The Financial Accounting Standards Board has added a new project to its agenda to re-examine the definition of a “nonpublic entity,” as part of its efforts to reach out more to private company constituents.
FASB has been expanding its efforts to be more responsive to the needs of private companies in the wake of a report from a Blue-Ribbon Panel on Standard Setting for Private Companies. FASB’s parent organization, the Financial Accounting Foundation, is considering a proposal to establish a Private Company Standards Improvement Council that would be able to vote for and recommend changes in accounting standards for privately held companies to FASB. The American Institute of CPAs has been pressing to set up a separate board independent of FASB.
The decision by FASB chair Leslie F. Seidman to add the new definition project to the board’s agenda stems from comments FASB received asking for a clarification of the existing definitions. FASB has also received ongoing questions about which definition of a nonpublic entity was being used in various projects.
When providing feedback to FASB, various stakeholders had specifically questioned which nonpublic entities would qualify for practical expedients, reduced disclosures and deferred effective dates. FASB identified a similar need for clarity on the definition of a nonpublic entity with respect to the scope of the Private Company Decision-Making Framework that the FASB staff has been developing with the help of a resource group composed of private company stakeholders.
FASB’s staff, with the help of a resource group, has been developing a set of decision criteria known as the Private Company Decision-Making Framework to help the board make decisions about whether and when to modify the requirements for recognition, measurement, presentation, disclosure, effective dates, and transition methods for financial accounting standards that apply to private companies. The staff plans to issue a discussion document for public comment in the second quarter, but will not finalize the framework until the Financial Accounting Foundation has made a decision about its plan to improve standard setting for private companies, and any new council has an opportunity to evaluate and agree with the proposed framework.
The new project will focus on defining what constitutes a private company to distinguish between different types of entities for standard-setting purposes. Another goal will be to determine which companies are to be included in the scope of the Private Company Decision-Making Framework that is being developed. FASB will also evaluate whether any changes that result from a consistent definition should be applied prospectively or retrospectively to affected accounting standards.
“The FASB Accounting Standards Codification includes several definitions of private companies that the FASB established to address specific types of issues over the years, including the scope of a standard, differences in accounting or disclosure requirements, and different effective dates,” said Seidman. “The FASB identified an opportunity to simplify the definition of a nonpublic entity and to address a few known practice issues. This project will also help us identify the scope of entities that would be considered in future discussions about potential differences in requirements for nonpublic entities.”
The FASB Accounting Standards Codification reorganizes the thousands of U.S. GAAP pronouncements, excluding governmental accounting standards, into roughly 90 accounting topics and displays all of the topics using a consistent structure. It also includes relevant guidance from the Securities and Exchange Commission that follows the same topical structure in separate sections in the codification.
