Robert Dyson warns that issues facing public companies affect private companies, too

February 28, 2012

It's no surprise to CPAs in private industry that pronouncements governing public companies can often impact private companies, too. But sometimes those impacts happen in unexpected ways, warned J. Roger Donohue, chair of the Financial Accounting Standards Committee and a speaker at FAE's Professional Issues Update on Dec. 13.

The conference, the first of its kind and free for Society members in industry, was developed as part of a larger effort by the Society to better serve members working outside public firms. Topics included estate, individual and international tax, health care reform, accounting and auditing issues, IFRS, fair value, and the Uniform Prudent Management of Institutional Funds and the New York Prudent Management of Institutional Funds acts; 120 members in industry registered for the event.

During his accounting and auditing update presentation, Donohue urged the audience to stay apprised of changes in public company accounting standards, since those standards, though geared toward public companies, frequently affect private companies as well. Such is the case, for example, with Financial Accounting Standard 157, which addresses fair value measurements—a method of determining the market price of an asset or transferring a liability, using quoted prices, complex calculations or the entity's own assumptions, depending on what information is available and what is being disclosed.

Private company stakeholders, as well as some involved with not-for-profits, have expressed concerns that many disclosure requirements that come with FAS 157 do not apply to them as nonpublic entities, and are excessively costly, said Robert A. Dyson, a Financial Accounting Standards Committee member and another conference speaker, during his "Understanding Fair Value" session.

But that standard is just one example of how private companies are being affected by public company regulations—in some cases, even a private company's choice of investments can affect what types of disclosures they're required to make, according to Dyson.

If a private company trades industrial development authority bonds (a financial instrument used to fund municipal projects) or a dormitory authority bond (which funds construction projects for state colleges and universities), then that company, for the purpose of fair value disclosure, is treated as a public company, Dyson said. But this detail can catch private entities unaware—especially when they're connected with a conduit entity, like a bank, which puts such bonds on the open market itself, he said.

"One of the traps … is that a bank could buy an IDA bond in its entirety, keep it for several years and then decide to unload its position," Dyson explained. So the company is private as long as the bank holds the IDA, but the minute the bank sells it, the company is considered public for fair value disclosure purposes, he said.

A symptom of a larger problem

This unfortunate surprise for private companies is written within a standard crafted primarily with public companies in mind. Donohue said that over the last five-to-10 years, there has been "overwhelming" demand for standards setters like the Financial Accounting Standards Board to pay more attention to issues specifically affecting nonpublic entities, and to have more consideration of how their actions affect them.

In response to that demand, the AICPA, the National Association of State Boards of Accountancy and the Financial Accounting Foundation established a blue-ribbon panel in December 2009 to address private entities' concerns about financial reporting requirements. The panel's report, released to the public in January 2011, recommended that the FAF create an independent board to modify and make exceptions to U.S. Generally Accepted Accounting Principles that would better serve users of private company financial statements. In October 2011, the FAF instead proposed a Private Company Standards Improvement Council to make recommendations for modifications and exceptions to U.S. GAAP that would ultimately require FASB approval.

The NYSSCPA strongly disagreed with this proposal in a letter written by NYSSCPA President Richard E. Piluso published Dec. 12, saying that the FAF's plan was inadequate in addressing the needs of private companies already struggling to keep up with public company standards. Piluso noted a similar, previous FASB effort—the formation of the Private Company Financial Reporting Committee, which failed in part because the FASB frequently did not accept the committee's recommendations. Without independence from the FASB, Piluso said that the proposed new private company board could meet the same fate.

Instead, the Society is encouraging the FAF to establish an independent standards board that would recommend modifications and exceptions to U.S. GAAP for private companies, while overseeing their implementation, and would report directly to the FAF, not the FASB.

Donohue echoed the Society's strong disagreement with the FAF's proposal, saying that it would not address the main problem: that the standards-setting process is too centered on the public company. "The FASB has the final word of approval on what is being recommended by the council and—just to let people know who is boss—the chairman of [the PCSIC] is a member of the FASB," he said.

Donohue emphasized the importance of private companies having their own presence in the standards-setting process. He believes the lack of an independent private company standards-setting body guarantees that whatever comes out of the advisory council would be subservient to the needs of public companies, with the success of proposals hinging on whether they meet the needs and objectives of public companies and the opinion of the FASB.

"That's not what you need," Donohue said. "You need someone who is thinking for you, thinking along these lines, and recognizing what comes out of GAAP before it comes down to what you're going to have [to do]."

Click here to see the article in The Trusted Professional The Newspaper of the New York State Society of Certified Public Accountants. Published in the February 2012 issue.