Spring 2013 issue of Horizons

During 2012, the Financial Accounting Foundation (FAF), the oversight body of the Financial Accounting Standards Board (FASB), created a new advisory body in an effort to improve the standard- setting process for private companies. The FAF’s decision established the Private Company Council (PCC) which will have two main responsibilities. First, the PCC will determine whether exceptions or modifications to existing nongovernmental U.S. Generally Accepted Accounting Principles (GAAP) are necessary to address the needs of users of private company financial statements. Any changes proposed by the PCC will be subject to subsequent endorsement by the FASB and submitted for public comment before being incorporated into GAAP. In addition, the American Institute of Certified Public Accountants (AICPA) declared its support for the FAF’s decision to create the PCC. The AICPA also announced plans to develop another comprehensive basis of accounting or special purpose framework to meet the needs of some privately held small- and medium-sized enterprises (SMEs). The AICPA’s proposed financial reporting framework (FRF) is being developed by the AICPA staff and the FRF-SME Task Force and will not be acted upon by any AICPA senior technical committee or the FASB. The decision to apply the FRF for SMEs would be made by an entity’s management based on the entity’s specific circumstances. The AICPA’s FRF for SMEs exposure draft covers only broad recognition and measurement principles. Implementation guidance, in the form of application examples, illustrative financial statements, and disclosure checklists will be issued as a separate document accompanying the final FRF for SMEs. Although no specific timetable is being proposed for updates or revisions, the AICPA Task Force expects to review the framework and propose changes no more frequently than every three or four years. The AICPA expects to issue the final framework in late spring 2013. Second, the PCC will also be the primary advisory body to the FASB on the appropriate treatment for private companies for items under active consideration on the FASB’s technical agenda.

Some of the most significant recognition and measurement elements of the AICPA’s proposed FRF for SMEs that may differ from current GAAP are:

∙ The basic financial statements would include a balance sheet, income statement, statement of changes in equity, and a statement of cash flows. A statement of comprehensive income is not required. ∙ A choice could be made by a parent company either to consolidate its subsidiaries, or account for its subsidiaries under the equity method. In either case, all subsidiaries would have to be accounted for in the same way.

∙ Control of a subsidiary would be based entirely on ownership of more than 50%, without consideration of current GAAP’s concept of variable interest entities.

∙ In broad terms, lease accounting would be similar to current GAAP and the distinction between a capital lease and an operating lease would be retained. Such treatment differs from accounting for leases as proposed by the FASB.

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