“GAAP has become increasingly complex in the past decades, and it’s probably the biggest issue impacting private companies”
By Melisa Galasso, CPA | SCACPA Advisor and Speaker on A&A Topics
Jeremy Dillard is a partner in the Los Angeles office of SingerLewak LLP, where he works with private companies and not-for-profit organizations to help them present financial statements to lenders, investors and donors so they are positioned for success. Jeremy has been a member of the Private Company Council since 2017.
Join Melisa Galasso in her conversation with Jeremy, as they discuss reducing the complexity and increasing the relevance of GAAP for private companies, and the projects the PCC will tackle next.
About the PCC
The Financial Accounting Foundation in 2012 created the Private Company Council, which focuses on private company matters and serves as an advisory body to the FASB. The PCC uses the Private Company Decision-Making Framework to assist FASB in providing modifications and exceptions to GAAP for private companies.
After a considerable lookback phase, the PCC today focuses on participating in due process as standards are being discussed to provide private company perspective. At the first PCC meeting on Dec. 6, 2012, the group selected its first set of issues to address – variable interest entity accounting for private companies, plain vanilla interest rate swaps, uncertain tax positions, and the separation criteria of intangibles from goodwill as a result of a business combination. This meeting resulted in the issuance of:
- ASU 2014-02, Accounting for Goodwill
- ASU 2014-03, Accounting for Certain Receive-Variable, Pay-Fixed Interest Rate Swaps—Simplified Hedge Accounting Approach
- ASU 2014-07, Applying Variable Interest Entities Guidance to Common Control Leasing Arrangements
- ASU 2014-18, Accounting for Identifiable Intangible Assets in a Business Combination
- ASU 2016-03, Effective Date and Transition Guidance
Since then, the PCC has primary participated in standard-setting advocacy.
Note: The Financial Accounting Foundation (FAF) oversees the activities between the PCC and FASB, and ensures the FASB engages in adequate consideration of private company financial reporting issues throughout the cycle of its standard-setting process. The FAF evaluated the PCC in 2018 and expressed its confidence in the working relationship between the PCC and FASB, and the leadership of the PCC Chair (Candace Wright) and its members. The FAF has scheduled its next evaluation of the PCC for later in 2020.
Melisa Galasso: Why did you want to join the PCC?
Jeremy Dillard: I have a passion for helping private companies provide high quality financial information that meets the expectations of the marketplace. Despite the usual resource limitations of private companies, management strives to prepare financial statements in conformity with GAAP. However, this task has become increasingly difficult for management in recent years. It’s now common for many private companies to express that GAAP is too complex for them to understand and implement, much less determine if there are misstatements or omitted disclosures in their financial statements. As a result, private companies are relying on their auditors or external accountants for assistance with GAAP issues. I joined the PCC to play a role in reducing the complexity and increasing the relevance of GAAP for private companies.
MG: How has the PCC contributed to the creation of #StandardsThatWork?
JD: The PCC works closely with the FASB to provide input on all ASUs that impact private companies. We have meetings to discuss the concepts of the ASU and provide feedback directly to the FASB members and staff where there should be differences for private companies (such as, accounting alternatives, practical expedients, delayed effective dates, or reduced disclosure requirements). Our goal is the final ASU will improve GAAP for private companies in a reasonable way that balances the costs and benefits of high-quality financial reporting.
MG: What is your favorite PCC standard?
JD: During 2003, the FASB issued Interpretation No. 46, Consolidation of Variable Interest Entities, as a solution to address some of the problems associated with the Enron scandal where management was intentionally structuring arrangements with related parties to achieve a desired accounting treatment. The PCC didn’t exist at the time and, consequently, FIN 46 included private companies despite the fundamental differences between public companies and private companies.
So, private companies have been applying the variable interest model for consolidation since 2003 and it’s added unnecessary costs for most of those entities (because the users of private company financial statements often understand the entity’s arrangements with variable interest entities and how they are usually driven by tax planning strategies, not to achieve an accounting treatment). I’ve worked with many private companies that chose to take a GAAP departure because FIN 46 didn’t result in financial statements that reflect their view of the company’s financial position and operating results.
During October 2018, the FASB issued ASU No. 2018-17, Consolidation (Topic 810): Targeted Improvements to Related Party Guidance for Variable Interest Entities. While the standard doesn’t have “a consensus of the Private Company Council” in the title, it’s focused on private companies. In plain English, it’s a huge improvement in GAAP for private companies because they can make an accounting policy election to no longer follow the variable interest model for consolidation.
MG: What do you think the PCC will tackle next?
JD: The PCC is working on a project to improve share-based compensation (that is, stock options). For private companies, the complex accounting issues related to stock options have been a challenge since the issuance of APB 25, Accounting for Stock Issued to Employees, in 1972. The commonly accepted method for determining the value of stock options is the Black-Scholes model, which requires the following inputs:
- Exercise price of stock option
- Fair value of common stock
- Expected term
- Risk-free interest rate
- Volatility rate
The PCC is working on an improvement related to the fair value of the common stock. This issue is unique to private companies because the value is not readily observable at the grant date. Currently, it’s common for private companies to pay for a valuation of the common stock that can be used for GAAP purposes as well as satisfying the requirements of §409A of the Internal Revenue Code. The PCC is developing a practical expedient whereby an entity can elect to assume that the price of the common stock at the grant date is equal to the exercise price of the stock option. There’s still a lot of work to be done, but we’re hoping this change will be a solution to help private companies easily account for the issuance of stock options.
MG: What is the biggest issue impacting private companies today that FASB can address?
JD: GAAP has become increasingly complex in the past decades, and it’s probably the biggest issue impacting private companies. For example, most CPAs serving private companies would provide both assurance and tax services when I started my career, but today it’s common for a CPA to specialize in assurance services because so much training is needed to understand GAAP in order to serve those same private companies.
The FASB has been working on narrow-scope simplifications and improvements to GAAP that are intended to improve or maintain the usefulness of the financial information while reducing cost and complexity. Some of the recently completed simplification projects include the following:
- Fees paid in cloud computing arrangements
- Presentation of debt issuance costs
- Inventory measurements
- Extraordinary items
MG: Where do you see the PCC in five years?
JD: The PCC has a great working relationship with the FASB. I expect the PCC will continue advising the FASB into the foreseeable future. Also, the business world is constantly evolving, and that provides many opportunities for the PCC to provide input about how GAAP should be changed for private companies.
About the Author: Melisa Galasso, with over 15 years of award-winning experience in the accounting profession, designs and facilitates courses in advanced technical accounting and auditing topics, including not-for-profit and governmental accounting. SCACPA is excited to partner with Galasso Learning Solutions and the Genuine Learning Blog for real-time A&A updates and answers for SCACPA members.
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