Private Company Private Company Financial Reporting Financial Reporting

CommitteeCommittee

OutlineOutline

►Background of Formation of Background of Formation of CommitteeCommittee

►Committee CharterCommittee Charter►Prospective ProjectsProspective Projects►Meeting HighlightsMeeting Highlights►How you can participateHow you can participate

Private Companies Financial Private Companies Financial Reporting CommitteeReporting Committee

►Latest effort by the profession to Latest effort by the profession to address needs of private companiesaddress needs of private companies

►Long history of task forces, Long history of task forces, committees and research leading to committees and research leading to this pointthis point

► Important because the full support of Important because the full support of FASB is behind this effortFASB is behind this effort

1974- AICPA Committee on GAAP for 1974- AICPA Committee on GAAP for Smaller and/or Closely Held BusinessesSmaller and/or Closely Held Businesses

►Was CPA focusedWas CPA focused►CPAs said user needs not met and CPAs said user needs not met and

financials too complex for users. financials too complex for users. ►Recommended differential disclosures- Recommended differential disclosures-

same measurement and recognition.same measurement and recognition.►FASB complied in certain standards- FASB complied in certain standards-

e.g. Earnings per sharee.g. Earnings per share

1981- Special Committee on 1981- Special Committee on Accounting Standards OverloadAccounting Standards Overload►Recommended that FASB reconsider Recommended that FASB reconsider

certain standardscertain standards►FASB simplify standards by avoiding FASB simplify standards by avoiding

complex and detailed rulescomplex and detailed rules►Promote/elevate income tax basis as Promote/elevate income tax basis as

substitute for GAAPsubstitute for GAAP►Differential recognition and Differential recognition and

measurementmeasurement►Triggered FASB research studyTriggered FASB research study

1983- FASB- Invitation to Comment: 1983- FASB- Invitation to Comment: Financial Reporting by Private and Small Financial Reporting by Private and Small

Public CompaniesPublic Companies►CPAs perceive lenders’ needs CPAs perceive lenders’ needs

differently than lenders dodifferently than lenders do►Creditor needs and decision-making Creditor needs and decision-making

processes are basically the same for processes are basically the same for private and public companiesprivate and public companies

►Users need complete GAAP financials Users need complete GAAP financials that are audited or reviewedthat are audited or reviewed

►Cost/benefit equation differs based on Cost/benefit equation differs based on company sizecompany size

1983 Study Findings1983 Study Findings

►60% of practitioners supported different 60% of practitioners supported different measurement in certain instances, measurement in certain instances, financial managers split, 9% of users financial managers split, 9% of users supportedsupported

►GAAP financials important tool for GAAP financials important tool for banks even though they can get info banks even though they can get info directly from companiesdirectly from companies

►FASB formed Small Business Advisory FASB formed Small Business Advisory Group as sounding boardGroup as sounding board

1996- AICPA Special Task Force 1996- AICPA Special Task Force on Standards Overloadon Standards Overload

►Focus group of CPA’s concluded that there Focus group of CPA’s concluded that there was a standards overload problemwas a standards overload problem

►Recommended increased small firm Recommended increased small firm involvement in standard setting process involvement in standard setting process (including representation on FAF and FASB(including representation on FAF and FASB

►Literature simplification and codification Literature simplification and codification (FASB-AICPA agreement on CD-ROM (FASB-AICPA agreement on CD-ROM licensinglicensing

►Disclosure guidance for OCBOA financialsDisclosure guidance for OCBOA financials

2005- Report of PCFR Task 2005- Report of PCFR Task ForceForce

►Attributes of GAAP reporting have high Attributes of GAAP reporting have high value according to constituentsvalue according to constituents

►Too many GAAP-specific requirements Too many GAAP-specific requirements lack relevance or decision usefulnesslack relevance or decision usefulness

►Majority of each of constituent groups Majority of each of constituent groups who had an opinion believed it would who had an opinion believed it would be useful if underlying accounting in be useful if underlying accounting in GAAP reporting were different for public GAAP reporting were different for public vs. non publicvs. non public

2005 Report Conclusions2005 Report Conclusions

►GAAP for private companies should be GAAP for private companies should be developed based on concepts and developed based on concepts and accounting that are appropriate for the accounting that are appropriate for the distinctly different needs of constituents of distinctly different needs of constituents of that financial reportingthat financial reporting

► Fundamental changes should be made in Fundamental changes should be made in the current GAAP standard setting process the current GAAP standard setting process to ensure that the financial reporting needs to ensure that the financial reporting needs of private company constituents are metof private company constituents are met

May 2005 AICPA Council May 2005 AICPA Council ResolutionResolution

► AICPA hereby supports the development of AICPA hereby supports the development of high quality GAAP for privately-held, for-high quality GAAP for privately-held, for-profit entities based on concepts and profit entities based on concepts and accounting that are appropriate for the accounting that are appropriate for the distinctly different needs of constituents of distinctly different needs of constituents of private company financial reporting, andprivate company financial reporting, and

► Council instructs AICPA management to Council instructs AICPA management to work with the FAF and FASB to identify and work with the FAF and FASB to identify and implement a process to develop GAAP for implement a process to develop GAAP for privately-held entities, which would result in privately-held entities, which would result in recognition, measurement, and disclosure recognition, measurement, and disclosure differences, where appropriate, from current differences, where appropriate, from current GAAP as applied by public companies.GAAP as applied by public companies.

