quantitative study.  Sub-questions concerning 12 specific GAAP requirements and immediate follow-on questions concerning usefulness and value of GAAP financial statements were rotated within each primary question from respondent-to-respondent to ensure any potential question position bias was eliminated.  Upon logging on to the survey, participants were asked to provide their e-mail address and categorize themselves into one of four categories that best fit their personal situation.  Owners/Managers of privately held, for-profit businesses  Practitioners  External Stakeholders such as creditors, lenders, investment/venture capital or surety/bonding firms  General ( not one of the above categories) 2004 Private Company Financial Reporting Broad Outreach Study

4 Copyright 2004. All rights reserved. Background, Objectives & Methodology  A total of 2,701 completed surveys were received as shown below. As a check and balance, completed surveys were accepted only once from the same respondent e-mail address.  912 Owners/Managers of privately held, for-profit businesses  173 with revenue under $5 Million  288 with revenue of $5 Million to $25 Million  428 with revenue over $25 Million  23 who did not provide company revenue information  1,295 Practitioners  706 from firms with 5 or less partners  232 from firms with 6 to 10 partners  119 from firms with 11 to 20 partners  233 from firms with 21 or more partners  5 who did not provide the number of partners in their firm  352 External Stakeholders  213 Creditors/Lenders  41 from Investor/Venture Capital firms  91 from Surety/Bonding/Insurance firms  7 from other types of firms  142 General Survey Respondents who did not classify themselves in any of the constituency groups above. 2004 Private Company Financial Reporting Broad Outreach Study

6 Copyright 2004. All rights reserved. Background, Objectives & Methodology  Information about the survey including background information and log-on instructions was disseminated through agencies and associations for whom the subject matter was appropriate and of likely interest, as well as through various electronic and print media channels.  All respondents self-selected themselves to participate in the survey. As a result of the online, self- selection methodology, the findings reflect only the opinions of the participants and no statistical significance should be inferred or associated with the outcome in terms of projecting the findings as being representative of the total actual target constituencies.  For the Owner/Manager Survey, qualified respondents indicated they were from privately owned, for-profit business that issue or release GAAP financial statements for external use.  For the Practitioner Survey, qualified participants indicated they were personally involved in auditing, reviewing or compiling GAAP financial statements for privately held, for-profit companies.  For the External Stakeholders Survey, qualifying criteria included indicating:  Creditors/Lenders: being primarily responsible for the evaluation and approval of business loans for privately held, for-profit companies.  Investor/Venture Capital firms and Surety/Bonding firms: being someone who primarily works with privately held, for-profit companies or does a large amount of work with such companies.  Participation eligibility criteria for all external stakeholders also included indicating that they personally serve or evaluate financial statements of privately held, for-profit companies and at least sometimes, at a minimum, require financial statements prepared in accordance with GAAP for their privately held, for-profit company clients and prospects. 2004 Private Company Financial Reporting Broad Outreach Study

9 Copyright 2004. All rights reserved. Background, Objectives & Methodology  The main body of this report contains information specifically from the three constituency groups referred to as Owners/Managers, Practitioners and External Stakeholders. Information from the General Survey participants is provided in Appendix A.  The information provided in this report is a result of primary research and its contents are proprietary to and for the sole use of AICPA and its designates. Any questions regarding the contents can be directed to The MSR Group only after receiving the expressed consent of these authorized personnel. 2004 Private Company Financial Reporting Broad Outreach Study

11 Copyright 2004. All rights reserved. Detailed Findings  To participate in the Owner/Manager Survey, all respondents were required to answer affirmatively that they represent companies that prepare, issue or release financial statements for external use, in accordance with GAAP.  As part of the screening process, 301 prospective participants, all from privately owned, for- profit companies, were screened out for not meeting the above requirement.  The following five slides provide pertinent information about those who did not meet participation requirements based on the issuing of financial statements.  Complete information is provided in the Frequency Tables & Cross-tabulation Report provided separately. 2004 Private Company Financial Reporting Broad Outreach Study

12 Copyright 2004. All rights reserved. Detailed Findings Q3. Does your company prepare, issue or release financial statements for external use? [If “Yes”, next asked Q5 (Slide 14)] (TOTAL n=1,213: n=310 for $25M) 2004 Private Company Financial Reporting Broad Outreach Study As shown, among all prospective participants, 22.9% of privately owned, for-profit businesses with revenue of less than $5 million do not prepare, issue or release financial statements for external use.

13 Copyright 2004. All rights reserved. Detailed Findings Q4. What is the primary reason your company does not prepare, issue or release financial statements for external use? [From Q3 (Slide 12). Asked only of those who DO NOT issue financial statements for external use who were then asked no more questions] [Multiple Responses Allowed] (TOTAL n=148: n=70 for $25M) The few “Other” reasons received include that it is because they are privately owned and/or have no debt. A complete listing of “Other” responses is provided in the Verbatim Responses. 2004 Private Company Financial Reporting Broad Outreach Study

14 Copyright 2004. All rights reserved. Detailed Findings Q5. There are four common bases used for preparing financial statements: Federal income tax, cash, modified cash and Generally Accepted Accounting Principles commonly referred to as GAAP. Are the financial statements your company prepares, issues or releases prepared in accordance with GAAP? [From Q3 (Slide 12). Asked only of those who DO issue financial statements for external use] (TOTAL n=1,047: n=231 for $25M) 2004 Private Company Financial Reporting Broad Outreach Study Considering the total prospective respondent base of 310 for $25M, the net percent of companies that do not issue financial statements for external use or do not issue them in accordance with GAAP is: <$5M: 40.0% $5m-$25M: 20.3% >$25M: 12.1% About half of these, (53% to 57%, depending on revenue size) do not issue financial statements for external use at all, as shown in Q3 (Slide 12).

15 Copyright 2004. All rights reserved. Detailed Findings Q6. On what accounting basis are your company’s financial statements prepared, for example cash basis or tax basis? [From Q5 (Slide 14). Asked only of those whose financial statements for external use are not prepared in accordance with GAAP] [Multiple Responses Allowed] (TOTAL n=116: n=53 for $25M) NOTE: Small sample sizes. There are only 116 total responses to this question. The “Other” responses include Accrual basis and/or a mix of GAAP and other bases or GAAP with exceptions. All Other” responses are provided in the Verbatim Responses. 2004 Private Company Financial Reporting Broad Outreach Study

16 Copyright 2004. All rights reserved. Detailed Findings Q7. Why does your company use that other basis? [Asked only of those whose financial statements for external use are not prepared in accordance with GAAP] [Multiple Responses Allowed] (TOTAL n=116: n=53 for $25M) NOTE: Small sample sizes. There are only 116 total responses to this question. “Other” responses include it is because they can use it for income tax reporting, it precludes unnecessary work and does not involve unneeded standards, and it better represents their company or meets their needs. A complete listing of “Other” responses is provided in the Verbatim Responses. 2004 Private Company Financial Reporting Broad Outreach Study

18 Copyright 2004. All rights reserved. Detailed Findings Owner/Manager Primary Study Demographics Business Demographics Revenue (Millions) <$5M (n=173) $5M-$25M (n=288) >$25M (n=428) %% Q1. Privately Owned, For-profit Company Yes100 Q2e. Respondent Title Within the Company President, Chief Executive Officer, or equivalent29.511.53.3 Chief Financial Officer30.147.652.6 Controller/Comptroller or equivalent23.730.229.2 Other Financial Executive5.22.14.4 Financial Manager2.90.34.0 Shareholder4.01.70.2 “Other” [See Verbatim Responses]4.65.96.1 Prefer Not to Answer00.70.2 Q3 & Q5. Prepare, Issue or Release Financial Statements for External Use Prepared in Accordance with GAAP Yes100 2004 Private Company Financial Reporting Broad Outreach Study

