The JofA spoke with CPAs about the proposed recommendations for the creation of U.S. GAAP with exceptions and modifications for private companies and how such a shift might affect accounting firms and private companies.
Several CPAs pointed to a potential for reduced costs because of the complexities associated with GAAP that private companies must comply with--and that many lenders and other financial statement users don't seem to find relevant.
While many of them could not quantify the money spent addressing these issues, almost all cited a "significant" amount of time that often cannot be billed to clients because of a lack of "perceived value."
John R. Burzenski, president of Burzenski & Co. and a member of the Private Company Financial Reporting Committee (PCFRC), an advisory group to FASB, elaborated on the issues his local Connecticut firm faces.
"All of these standard issues fall in our firm's lap as our clients do not have staff that can handle or understand the current or revised standards," he said. "We incur additional hours in our engagements, most of which the client does not understand and does not want to pay for."
Examples include explaining changes related to revenue recognition, leases, fair value measurement and financial instruments, he said. Some practitioners and financial statement preparers hope to see modifications and exceptions for private companies in these areas.
Matt Chavez, audit partner at Armanino McKenna in northern California, named share-based payments, preferred stock and convertible debt among the issues on which he spends an "inordinate" amount of time, especially in his work with many startup companies in Silicon Valley.
"When I look at the actual cost of my audits, often 40% of the audit budget is devoted to these areas that, frankly, the users of my clients' financial statements don't seem to be interested in or understand," he said.
Some CPAs expressed concerns about advising companies that are preparing for an IPO or that want to sell themselves to public companies about whether those companies should follow U.S. GAAP as used for public companies or U.S. GAAP with exceptions and modifications for private companies.
But Chavez said that it provides more opportunities to consult with companies and their boards in the future.
"It would allow me to explain what would be required if [or] when they go public," Chavez said. "I believe this would be viewed as more of a value-added discussion, and it would allow us to consult with companies [about] when it is the right time to start evaluating when the conversion would take place as well as what specific transactions might look like under [U.S. GAAP as used for public companies]."
Private company clients are unlike public companies in that generally they have more direct relationships with their bankers, bonding companies or other entities requesting the financial statements. As a result, the end-users already know what is going on with the company, said Christopher A. Roush, principal at Ohio CPA firm Rea & Associates Inc.
"The disclosure information on the interest-rate swap, or variable-interest entities or tax positions doesn't provide them with anything they want or can use," he said. …