FASB’s Take on EventsFASB’s Take on Events

►Leadership was listening to its Leadership was listening to its constituents from all quartersconstituents from all quarters

►Commitment to ensuring that GAAP Commitment to ensuring that GAAP meets the needs of usersmeets the needs of users

►Figure out the best way forwardFigure out the best way forward

Joint FASB/AICPA ProposalJoint FASB/AICPA Proposal

►Title: “Enhancing the Financial Title: “Enhancing the Financial Accounting and Reporting Standard-Accounting and Reporting Standard-Setting Process for Private Companies”Setting Process for Private Companies”

►New dedicated Web site – New dedicated Web site –

pcfr.orgpcfr.org►Comment period ended 8/15/2006Comment period ended 8/15/2006

FocusFocus

Consideration of Consideration of user needsuser needs and and costs/benefitscosts/benefits to determine whether to determine whether differences in GAAP for recognition, differences in GAAP for recognition,

measurement, presentation, measurement, presentation, disclosure, and effective dates are disclosure, and effective dates are

needed for private companiesneeded for private companies

Process Enhancement Process Enhancement ElementsElements

1.1. Improvements to current FASB Improvements to current FASB processesprocesses

2.2. Private Companies Financial Private Companies Financial Reporting Committee formed January, Reporting Committee formed January, 20072007

3.3. Funded by FASBFunded by FASB

FASB Processes Related to FASB Processes Related to Private CompaniesPrivate Companies

►FASB staff provides FASB Board FASB staff provides FASB Board with possible alternative with possible alternative solutions for private companiessolutions for private companies

►FASB Board (and resulting FASB Board (and resulting basis for conclusions) explicitly basis for conclusions) explicitly addresses consideration of addresses consideration of differencesdifferences

PCFRCPCFRC

►Chair selected by FASBChair selected by FASB►Chair selects committee membersChair selects committee members►Committee consists of 4 users, 4 Committee consists of 4 users, 4

preparers and 4 practitioners from preparers and 4 practitioners from various size companies/firmsvarious size companies/firms

►Users are two commercial lenders, one Users are two commercial lenders, one surety and one venture capitalistsurety and one venture capitalist

Our ConstituencyOur Constituency

Limited to Private, For Profit Limited to Private, For Profit EntitiesEntities

Committee CharterCommittee Charter

►Committee members as individuals Committee members as individuals serve as a resource to FASB, EITF and serve as a resource to FASB, EITF and FASB staff during research phase before FASB staff during research phase before an ED is developedan ED is developed

►Committee makes formal Committee makes formal recommendations to FASB on recommendations to FASB on prospective standard setting activitiesprospective standard setting activities

►Committee makes formal Committee makes formal recommendations on existing standardsrecommendations on existing standards

Committee CharterCommittee Charter

►Committee sets its own agendaCommittee sets its own agenda►Committee meets in public to Committee meets in public to

deliberate and reach conclusionsdeliberate and reach conclusions►Committee makes Committee makes formalformal

recommendations to FASBrecommendations to FASB►Motion to set forth recommendations Motion to set forth recommendations

to FASB requires affirmative vote of to FASB requires affirmative vote of two thirds of committee memberstwo thirds of committee members

Committee MeetingsCommittee Meetings

►Committee will meet 4-6 times per yearCommittee will meet 4-6 times per year►Meetings will be held around the Meetings will be held around the

country to allow constituents to observecountry to allow constituents to observe►Part of each meeting set aside for Part of each meeting set aside for

observers to commentobservers to comment►Highlights of committee meetings Highlights of committee meetings

posted to websiteposted to website

Projects- FASB PipelineProjects- FASB Pipeline

At May meeting PCFRC discussed the standard At May meeting PCFRC discussed the standard setting activities ongoing at the FASB and setting activities ongoing at the FASB and decided to address the projects listed below. decided to address the projects listed below.

► International ConvergenceInternational Convergence Certain PCFRC members will monitor this project.Certain PCFRC members will monitor this project.

► Liabilities and EquityLiabilities and Equity Task force formed to address this project.Task force formed to address this project.

► Financial Statement PresentationFinancial Statement Presentation Task force formed to address this project.Task force formed to address this project.

Projects- FASB PipelineProjects- FASB Pipeline

LeasesLeases► Task force formed to address this project. Task force formed to address this project.

PCFRC will initially focus on the scope of this PCFRC will initially focus on the scope of this project.project.

FASB 133 HedgingFASB 133 Hedging► The PCFRC has an interest in this project and The PCFRC has an interest in this project and

certain committee members will monitor this certain committee members will monitor this project.project.