19 Copyright 2004. All rights reserved. Detailed Findings Owner/Manager Primary Study Demographics Business Demographics (Cont’d) Revenue (Millions) <$5M (n=173) $5M-$25M (n=288) >$25M (n=428) %% Q19. Number of full-time employees in 2003 Under 2550.912.21.4 25-5030.120.53.5 51-10013.934.010.5 101-2503.528.124.3 Over 2501.23.859.8 Prefer not to say0.61.40.5 2004 Private Company Financial Reporting Broad Outreach Study

20 Copyright 2004. All rights reserved. Detailed Findings Owner/Manager Primary Study Demographics Business Demographics (Cont’d) Revenue (Millions) <$5M (n=173) $5M-$25M (n=288) >$25M (n=428) %% Q20. Type of Business Manufacturing10.419.121.5 Distribution/Wholesale2.36.613.1 Financial/Banking9.29.75.8 Services12.112.57.9 Insurance2.92.83.5 Healthcare5.22.83.5 Retail2.91.76.3 Technology18.55.21.9 Agriculture0.61.4 Transportation1.22.42.3 Construction16.824.319.4 Real Estate4.02.84.0 “Other” [See Verbatim Responses]13.38.09.3 Prefer not to say0.60.70 Q21. Number of Owners/Shareholders Under 557.257.341.8 6-2524.328.829.0 26-10013.97.612.4 Over 1002.34.910.0 Don’t know/ Prefer not to say2.31.46.8 2004 Private Company Financial Reporting Broad Outreach Study

21 Copyright 2004. All rights reserved. Detailed Findings Q2b. Are you an owner of your company? (n=173 for $25M) 2004 Private Company Financial Reporting Broad Outreach Study The survey was completed by a total of 288 company owners, of which 195 are also the person who prepares financial statements for their company.

22 Copyright 2004. All rights reserved. Detailed Findings Q2c. Are you the person who prepares financial statements for your company? [If “Yes”, next asked Q3 (Slide 24)] (n=173 for $25M) 2004 Private Company Financial Reporting Broad Outreach Study The survey was completed by a total of 771 respondents who prepare financial statements for their company.

23 Copyright 2004. All rights reserved. Detailed Findings Q2d. Who prepares financial statements for your company? [From Q2c (Slide 22). Asked only of those who are not the person who prepares financial statements for their company] (n=43 for $25M) A significantly greater percentage of <$5M businesses use outside accountants compared to larger revenue companies. Considering the total respondent base of 173 for $25M, the net percent of companies that report using outside accountants is: <$5M: 14% $5m-$25M: 5% >$25M: 2% 2004 Private Company Financial Reporting Broad Outreach Study

24 Copyright 2004. All rights reserved. Detailed Findings Q3. Does your company prepare, issue or release financial statements for external use? [All asked, then next asked Q5 (Slide 25)] (n=173 for $25M) 2004 Private Company Financial Reporting Broad Outreach Study

25 Copyright 2004. All rights reserved. Detailed Findings Q5. Are the financial statements your company prepares, issues or releases prepared in accordance with GAAP? [All asked, then next asked Q8 (Slide 26)] (n=173 for $25M) 2004 Private Company Financial Reporting Broad Outreach Study

26 Copyright 2004. All rights reserved. Detailed Findings Q8. Who does your company prepare GAAP financial statements for? [Multiple Responses Allowed] (n=173 for $25M) Lenders and management use to run the business are the most mentioned uses of GAAP financial statements. “Other” responses are provided in the Verbatim Responses. 2004 Private Company Financial Reporting Broad Outreach Study

27 Copyright 2004. All rights reserved. Detailed Findings Q8 (Special). Who does your company prepare GAAP financial statements for? [This slide combines mention of lenders/creditors into a single response rather than separate responses as on the previous slide] [Multiple Responses Allowed] (n=173 for $25M) Combining the responses adds 3% to 6% to the “Lenders” responses on the previous slide, depending on the cell. 2004 Private Company Financial Reporting Broad Outreach Study

28 Copyright 2004. All rights reserved. Detailed Findings Q9. Does your company ever issue financial statements prepared in accordance with GAAP but with exceptions to certain GAAP requirements? [If “Yes”, next asked Q10 (Slide 30). If NOT “Yes”, next asked Q11 (Slide 31)] (n=173 for $25M) It should be noted that roughly 65% to 75%, depending on the cell, said they have not, and only about 2% to 8% did not know. 2004 Private Company Financial Reporting Broad Outreach Study

29 Copyright 2004. All rights reserved. Detailed Findings Q9 (Special). Does your company ever issue financial statements prepared in accordance with GAAP but with exceptions to certain GAAP requirements? [This slide shows ONLY the mentions for the combined lender/creditor cell defined in Slide 27] n=142 for $25M) Considering only the combined lender/creditor response segment changes the outcome upward compared to the previous slide by about 1.5% or less, depending on the revenue cell. 2004 Private Company Financial Reporting Broad Outreach Study

30 Copyright 2004. All rights reserved. Detailed Findings Q10. Under what circumstances does your company ever issue financial statements prepared in accordance with GAAP but with exceptions to certain GAAP requirements? [From Q9 (Slide 28). Asked only of those who reported they ever do] [Multiple Responses Allowed] n=46 for $25M) NOTE: Small sample sizes for revenue of $25M or less. Overall, the most-mentioned circumstances are “When the outcome is closer to how management views or runs the business”, “When external parties accept it” and the “Cost to fully comply with GAAP.” The “Other” responses are provided in the Verbatim Responses. 2004 Private Company Financial Reporting Broad Outreach Study

31 Copyright 2004. All rights reserved. Detailed Findings Q11. Have you or other company representatives ever asked external parties (such as lenders or investors) if the company could issue financial statements either on another basis of accounting different from GAAP or on a GAAP basis but with exceptions to certain GAAP requirements? [All asked] (n=173 for $25M) The vast majority said they have not. Uncertainty is very low. Among those who prepare financial statements for their company, 15.8% said the company has asked, which is NOT significantly higher than the 10.9% of those who do not prepare financials for their company that said their company has asked. 2004 Private Company Financial Reporting Broad Outreach Study

33 Copyright 2004. All rights reserved. Detailed Findings Practitioner Primary Study Demographics Practitioner Demographics Number of Partners 5 or less (n=706) 6-10 (n=232) 11-20 (n=119) 21 or more (n=233) %% Q2. Personally Involved in Auditing, Reviewing or Compiling GAAP Financial Statements for Privately Held, For-profit Companies Yes100 Q3. Average Percent of Customers by Revenue Range Under $5 Million75.549.633.932.5 $5 Million to $25 Million19.335.846.632.3 Over $25 Million5.214.619.535.2 Q17. Firm Category Sole practitioner23.900.80 Local firm73.588.460.521.5 Regional firm1.710.337.843.3 National firm000.89.9 International firm0.10.9024.0 Prefer not to say0.70.401.3 2004 Private Company Financial Reporting Broad Outreach Study

34 Copyright 2004. All rights reserved. Detailed Findings Q4. Who do your private, for-profit company clients issue GAAP financials for? [Multiple Responses Allowed] (n=706 for 5 or less partners, n=232 for 6-10 partners, n=118 for 11-20 partners, and n=233 for 21 or more partners) NOTE: This question asked the practitioner to consider all of their clients when answering and may reflect as few as one of their clients or as many as all. Lenders, management use to run the business and shareholders are the most mentioned uses of GAAP financial statements from the practitioner perspective. The “Other” responses are provided in the Verbatim Responses. 2004 Private Company Financial Reporting Broad Outreach Study

35 Copyright 2004. All rights reserved. Detailed Findings Q5. When do you recommend that a private, for-profit client issue financial statements to external users prepared on something other than a GAAP basis, such as cash basis, modified cash basis or tax basis, for example, and why? [Multiple Responses Allowed] (n=706 for 5 or less partners, n=232 for 6-10 partners, n=118 for 11-20 partners, and n=233 for 21 or more partners) Overall, when external parties accept it, based on cost to fully comply with GAAP and when the outcome is closer to how management views the company are the most mentioned reasons for recommending use of a basis other than GAAP. “Other” responses are provided in the Verbatim Responses. 2004 Private Company Financial Reporting Broad Outreach Study

36 Copyright 2004. All rights reserved. Detailed Findings Q6. Do your private, for-profit clients ever issue financial statements prepared in accordance with GAAP but with exceptions to certain GAAP requirements? [If “Yes”, next asked Q7 (Slide 37). If NOT “Yes”, next asked Q9 (Slide 39)] (n=706 for 5 or less partners, n=232 for 6-10 partners, n=119 for 11-20 partners, and n=233 for 21 or more partners) 2004 Private Company Financial Reporting Broad Outreach Study NOTE: This question asked the practitioner to consider all of their clients when answering and may reflect as few as one of their clients or as many as all. The percent for 6-10 partners and 11-20 partners is significantly higher than the percent for 5 or less partners and 21 or more partners. The preponderance of remaining responses are “No.” Less that 2% of any cell was uncertain or preferred not to answer.

