Tuesday, March 6, 2012

Standards for Private Companies

I managed, almost, to get away from IFRS.  I instead chose to look at the push to change the U.S.'s standards (GAAP) to recognize the differences between public and private companies.  In the middle of the article I realized it had included how the international community was dealing with issue and so found myself reading about IFRS once again.

In the article One Size Does Not Fit All, Judith Kamnikar and Ashley Burrowes assess why the Financial Accounting Standards Board (FASB) should create a seperate set of standards for private companies.  It boils down to the end users of private companies being quite different from public companies, thus their needs are different.  Why should a private company have to figure its Earnings Per Share if they don't publicly sell their stock?

The FASB was created in 1971.  It took quite some time, however, for the FASB to decide to do something about the disparate reporting needs of private companies.  Finally in 2004 they created the Small Business Advisory Committee (SBAC) to begin the process of developing reporting and financial standards for small businesses.  The SBAC is still providing input private company reporting issues.

A seperate task force created by the AICPA (American Institute of Certified Public Accountants) in 2005 produced a report that concluded, "the users of private company financial statements have different needs than users of public company fiancial statements (and) that GAAP exceptions and OCBOA should not be the resolution to the private company financial reporting problems."  This report thus generated yet another committe, the Private Company Financial Reporting Committee (PCFRC) for the purpose of providing recommendations to the FASB about how prospective and existing GAAP rules would affect small businesses.  Unfortunatley, the PCFRC has not enjoyed much attention from FASB.

In response to this the AICPA again created another committee who issued another report in 2011 claiming that GAAP for private companies is "urgent and growing".

Internationally, the IASB has been a bit more receptive to the needs of small businesses and has implimented IFRS for SME's (International Financial Reporting Standards for Small and Medium-sized Entities).

Some of the changes in IFRS for SME's include:
  • Some topics are omitted from small business reporting
  • A more simplified accounting method
  • Substantially fewer disclosures
  • Omitted Earnings per share
In the end it appears that the IASB has made leaps and bounds on this issue within the international community while the FASB has sat on its thumbs.  In their defense, they have been overshadowed by the needs of public industry and it looks as if they are finally applying the attention that is required to fix this deficit of standards for private companies.


Kamnikar, J., Kamnikar, E., & Burrowes, A. (2012). One Size Does Not Fil All. Journal of Accountancy, 213(1), 46-49.

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