Private Company Financial Reporting Task Force Report

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Private Company Financial Reporting Task Force
Report
This report is not to be read apart from the
entire AICPA report, nor is it a report prepared
by the AICPA. This report was prepared for FEI
by Arthur Neis, who takes sole responsibility for
its content.
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Private Company Financial Reporting

• Mission
• Members
• Methodology
• Survey
• Participation
• Constituent Roles
• Findings
• Conclusions and Recommendations
• GAAP for Private Companies - Fundamental Change
• Recommended Action

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Mission

• What was being heard.
• Some GAAP reporting not understood or needed by
  private company users.
• Complexity of GAAP.
• Public company accounting issues and answers are
  driving GAAP.

Caution this is only one side of the story
was this simply a vocal minority?
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Mission

• Conduct research to explore whether
• general purpose financial statements of private,
  for profit companies prepared in accordance with
  GAAP meet the financial reporting needs of the
  constituents of that reporting, and,
• if the cost of providing GAAP financials is
  justified compared to the benefits.

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Members of Task Force

• Users
• Owners/Managers
• Venture Capitalists
• Bank Lender
• Former standards setter
• Practitioners

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Methodology

• Engage market research firm
• Random scientific survey
• Broad outreach on web

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Participation

• Random survey 1,200.
• Broad outreach 2,500.

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Random and Broad Outreach Survey

• 3,709 in total.
• 653 users.
• 1212 owners and financial managers.
• 1,702 practitioners.
• 142 other.

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Participation

• Results stratified by constituencies no
  averaging.
• Results essentially the same. Random survey
  basis for report. Broad outreach commented only
  if different.

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Findings

• GAAP is rated moderately high to high because
  such standards, for example, provide for
  comparability and consistency, by all
  constituents.
• An independent accountants report is also rated
  moderately high to high, by all constituents, and
  the external stakeholders rate the value of an
  independent accounting report higher than all
  other constituencies.

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Findings (Continued)

• A significant majority of external stakeholders
  have accepted financials on a basis other than
  GAAP, or with exceptions to GAAP.
• External stakeholders who have ever accepted
  financial statements from privately held,
  for-profit companies on a basis different from
  GAAP (cash, tax, OCBOA) range from approximately
  60-90 percent.
• Those that have accepted GAAP financial
  statements with exceptions ranged from 61-71
  percent.

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Findings (Continued)

• All key constituent groups rated many GAAP
  requirements as lacking in relevance and decision
  usefulness.
• And finally, of those who had an opinion, the
  majority of all constituents believe it would be
  useful if the underlying accounting in GAAP
  reporting was different in certain instances for
  private, for-profit companies.

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Detailed Findings Comparisons
Would it be useful if the underlying accounting
in GAAP reporting were different, in certain
instances, for public vs. non-public
companies? Business Industry
Random
Broad Outreach
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Detailed Findings Comparisons
Would it be useful if the underlying accounting
in GAAP reporting were different, in certain
instances, for public vs. non-public
companies? Practitioners
Random
Broad Outreach

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Detailed Findings Comparisons
Would it be useful if the underlying accounting
in GAAP reporting were different, in certain
instances, for public vs. non-public
companies? External Stakeholders
Random
Broad Outreach
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1983 FASB Survey 2004 AICPA Survey
1983 2004
Practitioners 57 86
Managers 35 66
Users 9 56
Should GAAP permit certain areas to be
measured differently by private companies
than by public companies? Of those that
had an opinion.
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Private Companies Distinctly Different
Needs/Characteristics

• Capital succession considerations and planned
  transfers of ownership.
• Different capital structures.
• Income and estate tax planning considerations.
• Multiple entities with common private ownership.
• Private companies cannot create cash (funny
  money) through their stock values for use in
  acquisitions, or for compensation.
• Outstanding stock is typically controlled by a
  Buy/Sell Agreement which restricts liquidity,
  transferability, use as collateral.

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Private Companies Distinctly Different
Needs/Characteristics (cont.)

• Common use by lenders of loans with personal
  guarantees and cross-collateralization.
• GAAP financial statements primarily for external
  lenders, who have direct access to company
  information.
• Ownership typically closely held. Owners active
  rather than passive investors.
• Private companies have stewardship needs versus
  valuation considerations of a public entity.

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Conclusions

• GAAP for private companies should be developed
  based on concepts in accounting that are
  appropriate for the distinctly different needs of
  constituents of that reporting.
• Although GAAP with exceptions and other bases are
  being used, and sometimes appropriate, these
  exceptions and other bases of accounting are not
  the best response to the private company needs.
• Fundamental change should be made in the current
  GAAP standards setting process to ensure that
  financial reporting and needs of private
  companies are met.

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Conclusions (cont.)

• Develop a cooperative effort that includes
  representatives of the key constituents of
  private companies to determine
• Who should establish private company GAAP.
• How to best effect fundamental change of
  standards setting and develop and oversee the
  implementation process.