37 Copyright 2004. All rights reserved. Detailed Findings Q7. Under what circumstances do practitioners’ private, for-profit clients issue financial statements prepared in accordance with GAAP but with exceptions to certain GAAP requirements? [From Q6 (Slide 36). Asked only of those who reported they ever do] [Multiple Responses Allowed] (n=416 for 5 or less partners, 167 for 6-10, 90 for 11-20 and 139 for 21 or more partners) The cost to fully comply with GAAP and when external parties accept it are the circumstances mentioned most often. “Other” responses are provided in the Verbatim Responses. 2004 Private Company Financial Reporting Broad Outreach Study

38 Copyright 2004. All rights reserved. Detailed Findings Q8. What are some of the more common GAAP requirements in which private companies report an exception to those requirements? [From Q7 (Slide 37). Asked only of those who reported they ever do] [Multiple Responses Allowed] (n=416 for 5 or less partners, 167 for 6-10, 90 for 11-20 and 139 for 21 or more partners) [Table is sorted in descending order for 5 or less partner firms] GAAP Requirement Number of Partners 5 or less6-1011-20 21 or more %% Cash flow statement56.049.125.641.7 Deferred income taxes44.534.125.323.7 Accrual basis of accounting41.345.536.737.4 Fair value basis of measuring assets and liabilities36.529.937.829.5 Intangibles28.428.136.732.4 Comprehensive income measurement28.125.116.720.9 Variable interest entities25.738.334.432.4 Classification of liabilities and equity16.621.024.419.4 Post retirement and retirement plans16.125.124.423.7 Leases16.117.426.722.3 Guarantees14.48.416.711.5 Share-based payments5.04.212.28.6 Don’t Know/ Can’t Answer2.21.82.20.7 Prefer Not to Answer1.21.800.7 2004 Private Company Financial Reporting Broad Outreach Study “Other” responses are provided in the Verbatim Responses.

39 Copyright 2004. All rights reserved. Detailed Findings Q9. Have your private company clients (or you on their behalf) ever asked external parties (such as lenders or investors) if the company could issue financial statements either on another basis of accounting different from GAAP or on a GAAP basis but with exceptions to certain GAAP requirements? [All asked] (n=706 for 5 or less partners, 232 for 6-10 partners, 119 for 11-20 partners, and 233 for 21 or more) 2004 Private Company Financial Reporting Broad Outreach Study The “Yes” percentage for 6-10 partners is is significantly higher than the percentage for 5 or less and 21 or more partners.

41 Copyright 2004. All rights reserved. Detailed Findings External Stakeholder Primary Study Demographics External Stakeholder Demographics Type of Firm Creditor/ Lender (n=213) Investor/ Venture Capital (n=41) Surety/ Bonding (n=91) %% Q2. Personally Serve or Evaluate Financial Statements of Privately Held, For-profit Companies Yes100 Q3. Average Percent of Customers by Revenue Range Under $5 Million42.751.548.5 $5 Million to $25 Million33.728.736.7 Over $25 Million23.619.814.7 2004 Private Company Financial Reporting Broad Outreach Study

42 Copyright 2004. All rights reserved. Detailed Findings Q4. Do you always, usually/sometimes or never require financial statements prepared in accordance with Generally Accepted Accounting Principles, commonly known as GAAP, for your privately held, for-profit company clients and prospects? (n=213 for creditor/lender, 41 for investor/venture capital, and 91 for surety/bonding) A significantly higher percent of surety/bonding and investor/venture capital firms “Always” require GAAP financial statements than creditors/lenders. None of the external stakeholders said they “Never” require GAAP financial statements. As a result, survey questions 4a (On what basis do you require financial statements to be submitted) & 4b (Why do you require that other basis instead of GAAP) were never asked. All also responded, with none saying they “Don’t Know” or “Prefer Not to Answer.” 2004 Private Company Financial Reporting Broad Outreach Study

43 Copyright 2004. All rights reserved. Detailed Findings Q5. What are your primary reasons for wanting GAAP financial statements? [Multiple Responses Allowed] (n=213 for creditor/lender, 41 for investor/venture capital, and 91 for surety/bonding) Use as a decision-making tool, providing comparability between periods and companies, and wanting an outside accountant’s involvement are the most mentioned reasons for wanting GAAP financial statements. The main reasons given in Q5a for the employer requiring it include: Consistency It’s the industry standard It’s a legal or other type of requirement in their operations. “Other” responses for Q5 and Q5a are provided in the Verbatim Responses. 2004 Private Company Financial Reporting Broad Outreach Study

44 Copyright 2004. All rights reserved. Detailed Findings Q6. Do you ever accept financial statements of private companies prepared on a basis of accounting different from GAAP, such as cash basis, tax basis, modified cash basis or some other basis, for example? [If “Yes”, next asked Q7 (Slide 45). If “No”, next asked Q9 (Slide 48). If “Don’t Know”, next asked Q10 (Slide 49)] (n=213 for creditor/lender, 41 for investor/venture capital, and 91 for surety/bonding) NOTE: This question asked the external stakeholder whether they have ever accepted financial statements of private companies on a basis of accounting different from GAAP and a positive response may indicate that they have done so one time or more. The percent of creditors/lenders that accept financial statements on a basis other than GAAP is significantly higher than the other two cells and the percent of surety/bonding is significantly higher than investor/venture capital. 2004 Private Company Financial Reporting Broad Outreach Study

45 Copyright 2004. All rights reserved. Detailed Findings Q7. What other bases do you accept? [From Q6 (Slide 44). Asked only of those who reported they ever do] [Multiple Responses Allowed] (n=187 for creditor/lender, 17 for investor/venture capital, and 59 for surety/bonding) 2004 Private Company Financial Reporting Broad Outreach Study “Other” responses are provided in the Verbatim Responses.

46 Copyright 2004. All rights reserved. Detailed Findings Q8. Please answer “Yes” or “No” if the decision as to whether or not you accept financial statements of private companies prepared on a basis of accounting different from GAAP ever changes based on the following factors. [From Q7 (Slide 45). Asked only of those who reported they ever do.] (n=187 for creditor/lender, 17 for investor/venture capital, and 59 for surety/bonding) Reponses by Percent 2004 Private Company Financial Reporting Broad Outreach Study Decision Factor Type of Firm Creditor/ Lender Investor/ Venture Capital Surety/ Bonding %% YesNo Don’t Know YesNo Don’t Know YesNo Don’t Know Company size 86.610.21.176.523.5093.26.80 The industry in which the company operates 55.142.21.147.1 5.944.154.21.7 The owner’s personal guarantee/liability 62.033.22.111.882.45.961.037.31.7 The amount of capital involved 74.322.51.158.841.2079.718.61.7

47 Copyright 2004. All rights reserved. Detailed Findings Q8e. In general, are you more likely to accept non-GAAP financials from smaller companies or larger companies. [From Q8 (Slide 46). Asked only of those who mentioned “Company Size” as a decision factor on Slide 46. Next asked Q10 (Slide 49)] (n=162 for creditor/lender, 13 for investor/venture capital, and 55 for surety/bonding) 2004 Private Company Financial Reporting Broad Outreach Study Approximately 10% to 25%, depending on the cell, said they are likely to accept non-GAAP financials from either size of company.

