Private company accounting alternatives–They’re not for everyone
Accounting requirements for private companies
Complex accounting requirements have presented a number of challenges for private companies, but recently significant progress has been made in giving these companies relief. The FASB and the Private Company Council (PCC) have jointly developed, and incorporated into US GAAP, several “accounting alternatives” for private companies.
February 13, 2015
Rob Morris, partner, Deloitte & Touche LLP
Complex accounting requirements have presented a number of challenges for private companies, but recently significant progress has been made in giving these companies relief. The FASB and the Private Company Council (PCC) have jointly developed, and incorporated into US GAAP, several “accounting alternatives” for private companies. In what some consider much awaited good news, these alternatives, when elected, can mitigate the costs of complying with accounting requirements in areas such as the accounting for goodwill, intangible assets, interest rate swaps and variable interest entities.
Some private companies are currently weighing the adoption of one or more of these accounting alternatives to simplify their financial reporting. When doing so, it’s important for companies to look beyond the immediate cost savings. Companies also need to consider their eligibility – both present and future – as well as the needs of their financial statement users. Consider the following questions:
- Is the company currently eligible … and will it continue to be? Eligibility for the accounting alternatives is based on the application of the FASB’s new definition of a public business entity, which is broad and can include entities that might otherwise view themselves as private (i.e., the definition extends beyond SEC registrants). Private companies need to carefully assess whether they currently meet the definition as well as whether they might at some point in the future (e.g., as a result of an IPO). Companies should assume that they would be required to unwind any accounting alternatives from their historical financial statements if, on some future date, they are no longer eligible. The potential effort and cost of later unwinding previously elected accounting alternatives could be significant.
- What do financial statement users think? Private companies should seek to understand the views of their owners and other financial statement users regarding the acceptability of the accounting alternatives. For example, since the application of an accounting alternative would need to be undone in an IPO, a private equity owner may object to its application. Or, since an investee’s application of an accounting alternative is not permitted in a public company’s recognition of its proportionate share of investee’s earnings under the equity method, a public company investor that has a significant stake in the business may also object to its application. Additionally, in some regulated industries where there are financial disclosures, regulators have expressed views on the acceptability of the accounting alternatives (e.g., banking agencies recently concluded that eligible banks and savings associations are generally permitted to use accounting alternatives in call reports).
Given the factors above, it is essential that private companies take pause and carefully assess whether the election of an accounting alternative makes sense given their current circumstances and future plans.
To learn more about the activities of the PCC, including existing accounting alternatives and the development of others, please visit the US GAAP Plus.