Private Company Financial Reporting

1. Private Company Financial Reporting

2. Why the Effort? • Given - Private companies importance to U.S. economy • Given – Growing concerns about GAAP expressed by practitioners and other stakeholders’ of private company reporting • Task Force Goal - Discover the truth • Underlying Principle - Protecting GAAP as the gold standard for financial information

3. Task Force Mission • Determine whether or not general purpose financial statements of private, for-profit entities, prepared in accordance with generally accepted accounting principles (GAAP), meet the needs of all constituents of that reporting. • Understand whether or not the cost of providing all that is required in GAAP financial statements is justified by the related benefits to private company constituents.

4. Scope • For-profit, privately-held companies • No size limitation • Grassroots outreach is U.S. focused • With understanding of what has been done internationally • NOT about broader-based information needs, such as non-financial performance indicators

5. Task Force Composition • Users • Former standard setter (FASB/FASAB) • Owners/financial executives • Academic • Practitioners

6. Target Key Constituents • External users – investors, lenders, sureties • Business owners and management • Non-management owners • Practitioners • Others

7. Accomplishing Mission • Discussion Paper • Focus groups • Research • Key: neutral; hard-driving; and factual summaries of viewpoints.

8. Survey Approach • Random telephone sampling • Broad outreach for any and all • Questions same in both survey forms • Independent market research firm

9. Random & Broad Outreach Survey • 3,709 in total • 653 users • 1212 owners and financial managers • 1,702 practitioners • 142 other

10. Participating Organizations Lenders American Bankers AssocAmerica’s Community Bankers AssocCommercial Finance AssocRisk Management AssocVarious state banking organizations Investors/owners National Federation of Independent BusinessNational Venture Capital Assoc Sureties Nat’l Assoc of Surety Bond ProducersSurety Society of America

11. Participating Organizations (cont) Preparers Association for Financial ProfessionalsFinancial Executives InternationalFinancial Executives Network Group NFIB US Chamber of Commerce Practitioners State Societies General FASBFederal Reserve Board

12. TF Findings • “Attributes” of GAAP reporting have high value according to all constituents (e.g., common language, consistency, etc). • Too many GAAP-specific requirements lack relevance or decision usefulness according to all constituents. • A majority of each of the constituent groups who had an opinion believe it would be useful if underlying accounting in GAAP reporting were different, in certain instances, for public vs. non-public companies. (One exception – sureties in broad outreach)

13. External Stakeholders Q16a: Average rating of value of private company GAAP financial statements in ability to use them: As a tool in making investment or credit decisions For Scientific: n=99 for Creditor/Lender, 101 for Investor/Venture Capital, and 95 for Surety/Bonding. For Broad Outreach: n=211 for Creditor/Lender, 40 for Investor/Venture Capital, and 91 for Surety/Bonding. [Findings are based on the average scores on a scale of 1 (Low) to 3 (High)] Detailed Findings Comparisons Random Broad Outreach

14. Specific GAAP Requirements -- Random Relevance/Decision Usefulness of specific GAAP requirements by mean scores. Table is sorted in descending order for Owner/Manager firms with less than $5 Million in revenue. Medium/High Relevance (above 2.0) Medium Relevance (2.0) Low Relevance (less than 2.0)

15. 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

16. 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

17. 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

18. 1983 FASB Survey Results on Differences Question • “Should GAAP permit certain areas to be measured differently by private companies than by public companies?” • Practitioners – yes (57%); no (28%) • Managers – yes (35%); no (37%) • Users – yes (9%); no (65%)

19. 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 1983 Random

20. TF Conclusions 1) GAAP for private companies should be developed based on concepts and accounting that are appropriate for the distinctly different needs of constituents of that financial reporting.

21. TF Conclusions (cont) 2) Although GAAP exceptions and other bases of accounting are being used and are sometimes appropriate, the TF does not believe that these exceptions and other bases of accounting are the best response to the findings identified in this study.

22. TF Conclusions (cont) 3) Fundamental changes should be made in the current GAAP standard setting process to ensure that the financial reporting needs of private company constituents are met.

23. TF Recommendation • Collaborative effort with key constituents • Outreach to FAF/FASB

24. Recent Developments • AICPA Board supports TF findings and conclusions • AICPA governing council supports via resolution • Working group with FASB

25. FASB/AICPA Working Group • Discussed several model processes by which possible differences can be identified • Discussed criteria by which differences would be appropriate • Any model process would be exposed to the constituents of private company reporting

26. Next Steps • Working group to reach agreement on details of proposed model process • Discussion by AICPA and FASB leadership • Exposure to constituents of private company reporting

27. What do you think?