48 Copyright 2004. All rights reserved. Detailed Findings Q9. What are the main reasons you only accept GAAP financial statements from private companies? [From Q6 (Slide 44). Asked only of those who said they do not ever accept financial statements of private companies on a basis of accounting different from GAAP in Q6] [Multiple Responses Allowed] (n=23 for creditor/lender, 21 for investor/venture capital, and 32 for surety/bonding) Comparability between periods and companies, wanting an outside accountant’s involvement, use as a decision- making tool, and standardized language are the most mentioned reasons for only accepting GAAP financial statements, especially by the investor/venture capital respondents. “Other” responses are provided in the Verbatim Responses. 2004 Private Company Financial Reporting Broad Outreach Study

49 Copyright 2004. All rights reserved. Detailed Findings Q10. For private, for-profit companies, do you ever accept financial statements prepared in accordance with GAAP, but with exceptions to certain GAAP requirements? [From Q6 (Slide 44), Q8e (Slide 47) and Q9 (Slide 48). All asked. If “Yes”, next asked Q11 (Slide 50). If “No, next asked Q13 (Slide 52). If “Prefer Not to Answer”, next asked Q14 series (Slide 65)] (n=213 for creditor/lender, 41 for investor/venture capital, and 91 for surety/bonding) NOTE: This question asked the external stakeholder to consider all of their clients when answering and may reflect as few as one of their clients or as many as all. The percent of investor/venture capital and surety/bonding that said they do NOT is significantly higher than creditor/lender. 2004 Private Company Financial Reporting Broad Outreach Study

50 Copyright 2004. All rights reserved. Detailed Findings Q11. Under what circumstances do you ever accept private, for-profit company financial statements prepared in accordance with GAAP but with exceptions to certain GAAP requirements. [From Q10 (Slide 49). Asked only of those who reported they ever do] [Multiple Responses Allowed] (n=155 for creditor/lender, 24 for investor/venture capital, and 66 for surety/bonding) [Circumstances are sorted in descending order based on aggregate percent mention by all cells] The type of exception requested is the primary circumstance for all three cells. “Other” circumstances are provided in the Verbatim Responses. 2004 Private Company Financial Reporting Broad Outreach Study

51 Copyright 2004. All rights reserved. Detailed Findings Q12. What are some of the more common GAAP requirements in which private companies report an exception to GAAP requirements? [From Q11 (Slide 50). Asked only of those who reported they ever do. Next asked Q14 series (Slide 65)] ] [Multiple Responses Allowed] (n=155 for creditor/lender, 24 for investor/venture capital, and 66 for surety/bonding) [Requirements are sorted in descending order based on aggregate percent mention by all cells] 2004 Private Company Financial Reporting Broad Outreach Study GAAP Requirement Type of Firm Creditor/ Lender Investor/ Venture Capital Surety/ Bonding %% Accrual basis of accounting51.633.356.1 Deferred income taxes38.137.536.4 Intangibles34.845.825.8 Fair value basis of measuring assets and liabilities30.345.833.3 Cash flow statement34.216.724.2 Classification of liabilities and equity27.745.821.2 Leases23.94.213.6 Comprehensive income measurement19.429.210.6 Variable interest entities15.533.316.7 Guarantees21.312.59.1 Post retirement and retirement plans18.78.37.6 Share-based payments5.233.31.5 Don’t Know/ Can’t Answer12.38.34.5 Prefer Not to Answer0.600 “Other” requirements are provided in the Verbatim Responses.

52 Copyright 2004. All rights reserved. Detailed Findings Q13. What are the main reasons you do not accept GAAP financial statements with exceptions to certain GAAP requirements. [From Q10 (Slide 49). Asked only of those who said they do not ever accept financial statements of private companies prepared in accordance with GAAP, but with exceptions to certain GAAP requirements in Q10] [Multiple Responses Allowed] (n=31 for creditor/lender, 14 for investor/venture capital, and 23 for surety/bonding) Providing useful information, providing comparability between periods and companies, standardized language and use as a decision-making tool are the most mentioned reasons for NOT accepting GAAP financial statements with exceptions to certain GAAP requirements. “Other” reasons are provided in the Verbatim Responses. 2004 Private Company Financial Reporting Broad Outreach Study

53 Copyright 2004. All rights reserved. Detailed Findings As previously shown, the percent of External Stakeholders who ever accept financial statements of private companies prepared on a basis of accounting different from GAAP, such as cash basis, tax basis, modified cash basis or some other basis, is as illustrated by the graph to the right. n=213 for creditor/lender, 41 for investor/venture capital, and 91 for surety/bonding) Owner/Manager 2004 Private Company Financial Reporting Broad Outreach Study PractitionersExternal Stakeholders A comparison of the percent of Owner/Manager respondents who reported that their company ever issues financial statements prepared in accordance with GAAP but with exceptions to certain GAAP requirements, the percent of practitioners that said their private, for-profit clients ever issue such financial statements, and the percent of External Stakeholders that said they ever accept financial statements prepared in accordance with GAAP, but with exceptions to certain GAAP requirements is shown below. (n=173 for $25M) (n=706 for 5 or less partners, 232 for 6-10 partners, 119 for 11-20 and 233 for 21 or more partners) (n=213 for creditor/lender, 41 for investor/venture capital, and 91 for surety/bonding)

54 Copyright 2004. All rights reserved. Detailed Findings The graphs below compare the percent of Owner/Manager respondents who reported that they or other company representatives ever asked external parties (such as lenders or investors) if the company could issue financial statements either on another basis of accounting different from GAAP or on a GAAP basis but with exceptions to certain GAAP requirements with the percent of practitioners that said their private company clients (or the practitioner on their behalf) ever asked external parties (such as lenders or investors) if the company could issue financial statements either on another basis of accounting different from GAAP or on a GAAP basis but with exceptions to certain GAAP requirements (n=173 for $25M) (n=706 for 5 or less partners, 232 for 6-10 partners, 119 for 11-20 and 233 for 21 or more partners) 2004 Private Company Financial Reporting Broad Outreach Study Owner/Manager Practitioners

55 Copyright 2004. All rights reserved. Detailed Findings The table below compares the percent of Practitioners and External Stakeholder responses for some of the more common GAAP requirements to which private companies report an exception to GAAP requirements. (n=416 for 5 or less partners, 167 for 6-10, 90 for 11-20 and 139 for 21 or more partners, 155 for creditor/lender, 24 for investor/venture capital, and 66 for surety/bonding) [Table is sorted in descending order for 5 or less partner firms] GAAP Requirement Practitioners by Number of Partners 5 or less6-1011-20 21 or more %% Cash flow statement56.049.125.641.7 Deferred income taxes44.534.125.323.7 Accrual basis of accounting41.345.536.737.4 Fair value basis of measuring assets and liabilities36.529.937.829.5 Intangibles28.428.136.732.4 Comprehensive income measurement28.125.116.720.9 Variable interest entities25.738.334.432.4 Classification of liabilities and equity16.621.024.419.4 Post retirement and retirement plans16.125.124.423.7 Leases16.117.426.722.3 Guarantees14.48.416.711.5 Share-based payments5.04.212.28.6 2004 Private Company Financial Reporting Broad Outreach Study “Other” responses are provided in the Verbatim Responses. External Stakeholders Creditor/ Lender Investor/ Venture Capital Surety/ Bonding %% 34.216.724.2 38.137.536.4 51.633.356.1 30.345.833.3 34.845.825.8 19.429.210.6 15.533.316.7 27.745.821.2 18.78.37.6 23.94.213.6 21.312.59.1 5.233.31.5

