Posts Tagged ‘blue ribbon panel


FAF says “no” to separate private company standard setting board

I’ve written previously  about the debate over private company reporting and the AICPA’s lobbying of the Financial Accounting Foundation to adopt the Blue Ribbon Panel’s recommendation for a separate standard setting board for private company GAAP.

On October 4, 2011 the FAF came back with an answer: “No”. The FAF instead opted for a separate “Private Company Standards Improvement Council” which would recommend changes to current GAAP for private companies to the FASB. The FASB would than make any changes to GAAP. This model is similar to the EITF model to handle emerging technical issues. Rather than restate or summarize this statement I thought it might be helpful to provide:

A link to the FAF executive summary of their recommendation  

A link to the AICPA’s response.

This story is not necessarily over. The FAF recommendation is open to public comment and as a result it is likely that there will be continued pressure on the FAF to revise their decision. However, the AICPA and private companies have made their voice heard already. I wonder if FAF would actually change its mind, since they resisted the first wave of public outcry for a separate board.


Are NFP’s more like Private Companies, or Public Companies?

There is currently a bit of a disagreement (perhaps spat) between the AICPA and the FASB. I wrote this previous post  on the AICPA’s Blue Ribbon Panel on Private Company Reporting. Their report was quite a slap in the face of the FASB, insisting that the FASB was not capable of responding to the needs of private companies. The report urges the FAF (FASB’s parent organization) to establish a new board to simplify current US GAAP for private companies. The AICPA has gone so far as to organize a letter writing campaign  to lobby the FAF to adopt this solution.

Regardless of the structure, it appears increasingly likely that we are moving to different reporting requirements for public and private companies. This “big GAAP” /“little GAAP” concept is not new and is similar to the IFRS for Small and Medium sized Entities (SME) used internationally. This raises an important question: Are NFP’s more like Private Companies, or Public Companies?

The answer is not straight forward. Let’s look at some key criteria which speak to this topic.

Phone Call Access – One key difference between public companies and private companies is the access financial statement users have to custom financial information. In private companies it is not unusual for a banker to call the company’s accounting department and ask for an accounts receivable aging, or other information. This type of access means footnote disclosures have less value because custom information is a phone call away. By contrast there are laws preventing phone call access between shareholders and public companies so that all investors have equal access to information. Nonprofits fall somewhere in-between. In accounting I seldom talk with donors, but we do create custom grant reports. In addition most nonprofits welcome donor calls seeking information.

Number of Readers – Private companies often have only a few readers of the financial statements (owners, bankers, venture capitalists). Public companies, on the other hand, have many stockholders and have financial statements which are public information. Once again not-for-profits are in the middle. They have many donors and often publish their financial statements on their websites. But despite the wide distribution of these statements, my experience is that donors are more interested that an organization is audited, than what the report says. Donors do scrutinize overhead ratios, but are more likely to get this information from the form 990 (or indirectly through Charity Navigator).

Financial Sophistication of Readers – One major criticism of existing US GAAP is that it is designed for very sophisticated financial statement readers (financial analysts, corporate bankers, hedge fund managers, etc.). Private companies insist that the level of disclosure required to meet the demands of this audience is neither necessary nor appropriate for their readers (owners, bankers, and occasionally venture capitalists). If this is true for private companies it is truer for not-for-profits. This is in no way a criticism of donors, I just believe that most donors are concerned with efficiency and program effectiveness rather than GAAP financial statements. Those donors who are financially sophisticated (Foundations, board members, major donors) tend to seek custom financial information (grant applications, custom reporting, etc.)

Public Trust – This is probably the strongest argument for requiring not-for-profits to model the public company GAAP. As nonprofits we have a strong responsibility to the general public and our donors. As a result, it would make sense to require the highest standard of disclosure in our financial statements.

Financial Capacity – Private companies lack the same financial resources as public companies. As a result new and complex standards take a disproportionate toll on smaller companies. In addition with smaller finance teams these companies are less able to research proposed new standards. As a result their voice is less heard/considered by standard setters. Anyone who has worked for both a nonprofit and a private company will tell you that there are even less resources in a nonprofit.

So, what do we make of this? I personally lean toward following private company standards while voluntarily providing additional disclosure relevant to donors (focusing on program effectiveness). The practical expedients and reduced disclosures would ultimately mean more money can go to programs. Meanwhile the pressure to prove oneself to donors and external pressures form watchdog organizations and governments will protect the public trust. What do you think?


Are NFPs SMEs? . . . or should we follow the recommendation of a BRP?

The AICPA , Financial Accounting Foundation, and the National Association of State Boards of Accountancy, recently commissioned a blue ribbon panel of experts (BRP) to review private company reporting. There is increasing concern that the same standards which meet the needs of public companies may not be appropriate for private companies. Here are some of the complaints:
Disclosure overload – Disclosures have been growing in number, complexity, and cost to prepare. As my colleague shared in a recent post, the frustration with these disclosures is not just the cost and time to prepare, it is the lack of relevance to primary financial statement users.
Fair Value – The recent and increasing trend toward fair value threatens to put theoretical precision ahead of practical usability for private companies.
Resources– Small companies have smaller accounting teams, and fewer resources. As a result private companies are less likely to comment on proposed new standards. This leads to  a perceived, or real, lack of responsiveness from the FASB to private company concerns.
There are also a very real difference in the users of financial statements.

  • Public companies have many financial statement users: Stockholders, Institutional Investors, Banks, and Financial Analysts. Most of these users are financially savvy.
  • Private companies have few financial statement users: Bankers, Owners, and Venture Capitalists. It is worth noting that the small number of financial statement users for private companies also often have direct access to company personal. For example, the company’s banker can call up and ask questions about the accounts receivable balance. This minimizes the benefit of standard disclosures because any needed information is a phone call away.

The BRP is wrapping up their work with a formal recommendation to be made in early December. Here is a link to a good 10 minute video highlighting some of their conclusions. If you are a super accounting nerd, here is a link to the full 43 minute video.

It is worth noting that the IASB has produces a condensed version of IFRS for Small and Medium sized Entities (SMEs). This condensed version of IFRS is only 200 pages long and simplifies reporting requirements. The BRP considered utilizing SME guidance, but ultimately rejected it because US private companies are still unfamiliar with IFRS, and because the SME guidance excludes the use of LIFO for inventory valuation.

With this environment, were do not-for-profits fit? Like public companies we often have many readers of our financial statements. But unlike public companies, the majority of our financial statement readers are donors, who often lack the financial sophistication of institutional investors and industry analysts. Similar to private companies, not-for-profits have small accounting departments and limited resources to devote to financial reporting. But unlike private companies our readers seldom have “phone call” access to records and reports. Complicating things further, nonprofits have a public trust due to the fact they receive donations. As a result, it seems logical that nonprofits would have a higher reporting threshold than a private company. But what should this look like? And what about the 990? One could argue that GAAP disclosures should be lighter for not-for-profits since most organizations file a 990 which is publicly available.

What do you think? Leave a comment. 🙂 This is a topic of conversation which I believe will increase in importance over the next few years as the BRP’s recommendations take hold and the SEC finalizes its position on IFRS.


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