Separate Financial Reporting Standards and Standard Setting for Private Companies

By Elifoglu, I. Hilmi; Fitzsimons, Adrian P. et al. | Review of Business, Summer 2012 | Go to article overview

Separate Financial Reporting Standards and Standard Setting for Private Companies


Elifoglu, I. Hilmi, Fitzsimons, Adrian P., Silliman, Benjamin R., Review of Business


Executive Summary

In 2011, the Blue-Ribbon Panel on Standard Setting for Private Companies (the Panel) issued its report to address how accounting standards can best meet the needs of users of U.S. private company financial statements, and concluded there are urgent and growing systemic issues that need to be addressed in the current U.S. accounting standard setting system.

At present, there are approximately 28 5 million private companies in the United States and approximately 14,000 public companies. Public companies have financial reporting requirements to the Securities and Exchange Commission (SEC) pursuant to the Securities Act of 1933 and the Securities Exchange Act of 1934. The "investor protection" mandate of those Acts has made the SEC a major force in the U.S. standard setting process both as a consequence of SEC regulations, interpretations, policy statements, Staff Accounting Bulletins, and other issuances as well as the SEC role as observer to the meetings of the Financial Accounting Standards Board (FASB) and the Emerging Issues Task Force (EITF). Over time, the investor focus of United States generally accepted accounting principles (U.S. GAAP) has not only dwarfed the concerns of other users but has also diminished the relevance and usefulness of financial statement information to other users.

Many of the private companies in the U.S. are very small businesses and thus have no reporting requirements other than filing income tax returns. There are, however, a significant number of private companies that prepare financial statements in accordance with U.S. GAAP because such financial statements are required by lenders, other creditors, bonding and credit-rating agencies, regulators, business owners, and others. Many private companies preparing U.S GAAP financial statements must issue audited, reviewed, or compiled financial statements. The primary concern of the Panel is that there are an increasing number of private company financial statements that are prepared in accordance with an Other Comprehensive Basis of Accounting (OCBOA), or the financial statements contain departures or exceptions to U.S. GAAP, which are disclosed in the accountant's or auditor's report. This article discusses the current developments in establishing separate accounting standards for private companies and how different objectives of financial statement users should be addressed.

Introduction

In 2011, the Blue-Ribbon Panel on Standard Setting for Private Companies (the Panel) (1) issued its report to address how accounting standards can best meet the needs of users of U.S. private company financial statements, and concluded there are urgent and growing systemic issues that need to be addressed in the current U.S. accounting standard setting system.

At present, there are approximately 28.5 million private companies in the United States and approximately 14,000 public companies. Public companies have financial reporting requirements to the Securities and Exchange Commission (SEC) pursuant to the Securities Act of 1933 and the Securities Exchange Act of 1934. The "investor protection" mandate of those Acts has made the SEC a major force in the U.S. standard setting process both as a consequence of SEC regulations, interpretations, policy statements, Staff Accounting Bulletins, and other issuances as well as the SEC role as observer to the meetings of the Financial Accounting Standards Board (FASB) and the Emerging Issues Task Force (EITF). Over time, the investor focus of United States generally accepted accounting principles (U.S. GAAP) has not only dwarfed the concerns of other users but has also diminished the relevance and usefulness of financial statement information to other users.

Many of the U.S. private companies are very small businesses and thus have no reporting requirements other than filing income tax returns. There are, however, a significant number of private companies that prepare financial statements in accordance with U. …

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