57 Copyright 2004. All rights reserved. Detailed Findings  The following 10 slides provide scattergram plots and for each of the constituency cells for 12 specific GAAP requirements cross-plotted by the average scores for Relevance/Usefulness and the Level of Challenge to Comply (for Business and Industry and Practitioners) or the Level of Challenge to Understand or Use (for External Stakeholders).  The 12 identical requirements evaluated are shown with a corresponding letter down the left hand side and can be found under Q12a-12l in the Owner/Manager Survey, Q10a-10l in the Practitioner Survey and Q14a-14l in the External Stakeholder Survey.  A scale of 1 to 3 was used for all evaluations, with 1 being Low, 2 being Medium, and 3 being High.  “Not Applicable” and “Don’t Know” responses were excluded from the average score calculations.  While the level of “Not Applicable” and “Don’t Know” responses varies from plot to plot, as a general rule, it is highest for Owner/Manager respondents, particularly from companies with $5-$25 Million in revenue and may range from about 25% to 35% for some requirements.  “Not Applicable” and “Don’t Know” responses are particularly high for Guarantees, Post Retirement and Retirement Plans, and Variable Interest Entities ranging from 40% to 60%, depending on the business size, and especially high for Share-based Payments (roughly 60 to 70% for $5M or higher business respondents and 40% to 55% for practitioner firms with less than 11 partners for this particular requirement).  The actual percentages of “Not Applicable” and “Don’t Know” responses for each of the evaluated requirements are shown in the Frequency Tables & Cross-tabulation report. 2004 Private Company Financial Reporting Broad Outreach Study

58 Plots are based on the average scores on a scale of 1 (Low) to 3 (High). Accrual basis of accounting (n=172/170) Cash flow statement (n=170/165) Classification of liabilities & equity (n=132/125) Comprehensive income measurement (n=123/119) Deferred income taxes (n=144/140) Fair value basis for assets & liabilities (n=147/143) Guarantees (n=95/87) Intangibles (n=129/122) Leases (n=148/144) Post retirement and retirement plans (n=91/88) Share-based payments (n=93/95) Variable interest entities (n=82/84) L K Copyright 2004. All rights reserved. Detailed Findings Relevance/Decision Usefulness vs. Challenge to Comply for specific GAAP requirements. Owner/Manager: < $5 Million revenue (n = # rating Relevance-Usefulness/# rating Challenge) A C E G I J D F H B Low (1) Relevance/Decision Usefulness High (3) High (3) Challenge to Comply Low (1) A B C D E F G I J H 2004 Private Company Financial Reporting Broad Outreach Study K L

59 L K Copyright 2004. All rights reserved. Detailed Findings Relevance/Decision Usefulness vs. Challenge to Comply for specific GAAP requirements. Owner/Manager: $5 Million-$25 Million revenue (n = # rating Relevance-Usefulness/# rating Challenge) A C E G I J D F H B Low (1) Relevance/Decision Usefulness High (3) High (3) Challenge to Comply Low (1) A B C D E F G I J H 2004 Private Company Financial Reporting Broad Outreach Study K L Plots are based on the average scores on a scale of 1 (Low) to 3 (High). Accrual basis of accounting (n=286/284) Cash flow statement (n=280/275) Classification of liabilities & equity (n=203/193) Comprehensive income measurement (n=199/188) Deferred income taxes (n=215/208) Fair value basis for assets & liabilities (n=243/233) Guarantees (n=145/130) Intangibles (n=183/176) Leases (n=255/253) Post retirement and retirement plans (n=166/160) Share-based payments (n=92/86) Variable interest entities (n=118/115)

60 L K Copyright 2004. All rights reserved. Detailed Findings Relevance/Decision Usefulness vs. Challenge to Comply for specific GAAP requirements. Owner/Manager: >$25 Million revenue (n = # rating Relevance-Usefulness/# rating Challenge) A C E G I J D F H B Low (1) Relevance/Decision Usefulness High (3) High (3) Challenge to Comply Low (1) A B C D E F G I J H 2004 Private Company Financial Reporting Broad Outreach Study KL Plots are based on the average scores on a scale of 1 (Low) to 3 (High). Accrual basis of accounting (n=428/426) Cash flow statement (n=426/423) Classification of liabilities & equity (n=333/322) Comprehensive income measurement (n=323/313) Deferred income taxes (n=330/328) Fair value basis for assets & liabilities (n=371/361) Guarantees (n=263/254) Intangibles (n=327/328) Leases (n=396/392) Post retirement and retirement plans (n=290/285) Share-based payments (n=155/154) Variable interest entities (n=267/265)

61 L K Copyright 2004. All rights reserved. Detailed Findings Relevance/Decision Usefulness vs. Challenge to Comply for specific GAAP requirements. Practitioners: 5 or less partners (n = # rating Relevance-Usefulness/# rating Challenge) A CEG I J D F H B Low (1) Relevance/Decision Usefulness High (3) High (3) Challenge to Comply Low (1) A B C D E F G I J H 2004 Private Company Financial Reporting Broad Outreach Study K L Plots are based on the average scores on a scale of 1 (Low) to 3 (High). Accrual basis of accounting (n=702/701) Cash flow statement (n=700/698) Classification of liabilities & equity (n=526/524) Comprehensive income measurement (n=610/610) Deferred income taxes (n=677/677) Fair value basis for assets & liabilities (n=628/630) Guarantees (n=558/549) Intangibles (n=663/666) Leases (n=692/687) Post retirement and retirement plans (n=562/560) Share-based payments (n=321/326) Variable interest entities (n=527/528)

62 L K Copyright 2004. All rights reserved. Detailed Findings Relevance/Decision Usefulness vs. Challenge to Comply for specific GAAP requirements. Practitioners: 6-10 partners (n = # rating Relevance-Usefulness/# rating Challenge) A C E G I J D F H B Low (1) Relevance/Decision Usefulness High (3) High (3) Challenge to Comply Low (1) A B C D E F G I J H 2004 Private Company Financial Reporting Broad Outreach Study KL Plots are based on the average scores on a scale of 1 (Low) to 3 (High). Accrual basis of accounting (n=230/230) Cash flow statement (n=230/230) Classification of liabilities & equity (n=200/202) Comprehensive income measurement (n=215/214) Deferred income taxes (n=231/231) Fair value basis for assets & liabilities (n=212/217) Guarantees (n=200/200) Intangibles (n=231/232) Leases (n=230/230) Post retirement and retirement plans (n=212/209) Share-based payments (n=138/140) Variable interest entities (n=188/193)

63 L K Copyright 2004. All rights reserved. Detailed Findings Relevance/Decision Usefulness vs. Challenge to Comply for specific GAAP requirements. Practitioners: 11-20 partners (n = # rating Relevance-Usefulness/# rating Challenge) A C E G I J D F H B Low (1) Relevance/Decision Usefulness High (3) High (3) Challenge to Comply Low (1) A B C D E F G I J H 2004 Private Company Financial Reporting Broad Outreach Study KL Plots are based on the average scores on a scale of 1 (Low) to 3 (High). Accrual basis of accounting (n=118/118) Cash flow statement (n=118/118) Classification of liabilities & equity (n=115/115) Comprehensive income measurement (n=112/112) Deferred income taxes (n=118/118) Fair value basis for assets & liabilities (n=108/109) Guarantees (n=103/102) Intangibles (n=118/118) Leases (n=119/119) Post retirement and retirement plans (n=111/109) Share-based payments (n=86/84) Variable interest entities (n=102/103)

64 L K Copyright 2004. All rights reserved. Detailed Findings Relevance/Decision Usefulness vs. Challenge to Comply for specific GAAP requirements. Practitioners: 21 or more partners (n = # rating Relevance-Usefulness/# rating Challenge) A C E G I J D F H B Low (1) Relevance/Decision Usefulness High (3) High (3) Challenge to Comply Low (1) A B C D E F G I J H 2004 Private Company Financial Reporting Broad Outreach Study K L Plots are based on the average scores on a scale of 1 (Low) to 3 (High). Accrual basis of accounting (n=232/232) Cash flow statement (n=230/231) Classification of liabilities & equity (n=212/210) Comprehensive income measurement (n=220/221) Deferred income taxes (n=228/228) Fair value basis for assets & liabilities (n=219/218) Guarantees (n=216/215) Intangibles (n=227/226) Leases (n=229/230) Post retirement and retirement plans (n=215/214) Share-based payments (n=171/173) Variable interest entities (n=211/211)

