Private Company Financial Reporting

Private Company Financial Reporting

Why the Effort?Why the Effort?

Given - Private companies importance to U.S. economy

Given – Growing concerns about GAAP expressed by practitioners and other stakeholders’ of private company reporting

Task Force Goal - Discover the truth Underlying Principle - Protecting GAAP

as the gold standard for financial information

Given - Private companies importance to U.S. economy

Given – Growing concerns about GAAP expressed by practitioners and other stakeholders’ of private company reporting

Task Force Goal - Discover the truth Underlying Principle - Protecting GAAP

as the gold standard for financial information

Task Force MissionTask Force Mission

Determine whether or not 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.

Understand whether or not the cost of providing all that is required in GAAP financial statements is justified by the related benefits to private company constituents.

Determine whether or not 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.

Understand whether or not the cost of providing all that is required in GAAP financial statements is justified by the related benefits to private company constituents.

ScopeScope

For-profit, privately-held companies No size limitation Grassroots outreach is U.S. focused

• With understanding of what has been done internationally

NOT about broader-based information needs, such as non-financial performance indicators

For-profit, privately-held companies No size limitation Grassroots outreach is U.S. focused

• With understanding of what has been done internationally

NOT about broader-based information needs, such as non-financial performance indicators

Task Force CompositionTask Force Composition

Users Former standard setter (FASB/FASAB) Owners/financial executives Academic Practitioners

Users Former standard setter (FASB/FASAB) Owners/financial executives Academic Practitioners

Target Key ConstituentsTarget Key Constituents

External users – investors, lenders, sureties

Business owners and management Non-management owners Practitioners Others

External users – investors, lenders, sureties

Business owners and management Non-management owners Practitioners Others

Accomplishing MissionAccomplishing Mission

Discussion Paper Focus groups Research Key: neutral; hard-driving; and factual

summaries of viewpoints.

Discussion Paper Focus groups Research Key: neutral; hard-driving; and factual

summaries of viewpoints.

Survey ApproachSurvey Approach

Random telephone sampling Broad outreach for any and all Questions same in both survey forms Independent market research firm

Random telephone sampling Broad outreach for any and all Questions same in both survey forms Independent market research firm

Random & Broad Outreach SurveyRandom & Broad Outreach Survey

3,709 in total 653 users 1212 owners and financial managers 1,702 practitioners 142 other

3,709 in total 653 users 1212 owners and financial managers 1,702 practitioners 142 other

Participating OrganizationsParticipating Organizations

LendersAmerican Bankers Assoc

America’s Community Bankers AssocCommercial Finance Assoc

Risk Management AssocVarious state banking organizations

Investors/ownersNational Federation of Independent Business

National Venture Capital Assoc

SuretiesNat’l Assoc of Surety Bond Producers

Surety Society of America

LendersAmerican Bankers Assoc

America’s Community Bankers AssocCommercial Finance Assoc

Risk Management AssocVarious state banking organizations

Investors/ownersNational Federation of Independent Business

National Venture Capital Assoc

SuretiesNat’l Assoc of Surety Bond Producers

Surety Society of America

Participating Organizations (cont)Participating Organizations (cont)

PreparersAssociation for Financial Professionals

Financial Executives InternationalFinancial Executives Network Group

NFIBUS Chamber of Commerce

PractitionersState Societies

GeneralFASB

Federal Reserve Board

PreparersAssociation for Financial Professionals

Financial Executives InternationalFinancial Executives Network Group

NFIBUS Chamber of Commerce

PractitionersState Societies

GeneralFASB

Federal Reserve Board

TF FindingsTF Findings “Attributes” of GAAP reporting have high value

according to all constituents (e.g., common language, consistency, etc).

Too many GAAP-specific requirements lack relevance or decision usefulness according to all constituents.

A majority of each of the constituent groups who had an opinion believe it would be useful if underlying accounting in GAAP reporting were different, in certain instances, for public vs. non-public companies. (One exception – sureties in broad outreach)

“Attributes” of GAAP reporting have high value according to all constituents (e.g., common language, consistency, etc).

Too many GAAP-specific requirements lack relevance or decision usefulness according to all constituents.

A majority of each of the constituent groups who had an opinion believe it would be useful if underlying accounting in GAAP reporting were different, in certain instances, for public vs. non-public companies. (One exception – sureties in broad outreach)

Detailed Findings ComparisonsDetailed Findings Comparisons External Stakeholders Q16a: Average rating of value of private company

GAAP financial statements in ability to use them: As a tool in making investment or credit decisions

For Scientific: n=99 for Creditor/Lender, 101 for Investor/Venture Capital, and 95 for Surety/Bonding.

For Broad Outreach: n=211 for Creditor/Lender, 40 for Investor/Venture Capital, and 91 for Surety/Bonding.

[Findings are based on the average scores on a scale of 1 (Low) to 3 (High)]

External Stakeholders Q16a: Average rating of value of private company GAAP financial statements in ability to use them: As a tool in making investment or credit decisions

For Scientific: n=99 for Creditor/Lender, 101 for Investor/Venture Capital, and 95 for Surety/Bonding.

For Broad Outreach: n=211 for Creditor/Lender, 40 for Investor/Venture Capital, and 91 for Surety/Bonding.

[Findings are based on the average scores on a scale of 1 (Low) to 3 (High)]

2.6

2.5

2.6

2.8

2.3

2.9

Creditor/ Lender

Investor/ Venture Capital

Surety/ Bonding

Creditor/ Lender

Investor/ Venture Capital

Surety/ Bonding

Random

Broad Outreach

Relevance/Decision Usefulness of specific GAAP requirements by mean scores.