Business CombinationsBusiness Combinations► Task force formed to address this project.Task force formed to address this project.

Projects- FASB PipelineProjects- FASB Pipeline

►Small- and Medium-Sized (“SME”) Small- and Medium-Sized (“SME”) Entities (IASB-related)Entities (IASB-related) The FASB can arrange an in-depth briefing The FASB can arrange an in-depth briefing

on this project from the IASB. Certain on this project from the IASB. Certain PCFRC members will monitor this project.PCFRC members will monitor this project.

►Revenue RecognitionRevenue Recognition This project is further out on the horizon.This project is further out on the horizon.

Subsequent EventsSubsequent Events

► The objective of this FASB project is to The objective of this FASB project is to establish general standards of accounting for establish general standards of accounting for and reporting of events that occur subsequent and reporting of events that occur subsequent to the balance sheet date to the balance sheet date

► Existing requirements currently contained in Existing requirements currently contained in the auditing literature- need to move to FASBthe auditing literature- need to move to FASB

► Project also considers whether certain minor Project also considers whether certain minor differences between U.S. GAAP and the differences between U.S. GAAP and the corresponding international financial reporting corresponding international financial reporting standard could be eliminated or minimized.standard could be eliminated or minimized.

Subsequent Events- PCFRC Subsequent Events- PCFRC Recommendation to FASBRecommendation to FASB

► PCFRC recommends that FASB require private PCFRC recommends that FASB require private companies to disclose in a policy note to the companies to disclose in a policy note to the financial statements the cut-off date in which financial statements the cut-off date in which subsequent events were considered by subsequent events were considered by management for purposes of subsequent management for purposes of subsequent events analysis and disclosure. events analysis and disclosure.

► PCFRC recommends that the FASB stay the PCFRC recommends that the FASB stay the course on its current tentative decision not to course on its current tentative decision not to converge with international accounting converge with international accounting standards related to refinancing of short-term standards related to refinancing of short-term obligations and curing breaches of borrowing obligations and curing breaches of borrowing covenants.covenants.

PCFRC Recommendations on PCFRC Recommendations on Proposed FSP-154-aProposed FSP-154-a

Considering the Effect of Prior-Year Considering the Effect of Prior-Year Misstatements When Quantifying Misstatements When Quantifying Misstatements in Current-Year Misstatements in Current-Year Financial StatementsFinancial Statements

1. Extend effective date for fiscal years 1. Extend effective date for fiscal years ending AFTER 12/15/2007ending AFTER 12/15/2007

154-a Recommendations154-a Recommendations

2. Remove requirement that provides for 2. Remove requirement that provides for differing transition approaches depending differing transition approaches depending on how entity previously evaluated on how entity previously evaluated materialitymateriality

3. Remove references to SAB 993. Remove references to SAB 99

4. Disclosures to reconcile retained earnings4. Disclosures to reconcile retained earnings

5. FASB exercise caution in bringing public 5. FASB exercise caution in bringing public co regulations to private companiesco regulations to private companies

PCFRC’S Agenda for Existing PCFRC’S Agenda for Existing GAAPGAAP

►FIN 48FIN 48►FIN 46RFIN 46R►FASB 123RFASB 123R►FIN 48 was selected first because of FIN 48 was selected first because of

the upcoming effective date.the upcoming effective date.

User NeedsUser Needs

►User members of the PCFRC walked User members of the PCFRC walked the PCFRC through the processes they the PCFRC through the processes they use to make lending, investment, and use to make lending, investment, and bonding decisions bonding decisions

►The PCFRC discussed what the needs The PCFRC discussed what the needs are of users of private company are of users of private company financial statements, how to identify financial statements, how to identify those needs, and how those needs those needs, and how those needs drive the demand for financial drive the demand for financial information. information.

Next MeetingNext Meeting

► July 26-27 in DenverJuly 26-27 in Denver►Will begin work on FIN 48 and FIN 46RWill begin work on FIN 48 and FIN 46R►Meeting open to the publicMeeting open to the public►Meeting materials posted to website Meeting materials posted to website

three weeks prior to meetingthree weeks prior to meeting►Website: www.pcfr.orgWebsite: www.pcfr.org

How Can You Participate?How Can You Participate?

►Become a member of our Resource Become a member of our Resource Group- sign up on website and receive Group- sign up on website and receive notification of meetings and meeting notification of meetings and meeting summariessummaries

►Resource Group will be tapped for special Resource Group will be tapped for special task forces and input on projectstask forces and input on projects

►Attend meetings and speak during open Attend meetings and speak during open mike sessionmike session

►Email chair with ideas and opinionsEmail chair with ideas and opinions

Your Thoughts Your Thoughts

In your opinion, what are the top two In your opinion, what are the top two existing GAAP standards that the new existing GAAP standards that the new Committee should consider for Committee should consider for different GAAP?different GAAP?

If you have given it any thought, what If you have given it any thought, what would be your different accounting for would be your different accounting for each of your top two?each of your top two?

Questions?Questions?

www.pcfr.orgwww.pcfr.org