65 L K Copyright 2004. All rights reserved. Detailed Findings Relevance/Decision Usefulness vs. Challenge to Understand/Use for specific GAAP requirements. External Stakeholders: Creditor/Lender (n = # rating Relevance-Usefulness/# rating Challenge) A CE G I J D F H B Low (1) Relevance/Decision Usefulness High (3) High (3) Challenge to Understand/Use Low (1) A B C D E F G I J H 2004 Private Company Financial Reporting Broad Outreach Study K L Plots are based on the average scores on a scale of 1 (Low) to 3 (High). Accrual basis of accounting (n=209/207) Cash flow statement (n=211/208) Classification of liabilities & equity (n=189/186) Comprehensive income measurement (n=199/195) Deferred income taxes (n=208/206) Fair value basis for assets & liabilities (n=204/203) Guarantees (n=198/193) Intangibles (n=209/207) Leases (n=208/206) Post retirement and retirement plans (n=195/189) Share-based payments (n=159/152) Variable interest entities (n=192/189)

66 L K Copyright 2004. All rights reserved. Detailed Findings Relevance/Decision Usefulness vs. Challenge to Understand/Use for specific GAAP requirements. External Stakeholders: Investor/Venture Capital (n = # rating Relevance-Usefulness/# rating Challenge) A C E G I J D F H B Low (1) Relevance/Decision Usefulness High (3) High (3) Challenge to Understand/Use Low (1) A B C D E F G I J H 2004 Private Company Financial Reporting Broad Outreach Study K L Plots are based on the average scores on a scale of 1 (Low) to 3 (High). Accrual basis of accounting (n=41/41) Cash flow statement (n=41/41) Classification of liabilities & equity (n=39/39) Comprehensive income measurement (n=38/37) Deferred income taxes (n=40/41) Fair value basis for assets & liabilities (n=41/41) Guarantees (n=39/38) Intangibles (n=41/41) Leases (n=41/41) Post retirement and retirement plans (n=38/37) Share-based payments (n=39/39) Variable interest entities (n=39/40)

67 L K Copyright 2004. All rights reserved. Detailed Findings Relevance/Decision Usefulness vs. Challenge to Understand/Use for specific GAAP requirements. External Stakeholders: Surety/Bonding (n = # rating Relevance-Usefulness/# rating Challenge) A C E G IJ D F H B Low (1) Relevance/Decision Usefulness High (3) High (3) Challenge to Understand/Use Low (1) A B C D E F G I J H 2004 Private Company Financial Reporting Broad Outreach Study K L Plots are based on the average scores on a scale of 1 (Low) to 3 (High). Accrual basis of accounting (n=89/89) Cash flow statement (n=89/89) Classification of liabilities & equity (n=79/76) Comprehensive income measurement (n=80/80) Deferred income taxes (n=89/89) Fair value basis for assets & liabilities (n=82/82) Guarantees (n=82/81) Intangibles (n=88/85) Leases (n=87/86) Post retirement and retirement plans (n=80/77) Share-based payments (n=61/59) Variable interest entities (n=84/84)

68 Copyright 2004. All rights reserved. Detailed Findings Relevance/Decision Usefulness of specific GAAP requirements by mean scores. (O/M n=82-428, Practitioner n=84-702, and External Stakeholder n=38-211, all depending on requirement and cell) [Average scores on a scale of 1 (Low) to 3 (High). Table is sorted in descending order for Owner/Manager firms with less than $5 Million in revenue. ] 2004 Private Company Financial Reporting Broad Outreach Study O/M by Revenue (Millions) Practitioners by Number of Partners External Stakeholders by Type of Firm <$5M $5- $25M>$25M 5 or less6-1011-20 21 or more Creditor / Lender Investor/ Venture Capital Surety/ Bonding Accrual basis of accounting2.72.9 2.72.82.92.8 2.92.7 Cash flow statement2.52.4 2.32.42.5 2.72.82.6 Leases1.9 2.02.1 2.42.32.2 Classification of liabilities & equity1.91.81.71.5 1.31.62.22.02.2 Fair value basis of measuring assets and liabilities1.8 1.61.81.71.82.31.92.4 Post retirement and retirement plans1.8 1.9 2.01.91.8 Variable interest entities1.8 1.61.71.81.72.31.92.5 Deferred income taxes1.7 1.81.61.82.0 2.12.02.5 Guarantees1.7 1.61.7 1.82.2 2.3 Intangibles1.7 1.6 1.71.82.31.72.1 Comprehensive income measurement1.71.61.51.4 1.52.32.02.4 Share-based payments1.61.71.51.31.4 1.61.51.71.6 As a very general statement, differences between means are usually statistically significant if they differ by.2 or more. Testing would have to be done between any specific pairs of interest to verify a significant difference, since both the average score and response distribution are factored into significance testing.

69 Copyright 2004. All rights reserved. Detailed Findings Level of Challenge to Comply/Understand or Use of specific GAAP requirements by mean scores. (O/M n=82-428, Practitioner n=84-702, and External Stakeholder n=38-211, all depending on requirement and cell) [Average scores on a scale of 1 (Low) to 3 (High). Table is sorted in descending order for Owner/Manager firms with less than $5 Million in revenue. ] 2004 Private Company Financial Reporting Broad Outreach Study O/M by Revenue (Millions) Practitioners by Number of Partners External Stakeholders by Type of Firm <$5M $5- $25M>$25M 5 or less6-1011-20 21 or more Creditor / Lender Investor/ Venture Capital Surety/ Bonding Share-based payments2.52.42.22.8 2.7 2.22.62.0 Variable interest entities2.3 2.22.72.82.72.82.12.72.1 Fair value basis of measuring assets and liabilities2.22.32.22.72.62.7 1.82.01.7 Deferred income taxes2.22.1 2.42.2 2.02.32.0 Post retirement and retirement plans2.11.9 2.4 2.02.51.8 Guarantees2.01.9 2.4 2.51.72.01.9 Classification of liabilities & equity2.01.8 2.4 2.32.02.2 Intangibles1.9 1.82.22.42.5 1.71.91.6 Comprehensive income measurement1.91.8 2.22.1 2.01.9 1.8 Cash flow statement1.7 1.8 1.7 1.61.91.61.8 Leases1.71.61.72.01.9 1.81.91.61.8 Accrual basis of accounting1.71.5 1.81.71.51.61.71.51.7 As a very general statement, differences between means are usually statistically significant if they differ by.2 or more. Testing would have to be done between any specific pairs of interest to verify a significant difference, since both the average score and response distribution are factored into significance testing.