Table is sorted in descending order for Owner/Manager firms with less than $5 Million in revenue.

Owner/Manager by Revenue (Millions)

Practitioners by Number of Partners

External Stakeholders by Type of Firm

<$5M$5-

$25M >$25M5 or less 6-10 11-20

21 or more

Creditor/ Lender

Investor/ Venture Capital

Surety/ Bonding

Accrual basis of accounting

Cash flow statement

Comprehensive income measurement

Classification of liabilities & equity

Fair value basis of measuring assets & liab.

Post retirement and retirement plans

Deferred income taxes

Leases

Guarantees

Intangibles

Variable interest entities

Share-based payments

Medium/High Relevance (above 2.0)Medium Relevance (2.0)Low Relevance (less than 2.0)

Specific GAAP Requirements -- RandomSpecific GAAP Requirements -- Random

Would it be useful if the underlying accounting in GAAP reporting were different, in certain instances, for public vs. non-public companies?

Business & Industry

38.0%50.0% 49.0%

61.3% 66.0% 67.8%

20.8%22.9% 23.1%38.0%

31.0%22.0% 17.9%

11.1% 9.1%

29.0%19.0%

24.0%

Revenue <$5Million

Revenue $5-$25 Million

Revenue >$25 Millio

n

Revenue <$5Million

Revenue $5-$25 Million

Revenue >$25 Millio

n

No answer

No

Yes

Random Broad Outreach

Detailed Findings ComparisonsDetailed Findings Comparisons

81.3% 83.0%90.0%

78.0%86.7% 85.3% 90.8%

66.5%

21.0% 9.3% 9.1%

27.9%

4.7% 6.0% 3.8% 5.2% 5.6%9.0%11.0%14.0%

6.7%2.5%1.0%1.0%

5 or less Partn

ers

6-10 Partners

11-20 Partners

21 or more Partn

ers

5 or less Partn

ers

6-10 Partners

11-20 Partners

21 or more Partn

ers

No answer

No

Yes

Would it be useful if the underlying accounting in GAAP reporting were different, in certain instances, for public vs. non-public companies?

Practitioners

Detailed Findings ComparisonsDetailed Findings Comparisons

Random Broad Outreach

51.0% 50.5%39.0% 37.6%

53.7%

28.6%

35.2%

24.4%

39.6%

16.0%8.9%

25.0% 26.8% 22.0%30.8%

33.0% 40.6%

36.0%

Creditor/ L

ender

Investor/ Venture Capita

l

Surety/ Bonding

Creditor/ L

ender

Investor/ Venture Capita

l

Surety/ Bonding

No answer

No

Yes

Would it be useful if the underlying accounting in GAAP reporting were different, in certain instances, for public vs. non-public companies?

External Stakeholders

Detailed Findings ComparisonsDetailed Findings Comparisons

Random Broad Outreach

1983 FASB Survey Results on Differences Question1983 FASB Survey Results on Differences Question

“Should GAAP permit certain areas to be measured differently by private companies than by public companies?”• Practitioners – yes (57%); no (28%)• Managers – yes (35%); no (37%)• Users – yes (9%); no (65%)

“Should GAAP permit certain areas to be measured differently by private companies than by public companies?”• Practitioners – yes (57%); no (28%)• Managers – yes (35%); no (37%)• Users – yes (9%); no (65%)

9.0%

51.0% 50.5%39.0%

40.6%

36.0%

26.0%16.0%

8.9%25.0%

65.0%

33.0%

Creditor/ L

ender

Investor/ Venture Capita

l

Surety/ Bonding

No answer

No

Yes

Random1983

Would it be useful if the underlying accounting in GAAP reporting were different, in certain instances, for public vs. non-public companies?

External Stakeholders

Detailed Findings ComparisonsDetailed Findings Comparisons

TF ConclusionsTF Conclusions

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

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

TF Conclusions (cont)TF Conclusions (cont)

2) Although GAAP exceptions and other bases of accounting are being used and are sometimes appropriate, the TF does not believe that these exceptions and other bases of accounting are the best response to the findings identified in this study.

2) Although GAAP exceptions and other bases of accounting are being used and are sometimes appropriate, the TF does not believe that these exceptions and other bases of accounting are the best response to the findings identified in this study.

TF Conclusions (cont)TF Conclusions (cont)

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

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

TF RecommendationTF Recommendation

Collaborative effort with key constituents Outreach to FAF/FASB

Collaborative effort with key constituents Outreach to FAF/FASB

Recent DevelopmentsRecent Developments

AICPA Board supports TF findings and conclusions

AICPA governing council supports via resolution

Working group with FASB

AICPA Board supports TF findings and conclusions

AICPA governing council supports via resolution

Working group with FASB

FASB/AICPA Working GroupFASB/AICPA Working Group

Discussed several model processes by which possible differences can be identified

Discussed criteria by which differences would be appropriate

Any model process would be exposed to the constituents of private company reporting

Discussed several model processes by which possible differences can be identified

Discussed criteria by which differences would be appropriate

Any model process would be exposed to the constituents of private company reporting

Next StepsNext Steps

Working group to reach agreement on details of proposed model process

Discussion by AICPA and FASB leadership

Exposure to constituents of private company reporting

Working group to reach agreement on details of proposed model process

Discussion by AICPA and FASB leadership

Exposure to constituents of private company reporting

What do you think?What do you think?