1. Private Company Financial Reporting Standards

2. Overview Private companies play a major role in the U.S. economy
Financial reporting user needs and cost/benefit decisions may be different in the private company arena.
Owners, preparers, users, practitioners and others have expressed concerns about current GAAP relevance to private companies
The AICPA and FASB together are looking into enhancing the standard-setting process for private companies.
Public companies get the lion’s share of attention in the business press. However, of the roughly 22 million companies in the United States, only about 17,000 are registered with the SEC. Given the sheer number of private companies, their importance to the U.S. economy cannot be overstated.
The AICPA had been aware of some concerns from practitioners and other stakeholders of private company financial reporting that GAAP, as currently written, did not always reflect the specific needs of private companies.

3. The International Perspective
Canadian Accounting Standards Board
International Accounting Standards Board
International Federation of Accountants
The United States is not alone in debating alternative accounting standards for private companies
The Canadians are currently working to develop standards for private companies, or as they are called outside our borders, SMEs, for small and medium enterprises.
The IASB is developing standards for SMEs and may expose a suite of them this summer.
IFAC, of which the AICPA is a member body, has voiced its public support of accounting principles for SMEs.
The concept of private company standards, therefore, is clearly an idea whose time has come.

4. AICPA Task Force Mission
Determine if general purpose financial statements of private, for-profit entities, prepared in accordance with generally accepted accounting principles (GAAP), meet the needs of all constituents of that reporting
Determine if the benefits to constituents of private company financial reporting outweigh the costs of preparing financial statements according to current GAAP
The Institute convened a task force in late 2003 to determine if these concerns were limited or widespread. The task force included representatives of private company business owners and financial managers, practitioners, lenders, investors, and a former standards setter.

5. Outreach Survey 3,709 in total 653 users
1,212 owners and financial managers
1,702 practitioners
142 other
In early 2004, the task force conducted a survey of business owners and management; non-management owners, practitioners, and users of private company financial statements, including investors, lenders and sureties. The total survey sample was 3,709.
This research was the most comprehensive ever undertaken on the issue of private company financial reporting.

6. Participating Organizations
Lenders
American Bankers Association
America’s Community Bankers Association Commercial Finance Association Risk Management Association Various state banking organizations
Investors/Owners
National Federation of Independent Business National Venture Capital Association
Sureties
National Association of Surety Bond Producers Surety Society of America
We reached out to an impressive roster of organizations that helped spread the word to their members and constituents and encouraged them to share their views on the topic.

7. Participating Organizations (cont’d)
Preparers
Association for Financial Professionals Financial Executives International Financial Executives Network Group
National Federation of Independent Businesses
U.S. Chamber of Commerce
Practitioners
State CPA Societies
General
FASB Federal Reserve Board

8. Task Force Findings
Aspects of GAAP reporting have high value (e.g., common language, consistency)
Some aspects of GAAP could be improved for the financial reporting of private companies.
There are potential differences in public/non-public needs and cost/benefit decisions.
This is what the survey revealed:
First – the attributes of GAAP reporting – such as consistency – are very highly valued by all constituents
Second – There are too many specific requirements that constituents felt lacked relevance or were not considered useful in making decisions.
Lastly – The majority of each of the constituent groups thought it would be useful if the underlying accounting were different in certain instances for private companies.

9. Task Force Conclusions
1) The AICPA and FASB together should consider enhancements in the standard-setting process to accommodate differences between public and private companies.
As a result of the findings, the Task Force came to these conclusions.

10. Task Force Conclusions (cont’d)
2) Although GAAP exceptions and other bases of accounting are being used and are sometimes appropriate, the Task Force does not believe they are the best response to the findings identified in this study.
The idea behind this conclusion is that OCBOA is not an ultimate solution to what needs to be improved in GAAP.

11. Proposed Model for Implementation
AICPA and FASB release a proposal describing process changes at FASB designed to meet the needs of private company constituents.
The proposal calls for a jointly sponsored and funded committee to evaluate differences in current and prospective GAAP for private companies.
The committee is staffed by AICPA and FASB.
The debate is no longer “if” something should be done, but rather “what and how” it should get done.
The AICPA formed a working group with FASB to develop a proposal on how to explore differences in GAAP for private companies.
In June 2006, the AICPA/FASB working group issued a proposal outlining a model for a special committee whose mission is to begin investigation of differential GAAP.
The proposal calls for a committee composed of an equal number of users, preparers and practitioners from the private company environment.
The committee will be staffed by the AICPA and FASB.

12. Committee Mission
To consider differences in prospective and existing GAAP accounting standards related to private companies based on user needs and cost/benefit considerations
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13. Committee Role
Serve as an additional resource to FASB and the EITF before an exposure draft on a standard is issued
Make formal recommendations to FASB on existing and prospective standards
The committee would deliberate and reach conclusions as a group in open, public meetings.
If it proposes differences in private company GAAP, it would present supporting evidence to warrant the differences.
FASB would make process changes; for example, it will re-examine a proposed standard if the committee proposes a difference in accounting by private companies.
If appropriate differences for private companies are accepted by FASB, the model would have helped strengthen private sector accounting standard setting.

14. Model Funding Volunteer approach (part-time Chair)
AICPA and FASB co-fund (except for incremental staff hires)
Annual total cost about $650K
Accounting Research Association support of 50 percent annually over four years
The AICPA and FASB envision the committee to be a group of volunteers, with the exception of a part-time Chair, who would receive a stipend. As I noted earlier, we are seeking users, such as lenders; sureties; investors; preparers, such as CFOs; and practitioners.
The AICPA and FASB will share equally in the costs of maintaining the committee, with the exception of staff hires at either organization.
The Accounting Research Association will contribute approximately 50 percent of the AICPA’s portion of the operational costs. The ARA, you may know, was founded to help support the activities of FASB and GASB. Its charter, therefore, is consistent with the objectives of the private company financial reporting project.

15.
The AICPA and FASB have created a dedicated website for private company financial reporting.
You may find the proposal on the site. We encourage you to comment on the proposal and to ask your constituents to do the same. The comment period ends August 15, 2006.

16. Outreach Plan Joint AICPA/FASB communication effort
Key organizations and regulators
State societies and AICPA members
The leadership of both the AICPA and FASB has reached out to various stakeholder organizations and succeeded in securing their interest in and support for this landmark endeavor. The groups are being solicited for candidates for the committee.
This particular session is part of the AICPA’s outreach through state CPA societies.
We look forward to your support of this historic project, and we’d like to hear from you.

17. Questions?