71 Copyright 2004. All rights reserved. Detailed Findings Owner/Manager (O/M) Q13a, Practitioner (P) Q11a, External Stakeholder (ES)Q15a. Average rating of GAAP financial statements’ usefulness on a private company’s ability to: Raise capital from lenders, investors or others (O/M n=158-395, Practitioner n=113-683, and External Stakeholder n=41-209, depending on the cell) [Findings are based on the average scores on a scale of 1 (Low) to 3 (High)] 2004 Private Company Financial Reporting Broad Outreach Study Significance testing. O/M $5M-$25M > P 5 or less O/M >$25M >O/M<$5M, P 5 or less and P 6-10 P 6-10 > P 5 or less P 11-20 > P 5 or less P 21+ > O/M<$5M and P 5 or less ES C/L > all O/M and all P ES VC > P 5 or less ES SB > all O/M $25M or less and all P 20 and less

72 Copyright 2004. All rights reserved. Detailed Findings Owner/Manager (O/M) Q13b, Practitioner (P) Q11b, External Stakeholder (ES)Q15b. Average rating of GAAP financial statements’ usefulness on a private company’s ability to: Obtain credit from vendors or suppliers (O/M n=160-401, Practitioner n=115-688, and External Stakeholder n=39-203, depending on the cell) [Findings are based on the average scores on a scale of 1 (Low) to 3 (High)] 2004 Private Company Financial Reporting Broad Outreach Study Significance testing. ES C/L > all O/M and all P ES VC > all O/M and all P ES SB > all O/M, all P and ES C/L

73 Copyright 2004. All rights reserved. Detailed Findings Owner/Manager (O/M) Q13c, Practitioner (P) Q11c, External Stakeholder (ES)Q15c. Average rating of GAAP financial statements’ usefulness on a private company’s ability to: Qualify for bidding on contracts or obtain licenses (O/M n=118-310, Practitioner n=113-658, and External Stakeholder n=38-177, depending on the cell) [Findings are based on the average scores on a scale of 1 (Low) to 3 (High)] 2004 Private Company Financial Reporting Broad Outreach Study Significance testing. P 5 or less > all O/M P 6-10 > all O/M, P 5 or less, ES C/L and ES VC P 11-20 > all O/M P 21+ > all O/M ES C/L > all O/M $5M ES VC > O/M <$5M ES SB > all O/M, all P, and all other ES

74 Copyright 2004. All rights reserved. Detailed Findings Owner/Manager (O/M) Q13d, Practitioner (P) Q11d, External Stakeholder (ES)Q15d. Average rating of GAAP financial statements’ usefulness on a private company’s ability to: Manage, plan or forecast for business (O/M n=171-425, Practitioner n=117-698, and External Stakeholder n=40-206, depending on the cell) [Findings are based on the average scores on a scale of 1 (Low) to 3 (High)] 2004 Private Company Financial Reporting Broad Outreach Study Significance testing. All O/M < all P ES C/L > all O/M, all P and ES VC ES SB > all O/M, all P and all other ES

75 Copyright 2004. All rights reserved. Detailed Findings External Stakeholder (ES)Q16a. Average rating of value of private company GAAP financial statements in ability to use them: As a tool in making investment or credit decisions (n= 40-211, depending on the cell) [Findings are based on the average scores on a scale of 1 (Low) to 3 (High)] 2004 Private Company Financial Reporting Broad Outreach Study Significance testing. ES C/L > ES VC ES SB > ES VC

76 Copyright 2004. All rights reserved. Detailed Findings External Stakeholder (ES)Q16b. Average rating of value of private company GAAP financial statements in ability to use them: As a check and balance against other tools you may use in making investment or credit decisions (n= 41-211, depending on the cell) [Findings are based on the average scores on a scale of 1 (Low) to 3 (High)] 2004 Private Company Financial Reporting Broad Outreach Study Significance testing. ES C/L > ES VC ES SB > ES VC

77 Copyright 2004. All rights reserved. Detailed Findings External Stakeholder (ES)Q16c. Average rating of value of private company GAAP financial statements in ability to use them: To be able to execute your investment exit strategy (n= 40-180, depending on the cell) [Findings are based on the average scores on a scale of 1 (Low) to 3 (High)] 2004 Private Company Financial Reporting Broad Outreach Study Significance testing. There are no significant differences between cells.

78 Copyright 2004. All rights reserved. Detailed Findings Owner/Manager (O/M) Q14a, Practitioner (P) Q12a, External Stakeholder (ES)Q17a. Average rating of private company GAAP financial statements on: The value of comparability between periods and companies (O/M n=170-426, Practitioner n=119-698, and External Stakeholder n=41-212, depending on the cell) [Findings are based on the average scores on a scale of 1 (Low) to 3 (High)] 2004 Private Company Financial Reporting Broad Outreach Study Significance testing. O/M $5M-$25M > P 5 or less O/M >$25M >O/M<$5M, P 5 or less and P 6-10 P 6-10 > P 5 or less P 11-20 > O/M<$5M and P 5 or less P 21+ > O/M<$5M and P 5 or less ES C/L > all O/M, all P, and ES VC ES VC > O/M<$5M and P 5 or less ES SB > all O/M, all P, and ES VC

79 Copyright 2004. All rights reserved. Detailed Findings Owner/Manager (O/M) Q14b, Practitioner (P) Q12b, External Stakeholder (ES)Q17b. Average rating of private company GAAP financial statements on: The understandability of the information presented (O/M n=172-428, Practitioner n=119-703, and External Stakeholder n=41-212, depending on the cell) [Findings are based on the average scores on a scale of 1 (Low) to 3 (High)] 2004 Private Company Financial Reporting Broad Outreach Study Significance testing. O/M all P O/M $5M-$25M > all P O/M >$25M > all P P 6-10 > P 5 or less P 11-20 > P 5 or less P 21+ > P 5 or less ES C/L > all O/M, all P, and ES VC ES VC > all P ES SB > all O/M, all P, and ES VC

80 Copyright 2004. All rights reserved. Detailed Findings Owner/Manager (O/M) Q14c, Practitioner (P) Q12c, External Stakeholder (ES)Q17c. Average rating of private company GAAP financial statements on: The value of having an independent accountant’s report (O/M n=163-421, Practitioner n=119-702, and External Stakeholder n=41-212, depending on the cell) [Findings are based on the average scores on a scale of 1 (Low) to 3 (High)] 2004 Private Company Financial Reporting Broad Outreach Study Significance testing. O/M >$25M > all other O/M and P 5 or less P 5 or less > O/M <$5M P 6-10 > O/M $25M or less and P 5 or less P 11-20 > all O/M and P 5 or less P 21+ > all O/M and P 5 or less ES C/L > all O/M and P10 or less ES VC > all O/M and P10 or less ES SB > all O/M, all P, and ES C/L Other testing shows an average rating of 2.5 for both those who do not prepare their own company’s financial statements and those who do.

81 Copyright 2004. All rights reserved. Detailed Findings Owner/Manager (O/M) Q14d, Practitioner (P) Q12d, External Stakeholder (ES)Q17d. Average rating of private company GAAP financial statements on: The benefit of preparing or using GAAP financial statements compared to the cost of preparing them (O/M n=170-427, Practitioner n=118-702, and External Stakeholder n=40-204, depending on the cell) [Findings are based on the average scores on a scale of 1 (Low) to 3 (High)] 2004 Private Company Financial Reporting Broad Outreach Study Significance testing. O/M P 5 or less O/M $5M-$25M > P 5 or less O/M >$25M > all other O/M, P 20 or less, and ES VC P 6-10 > P 5 or less P 11-20 > P 5 or less P 21+ > all other P ES C/L > O/M $25M or less, all P, and ES VC ES VC > P 5 or less ES SB > all O/M, all P, and all other ES

83 Copyright 2004. All rights reserved. Detailed Findings Owner/Manager (O/M) Q15, Practitioner (P) Q13, External Stakeholder (ES)Q18. How challenging would you say it is to keep current and up-to-date on GAAP standards? (O/M n=173-428, Practitioner n=119-706, and External Stakeholder n=41-213, depending on the cell) 2004 Private Company Financial Reporting Broad Outreach Study Significance testing for “Extremely Challenging”. All O/M > ES SB All P > All O/M and all ES except VC ES C/L > ES SB ES VC > O/M $5M or more, and all other ES

84 Copyright 2004. All rights reserved. Detailed Findings Owner/Manager (O/M) Q16, Practitioner (P) Q14, External Stakeholder (ES)Q19. Would it be useful if the underlying accounting in GAAP reporting were different, in certain instances, for public vs. non-public companies? (O/M n=173-428, Practitioner n=119-706, and External Stakeholder n=41-213, depending on the cell) 2004 Private Company Financial Reporting Broad Outreach Study Significance testing for “Yes”. All O/M > ES C/L and ES SB All P except P 21 or more > All O/M and all ES P 21 or more > ES C/L and ES SB Other testing shows that 66.8% of those who prepare their own company’s financial statements replied “Yes” and 62.3% of those who do not also replied “Yes”. The difference is not significant. Significance testing for “Yes” vs. “No” by constituency. Each O/M “Yes” > Each O/M “No” Each P Yes” > Each P “No” ES VC “Yes” > ES VC “No” The “Yes”/”No” differences between the other ES are not significant.

