The Blue Ribbon Panel (BRP) concluded that the current U.S. accounting standard-setting process has systemic issues involving (a) an insufficient understanding of the needs of users of private company financial statements and (b) an insufficient weighing of the costs and benefits of GAAP for use in private company financial reporting.
These issues have caused a lack of relevance for a number of accounting standards — for example, those on variable interest entities, uncertain tax positions, fair value measurements, and goodwill impairment — for many users of private company financial statements.
Since it also appears that the least relevant standards for private company users are often the most complex, the BRP believes that private companies are incurring significant unnecessary costs for GAAP financial statement preparation and audit, review, or compilation services.
There are approximately 28 million private companies in the United States. Many are very small businesses that have no reporting requirements other than filing income tax returns. However, a significant number of private companies are required to prepare GAAP financial statements by lenders, bonding companies, regulators, and others.
The BRP reported that the increase in costs to provide potentially irrelevant information has led to more users who are willing to accept qualified opinions — a development that calls into question whether those aspects of GAAP are truly “generally accepted.”
These increasing instances of nonacceptance, coupled with a concern about the overall complexity of GAAP expressed by many private company preparers and their CPA practitioners led the BRP to conclude that, at a minimum, the current accounting standard-setting system needs to be improved to better address the needs of users of private company financial statements in a cost-effective manner.
The new board would consist of members that are representatives of the private company sector and would work closely with the FASB. The new board would have the responsibility to conduct outreach to private company stakeholders and provide input and feedback to the FASB. Nothing would preclude the FASB from receiving input from private companies, but the specific responsibility for seeking such input would reside with the new board.
According to Mark Zyla, a CPA practicing in Atlanta, “Standard setters do not understand decision-useful information from the perspective of private company financial statement users and have not weighed the costs and benefits of GAAP for private company financial reporting. These shortcomings have led to standards that lack relevance for many users and to standards with a level of complexity that is a burden for private companies and their CPA practitioners.
“Fair value measurement and goodwill impairment are two of the current accounting standards cited by the report as contributing to the problem,” Zyla continued. “Small CPA practitioners indicated that bankers often ignore fair value disclosures, because they are more interested in determining the timing and uncertainty of cash flows. The CPAs also indicated that bankers are often willing to accept financial statements prepared on another comprehensive basis of accounting (i.e. tax basis) without fair value disclosures, which indicates a lack of relevance.”
The BRP recommends a U.S. GAAP model with exceptions and modifications for private companies, with process enhancements. A supermajority of BRP members further recommend that a separate private company standard-setting board under the Financial Accounting Foundation (FAF) be established to ensure that those enhancements are made and result in appropriate and sufficient exceptions and modifications for private companies.
NASBA’s Response
Billy Atkinson spoke as a representative of NASBA with a consensus opinion of several committees to report there was no need for a separate board. It is the minority opinion of the 18-member panel.
“The question is what to do with what the rest of the committee members think. Maybe we need to take a look at this and give the FASB a chance to work, “ David Costello, CPA and CEO of NASBA suggested. “Another reason this has gone unaddressed, is if IFRS becomes prevalent in the U.S., then there could really be a mess. So we should not make an extreme change after creating standards for 50 years.”
“The State Boards determine the standards. So we are asking the state board members what they think,” Costello said.
The FAF has formed a board to review the recommendations from the BRP.
Depending on the report of the state boards this information will also be made available to FAF.
David Costello, CPA, is the outgoing CEO of NASBA and has led the public accountancy profession for several years. His departure will be sorely missed.
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