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Jessica Chang

ACCT 606 Personal Paper

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Back in 2005, the American Institute of Certified PublicAccountants (AICPA) did a study of private company accountingthrough the Private Company Financial Reporting Task Force. Thereport resulting from that study, now commonly known as the Castellano

Report, concluded that the users of private company financialstatements have different needs than users of public company financialstatements, (and) that GAAP exceptions and OCBOA should not be theresolution to the private company financial reporting problems. Theconcern is that the current U.S.GAAP standards are not relevant tomany of the smaller private businesses since they were designed in away to help investors understand the financials of publically tradedcompanies. However, because these private companies must stilladhere to GAAP standards, they waste a significant amount of time andmoney to prepare their financial statements. Since then, the need for aseparate reporting standard for private companies has brought aboutmuch discussion and many recommendations for change have surfaced.

In 2009, the Blue-Ribbon Panel was created to address this

problem. In 2011, the committee suggested that there should be aseparate set of accounting standards specific for private companies; thenew board would be overseen by the Financial Accounting Foundation(FAF), should be independent of FASB, and would have the authority tonot only set standards, but also set exceptions and modifications toexisting GAAP as they deem fit for privately help companies. It wouldessentially still be based on the current U.S. GAAP. However, it wasrecommended that exceptions and modifications be made so that theresulting financial statements would be more in line with what the usersof these private company financial statements needed. The problemwith this suggestion was that it would result in two separate sets of USaccounting standards.

In response to the Blue-Ribbon Panels suggestion, FAFproposed the Private Company Standards Improvements Council

(PCSIC), which would be responsible to improve the standard-settingprocess as it relates to private companies. With the users of privatecompany financial statements in mind, the PCSIC would be responsibleto develop recommendations for changes or exceptions to any of theGAAP standards issued by FASB. Any of the PCSICs proposals wouldhave to be first approved by FASB and then opened to the public forcomment and votes, before it is submitted to FASB again for finalratification.

The issues surrounding the proposal for the new PCSIC is thematter of its independence from FASB. In addition to the fact that anyfinal say was dependent upon FASB, the makeup of PCSIC memberswas also tied to FASB control. The chairman was proposed to be aFASB member who had significant experience in private companies.Furthermore, the Board of Trustees proposed just between four and six

meetings per year and recommended that FASB members shouldattend all the meetings of the group. In the summary of stakeholderscomments, many suggest that the number of mandated meetingsshould be higher and that PCSIC should be able to meet regardless ifthere are FASB members present or not.

After receiving feedback on the October 2011 proposal for thecreation of PCSIC, the FAF issued another report on May 30, 2012,establishing instead the Private Company Council (PCC). The PCC isyet another standard-setting body created with the private companies in

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Jessica Chang

ACCT 606 Personal Paper

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mind. The PCC is to develop with FASB a set of criteria on which it willthen determine if any exceptions or modifications to existing GAAP areneeded in order for the financial statements of private companies tomeet the needs of their users. The PCC is also to be the primary

advisory body to the FASB when questions about the proper treatmentof private companies under current GAAP should arise.

In the establishment of the PCC, many of the concerns thatarose with the proposal of the PCSIC have been addressed. RegardingPCC members, it was decided that the FAFs Board of Trustees wouldselect and appoint 9 to 12 members, including a Chair. While therequirement for all members, including the Chair, to have significantexperience in preparing and utilizing private company financialstatements remains the same, it was decided that the PCC Chair willnot be affiliated with the FASB. Once appointed, members of the PCCwould serve a three-year term. At the end of the three years, it ispossible to be reappointed for another two years. All chair and councilmembers are to serve without remuneration. However, any expensesincurred that are related to PCC activities would be reimbursed.

The PCCs agenda would be decided according to the criteriamutually developed by the FASB and the PCC. It would use this set ofcriteria to determine if exceptions or modifications to U.S. GAAP arenecessary for private company financial statements. The due processfor approval is like that of the PCSIC proposal, with FASBs decision thefinal determining factor. However, if FASB does not approve, the FASBChairman is required to provide the PCC Chair a written documentexplaining his reasons, as well as suggestions for changes.