85 Copyright 2004. All rights reserved. Detailed Findings Owner/Manager (O/M) Q17, Practitioner (P) Q15, External Stakeholder (ES)Q20. Would it be useful if the underlying accounting in GAAP reporting were different, in certain instances, based on the size of companies? (O/M n=173-428, Practitioner n=119-706, and External Stakeholder n=41-213, depending on the cell) 2004 Private Company Financial Reporting Broad Outreach Study Significance testing for “Yes”. All O/M > ES C/L and ES SB O/M O/M >$25M P 5 or less > all O/M, all ES and P 11 or more partners. P 6-10 > all O/M, all ES and P 21+. P 11-20 > O/M >$25M, ES C/L and ES SB P 21+ > ES C/L and ES SB Other testing shows that 49.8% of those who prepare their own company’s financial statements replied “Yes” compared to 52.9% of those who do not prepare their own statements. The difference is not significant. Significance testing for “Yes” vs. “No” by constituency. O/M “Yes” > O/M “No” except for >$25M P Yes” > P “No” except for P21+ ES “No” > “Yes” except for ES VC The ES VC “Yes”/”No” difference is not significant.

86 Copyright 2004. All rights reserved. Detailed Findings  Owner/Manager Q18, Practitioner Q16, External Stakeholder Q21. What suggestions, if any, would you provide for improving the underlying accounting for GAAP financial reporting for privately held, for-profit companies? Suggestions mentioned most often include:  Owners/Managers  Simplify the reporting process and recognize that many of the requirements do not apply to small, privately held companies and/or do nothing but create more work and expense without providing useful information to management or anyone else.  Have fewer/less stringent requirements than for larger/publicly held companies  Practitioners  Simplify the reporting process and make it less complex  Do not hold smaller and/or privately owned companies to the same standards used for larger and/or publicly held companies.  Reduce the cost of GAAP  Require fewer disclosures.  External Stakeholders  Streamline/simplify the reporting process and make it less complex, if possible, but maintain the consistency of the GAAP standards. A complete listing of suggestions is provided in the Verbatim Responses 2004 Private Company Financial Reporting Broad Outreach Study

88 Copyright 2004. All rights reserved. Detailed Findings – General Survey General Survey Participant Demographics General Survey Demographics (n=142) % Q1. Type of business that best describes work or organization Educator19.0 Tax Practitioner17.6 Consultant/Advisor28.2 Attorney2.1 Association Staff9.9 Other (See Verbatim Responses)23.2 Q2. Any experience specific to GAAP financial statements of privately owned, for-profit companies Yes100 2004 Private Company Financial Reporting Broad Outreach Study

90 Plots are based on the average scores on a scale of 1 (Low) to 3 (High). Accrual basis of accounting (n=141/141) Cash flow statement (n=142/142) Classification of liabilities & equity (n=142/142) Comprehensive income measurement (n=142/142) Deferred income taxes (n=142/142) Fair value basis for assets & liabilities (n=142/142) Guarantees (n=142/142) Intangibles (n=142/142) Leases (n=142/142) Post retirement and retirement plans (n=142/142) Share-based payments (n= 142/142) Variable interest entities (n= 142/142) L K Copyright 2004. All rights reserved. Detailed Findings – General Survey Relevance/Decision Usefulness vs. Challenge to Comply for specific GAAP requirements. General Survey: Mix of educators, tax practitioners, consultants and others (n = # rating Relevance-Usefulness/# rating Challenge) A CE G I J D F H B Low (1) Relevance/Decision Usefulness High (3) High (3) Challenge to Comply Low (1) A B C D E F G I J H 2004 Private Company Financial Reporting Broad Outreach Study K L

92 Copyright 2004. All rights reserved. Detailed Findings – General Survey Q4a. Average rating of GAAP financial statements’ usefulness on a private company’s ability to: Raise capital from lenders, investors or others (n=137) [Findings are based on the average scores on a scale of 1 (Low) to 3 (High)] 2004 Private Company Financial Reporting Broad Outreach Study

93 Copyright 2004. All rights reserved. Detailed Findings – General Survey Q4b. Average rating of GAAP financial statements’ usefulness on a private company’s ability to: Obtain credit from vendors or suppliers (n=136) [Findings are based on the average scores on a scale of 1 (Low) to 3 (High)] 2004 Private Company Financial Reporting Broad Outreach Study

94 Copyright 2004. All rights reserved. Detailed Findings – General Survey Q4c. Average rating of GAAP financial statements’ usefulness on a private company’s ability to: Qualify for bidding on contracts or obtain licenses (n=124) [Findings are based on the average scores on a scale of 1 (Low) to 3 (High)] 2004 Private Company Financial Reporting Broad Outreach Study

95 Copyright 2004. All rights reserved. Detailed Findings – General Survey Q4d. Average rating of GAAP financial statements’ usefulness on a private company’s ability to: Manage, plan or forecast in a business (n=136) [Findings are based on the average scores on a scale of 1 (Low) to 3 (High)] 2004 Private Company Financial Reporting Broad Outreach Study

96 Copyright 2004. All rights reserved. Detailed Findings – General Survey Q5a. Average rating of private company GAAP financial statements on: The value of comparability between periods and companies (n=137) [Findings are based on the average scores on a scale of 1 (Low) to 3 (High)] 2004 Private Company Financial Reporting Broad Outreach Study

97 Copyright 2004. All rights reserved. Detailed Findings – General Survey Q5b. Average rating of private company GAAP financial statements on: The understandability of the information presented (n=140) [Findings are based on the average scores on a scale of 1 (Low) to 3 (High)] 2004 Private Company Financial Reporting Broad Outreach Study

98 Copyright 2004. All rights reserved. Detailed Findings – General Survey Q5c. Average rating of private company GAAP financial statements on: The value of having an independent accountant’s report (n=139) [Findings are based on the average scores on a scale of 1 (Low) to 3 (High)] 2004 Private Company Financial Reporting Broad Outreach Study

99 Copyright 2004. All rights reserved. Detailed Findings – General Survey Q5d. Average rating of private company GAAP financial statements on: The benefit of preparing or using GAAP financial statements compared to the cost of preparing them (n=138) [Findings are based on the average scores on a scale of 1 (Low) to 3 (High)] 2004 Private Company Financial Reporting Broad Outreach Study

101 Copyright 2004. All rights reserved. Detailed Findings – General Survey Q6. How challenging would you say it is to keep current and up-to-date on GAAP standards? (n=142) 2004 Private Company Financial Reporting Broad Outreach Study

102 Copyright 2004. All rights reserved. Detailed Findings – General Survey Q7. Would it be useful if the underlying accounting in GAAP reporting were different, in certain instances, for public vs. non-public companies? (n=142) 2004 Private Company Financial Reporting Broad Outreach Study

103 Copyright 2004. All rights reserved. Detailed Findings – General Survey Q8. Would it be useful if the underlying accounting in GAAP reporting were different, in certain instances, based on the size of companies? (n=142) 2004 Private Company Financial Reporting Broad Outreach Study

104 Copyright 2004. All rights reserved. Detailed Findings – General Survey  Q9. What suggestions, if any, would you provide for improving the underlying accounting for GAAP financial reporting for privately held, for-profit companies? Suggestions mentioned most often include:  Recognize that many of the requirements do not apply to small, privately held companies and/or do nothing but create more work and expense without providing relevant and useful information to management or anyone else.  Simplify the GAAP language and reporting process  Have fewer/less stringent requirements than for larger/publicly held companies. A complete listing of suggestions is provided in the Verbatim Responses 2004 Private Company Financial Reporting Broad Outreach Study

2004 Private Company Financial Reporting Study Broad Outreach Survey Executive Report October 2004.

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2004 Private Company Financial Reporting Study Broad Outreach Survey Executive Report October 2004.

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