The parent organization of the Financial Accounting Standards Board will propose on Tuesday that a new body be set up to modify accounting rules for private companies, some of which have complained that existing rules are too complicated and costly.
The new group, to be called the Small Company Standards Improvement Council, would be able to modify or allow exceptions to Generally Accepted Accounting Principles, known as GAAP, for nonpublic companies.
The new group would be led by a member of FASB, and its meetings would include all seven members of the accounting standards board, said John J. Brennan, the chairman of the Financial Accounting Foundation, which appoints members of the accounting board. Decisions would be subject to ratification by FASB, which presumably would want to keep variations in standards to a minimum.
The American Society of Certified Public Accountants has been leading a campaign for a separate standard-setter, and that was the proposal made in January by a panel whose members were chosen by the society, the foundation and state boards of accountancy. The foundation said that it rejected an entirely separate board out of concern that it would create a “little GAAP” for private companies and a “big GAAP” for public companies.
“The objective is to have GAAP be GAAP, with differences that will be almost inside baseball,” Mr. Brennan said in an interview. “The goal is when a banker looks at financial statements, they know that GAAP is GAAP.”
Under American law, public companies — those whose securities trade in public markets and are registered with the Securities and Exchange Commission — must follow GAAP. All other companies may use any system of accounting they choose. In practice, lenders are often willing to consider cash-flow statements or tax returns in making lending decisions.
One argument for different accounting rules is that those lenders can call the company and seek extra details, while public company investors are unlikely to be able to obtain additional information. Therefore, there may be less need for disclosures from private companies that can be expensive to compile.
Among the rules some private companies would like to have modified are those on fair value measurement, the impairment of good will, the consolidation of off-balance-sheet entities, disclosure of uncertain income tax benefits and accounting for stock options. It is expected that private companies that want to use the full GAAP could continue to do so.
In a speech in June, the chief accountant of the S.E.C., James Kroeker, cautioned against immediate action, saying that “in a number of areas additional research, study and outreach, particularly to investors, would be warranted prior to implementing any significant change in the standard-setting structure applicable to nonpublic entities.”
The S.E.C. has no direct authority in the area, but it would be able to decide whether a company that took advantage of private company exceptions to GAAP would have to redo its books when it filed to go public.
In a letter supporting the establishment of a separate board, William A. Pickert, an accountant in Wichita, Kan., said he had been “alarmed at the increasing frequency of the issuance of financial statements with GAAP departures. While once a very rare situation, this practice is becoming routine.” He said lenders would accept such statements because they understood some rules were overly burdensome.
The society of accountants, in encouraging letters to support a separate standard-setter, argued that “history and the current environment clearly show that FASB cannot effectively balance the competing needs of both the public company and private company areas.” It added that “it does not make sense to incur significant cost to comply with standards that have become ever more irrelevant in the private company world.”
A dissenting panel member, Teri Yohn, said no evidence had been given “to suggest that there are sufficient differences between public companies and private companies to warrant different standards.” Ms. Yohn, a professor at Indiana University, added that “differential accounting standards for private companies will add significant complexity and cost to financial reporting.”
If different rules are adopted for private companies, an issue will arise of how investors should be informed when a company chooses to use the private rules. Teresa S. Polley, the chief executive of the Financial Accounting Foundation, said she did not think a different auditor’s letter would be necessary.
“They are following GAAP,” she said. “We don’t see the need for there to be any disclosure of an exception.”
The foundation said it would not adopt any changes until it considered public comments, which are due by Jan. 14.
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