One Size Syndrome

Last week, the Financial Accounting Foundation (FAF) issued a proposal to create a new Private Company Standards Improvement Council (PCSIC) responsible for determining whether exceptions to GAAP should be allowed for private companies in appropriate situations. Any recommendations from this new PCSIC would have to be ratified by FASB before they would become effective. 

This proposal runs counter to what was recommended by a Blue-Ribbon Panel on Private Company Financial Reporting (BRP), sponsored by AICPA, NASBA and FAF. The BRP recommended a separate board be established under the auspices of FAF, but with standard-setting authority independent of FASB. TSCPA was also supportive of a separate board and along with thousands of CPAs and financial statement users, encouraged FAF to adopt the BRP’s recommendations.

In issuing the proposal, the FAF trustees concluded that “creating a separate standard-setting board for private companies would likely lead to the establishment of two separate sets of U.S. accounting standards—a so-called “little GAAP” for private companies and a “big GAAP” for public companies, which is not a desired outcome.”

So let me see if I have this right. If we create a new PCSIC under the control of FAF to recommend to FASB when and where there should be exceptions to GAAP for private companies, then we will preserve the purity of GAAP. But if we have a separate board under the control of FAF, do the same thing without getting FASB approval, then all bets are off; GAAP will be diminished and the world will end as we know it?

Talk about form over substance. It is hard not to read this proposal and think anything other than “politics and turf protection for FASB.” The logic is otherwise elusive.

FASB has always had the authority to allow exceptions to GAAP for private companies, but they have chosen not to do so – in the name of uniform GAAP purity I presume. So why would I think a lot is going to change under this proposal, especially if the driving motivator is to avoid the appearance of different standards?

One size rarely fits all. And to force all companies – public and private – to use the same standards, whether they make sense or not, is myopic thinking. The focus should be on developing the best and most appropriate standards for the different types of business entities and the users of their financial information. Likewise, it is difficult to serve more than one master. In the case of FASB, the primary focus should be on public companies. It will be a challenge for them to do that well and also give fair consideration and attention to private companies. A separate board with a separate focus could. It’s too bad that FAF did not see it that way. 

FAF is accepting comments on this proposal until Jan. 14, 2012. If you are interested, please provide your input. You can get a copy of the full report by going to the FAF website at:  www.accountingfoundation.org.

Comments

[Kathy Kapka]

I agree John. After seeing this board in action, I knew that they would not give up easily. It is too bad that this has become more of a power struggle than an intellectual discussion on what would be the best approach to determining accounting rules for private companies. But now that they have come up with a "plan", we can only hope they will have to be accountable for it.