In the article “The Private CompanyCouncil”, the author discusses the formation of the PCC, Private CompanyCouncil. The author illustrates that the purpose of establishing the PCC is toprovide a different set of financial reporting standard for private companiesin the United States. The major argument in the article is that if the FASB hasthe privilege to override decisions made by PCC. The author suggests two opposing point ofview on the establishment of the PCC. While some people believe that PCC wouldbe beneficial because private companies have different needs of financialreporting than public companies.
Having a separate standard-setting body wouldsave time and money to comply financial statements for private companies. Asimpler and compact financial statement would be present to users of financialstatements of private companies. On the other hand, the Big Four states thatthere are no significant distinctions between the two.
Some parties view thatthe PCC is a way for private companies to bypass the complexity of complyingunder GAAP. Brennan refers advocates of the PCC “wanted the brand value of GAAPwithout the burdens of compliance” (Remanna, and Vicbira, 2013). He worriesthat setting up exceptions would impair regular GAAP brand. There should besome kind of labels to differentiate regular GAAP-based financial statements fromGAAP alternative-based. It would give a notice that the financial statementsare not complied with regular GAAP standards.
Therefore, it would clear upconfusion of users of the financial statements. According to Financial AccountingStandards Board, FASB, four public meetings were held prior to the creation ofthe PCC was approved in May, 2012. In October 2012, Financial AccountingFoundation, FAF, proposed the structure for PCC, which would reduce theresponsibility of FASB over privately held companies in the United States.There are nine to twelve PCC members selected by FAF.
The current PCC Chair,Mr. Candace Wright, is expected to work with FASB to ensure the PCC operates tofasten the procedure of setting financial reporting provisions for privatecompanies. Corresponding to FASB, “The PCC will review and propose alternativeswithin GAAP to address the needs of users of private company financial statements”(FASB, 2013). With that being said, the PCC is created to make changes to GAAP inorder to better fit the users of financial statements of private companies.However, at least two-thirds of all PCC members has to agree for a GAAPalternative to forward to the FASB for approval. In December 2013, the Private CompanyDecision-Making Framework was issued, which is aimed to evaluate the financialaccounting reporting for private companies.
It is about “whether and in whatcircumstances to provide alternative recognition, measurement, disclosure,display, effective date, and transition guidance for private companiesreporting under U.S. GAAP” (FASB, 2013). The fundamental objective of thisguide is to explain when it is acceptable for the PCC to modify GAAP. Thedifferent needs of users of public and private company financial statementsbecomes the critical consideration.
Users of private company financialstatements usually do not request the complex and in-depth information, such asstock price valuation and capital market fairness, which is presented in publiccompany financial statements. As a result, with a separate set of financialreporting standard would decrease the time and costs preparing the financialstatements. Besides the Private CompanyDecision-Making Framework, FASB also issued an update of Definition of a PublicBusiness Entity. The definition is revised to help distinguish privatecompanies from public companies.
It determines which entity would report its financialsin accordance with GAAP and which would follow GAAP alternative made by thePCC. An example ofGAAP alternatives is the goodwill accounting alternative. FASB issuedAccounting Standard Update in 2014 about accounting for goodwill. This update simplifiesgoodwill accounting for private companies in the United States while meets theneeds of users of financial statements.
It allows private companies to amortizegoodwill on a straight-line basis over a period not more than ten years. Furthermore,annual impairment testing is not required anymore. Instead, a private companycan have the option to test goodwill for impairment either at the entity levelor the reporting unit level. The accounting alternative on goodwill reducestime spent to measure impairment for private companies that carry goodwill ascompanies would test impairment less frequently.