Transcript Private Company Financial Reporting

IFRS- What About
Private Companies?
Judith H. O’Dell, Chair
Private Company Financial
Reporting Committee
October 28, 2008
Outline
► About
the Private Companies Financial
Reporting Committee
► IFRS for Private Entities
► Possibilities for U.S. private companies
PCFRC
► Funded
by FASB
► Committee consists of 4 users (bankers, VC
and surety), 4 preparers and 4 practitioners
from various size companies/firms
► Makes formal recommendations to FASB
► Filter is user needs and cost/benefits
Perspective
► There
are about 17,000 public companies in
the U.S.
► There are about 22,000,000 private entities
in the U.S. ranging from sole proprietorships
to billion dollar plus companies
► Accounting standard setting focuses on
public companies and needs of investors
Forces Affecting Private
Company Accounting
► Convergence
with international standards
► Changes in size of FASB Board
► FASB emphasis on public co-investor needs
► SEC plans for U.S. Issuers to report using IFRS
in 2014 if milestones met
► AICPA recognition of IFRS as GAAP
► Increasing acceptance by users of reports with
GAAP exceptions
IFRS for Private Entities
►
►
►
An IFRS expressly designed to meet the financial reporting
needs of entities that (a) do not have public accountability
and (b) publish general purpose financial statements for
external users.
Users include owners who are not involved in managing
the business, existing and potential creditors, and credit
rating agencies.
Derived from full IFRSs with appropriate modifications
based on the needs of users of private entity financial
statements and cost-benefit considerations.
Timeline
► 2/07-
Exposure draft issued- 7 languages
► 6/07- Field tested- 116 companies in 20
countries
► 11/07- Comment deadline- 162 letters
► 1st QTR 2009- Final document with
educational materials
► See www.iasb.org for document and
updates on project
Updating and Training
► Document
will only be updated every two
years- users will not have to monitor
changes in standards
► Document is only 250-pages self-contained
► Has disclosure checklists and sample
statements
► Training materials ready to go
Effect of Private Entities
Document in the U.S.
► AICPA
has recognized IASB as body authorized
to promulgate GAAP
► Once Private Entities Document is approved by
IASB, private companies in the U.S. could
report using it and it would be GAAP
► May be applicable to private companies who
are U.S. subsidiaries of foreign companies
► Would it be more widely adopted?
Possibilities for U.S. Privates
When Public Companies Go IFRS
Assume Public Companies are on IFRS
1. IFRS with Private Entities Option
2. U.S. Adapted version of Private Entities
3. IFRS with differential reporting
4. Separate U.S. Private Co GAAP- Revised
5. Separate U.S. GAAP- Maintained and
Updated for Private Companies
Model 1 – IFRS with Private
Entities Option
► IFRS
is already recognized by AICPA as
GAAP in the U.S.
► U.S. private companies have the option of
following IFRS for Private Entities when
adopted by IASB
► If not, then they may elect to follow IFRS or
another comprehensive basis of accounting
(e.g., cash-basis, tax-basis.)
Model 1 in Operation
► IFRS
for Private Entities is set by the IASB
and updated only periodically
► FASB exists to provide input into the IASB
standard setting process
► U.S. private company constituents would
influence the standard setting process
through the channels established by the
IASB and FASB
Model 1- Pros
► Simplified,
self-contained set of accounting
principles developed for private companies
► Based on IFRS, possesses a level of
comparability with U.S. public company
financial statements and international
companies
► Allows for comparability of private company
financial statements across borders
Model 1- Pros Cont.
►
►
►
►
Time and effort to prepare private company financial
statements reduced
No effort required to develop differential standards for
private companies in the U.S.
Greater emphasis on principle-based standards and the
need for professional judgment, less reliance on detailed
rules
Certain differential standards, thought to be needed for
private companies in the U.S., may already be addressed in
the IFRS for Private Entities
Model 1- Cons
IFRS-based accounting provides little benefit to private
companies and is mostly useful to public companies
that need to operate internationally
► Positions taken on some important technical issues in
IFRS for Private Entities may not find general
acceptance in the U.S. private company marketplace
► Conversion to IFRS for Private Entities would cause
significant increases in costs and workload
► Conversion costs outweigh benefits
►
Model 1- Cons Cont.
►
Preparers, users and practitioners who work with private
company financial statements are unfamiliar with IFRS. The
learning curve would be difficult-- this will change
►
Considered a “dumb-downed” approach and second class
►
More principles-based -- may not be adequate in the litigious
U.S. marketplace
►
When a private company has an issue that is not addressed
under IFRS for Private Entities, inconsistent accounting can
occur, reducing comparability
►
Loss of industry-specific accounting guidance
Model 2-U.S. Adapted Version
of Private Entities Document
The IFRS Private Entities Document is
tailored to suit the needs of private
company financial reporting constituents
in the U.S.
Model 2 in Operation
►
An accounting board in the U.S. would need to exist to
adapt the IFRS Private Entities standard to suit the needs
of U.S. private company constituents and develop changes
to the literature to reflect needs and circumstances in the
U.S. private company marketplace.
►
A funding mechanism would need to be identified for this
board and effort.
►
Private company constituents would influence the standard
setting process by commenting to this board and to the
IASB on proposed standards.
Model 2- Pros
► Needs
of U.S. private company financial reporting
constituents are prioritized and incorporated
► Linkage to IFRS for Private Entities, resulting in
some comparability
► Simplified, self-contained set of accounting
principles developed for private companies
► Avoid current problem of GAAP requirements that
lack relevance/decision usefulness for users
Model 2- Pros Cont.
► Condensation
and simplification would provide a
more manageable reference
► Advanced starting point
► Places greater emphasis on principle-based
standards and the need for professional judgment,
with less reliance on detailed rules
► Maintain certain industry-specific accounting
guidance
Model 2- Cons
Same as Model 1 but:
► Confusion will result trying to incorporate
U.S. differential standards into the IFRS for
Private Entities
► Diminished ability to compare U.S. private
companies with those in other countries,
especially if a large number of differences
are allowed
Model 3- IFRS with
Differences for
Private Companies
IFRS is modified to suit the needs of private
company financial reporting constituents by
deleting some requirements or embedding
different treatments in the standards.
Model 3 in Operation
►
►
►
►
An accounting board in the U.S. would need to exist to rule
on differential standards for private companies
Board would continue to maintain the literature, modifying
IFRS as necessary to reflect the needs of users of U.S.
private companies
A mechanism would need to be identified to fund this
board and their work
Private company constituents would influence the standard
setting process by commenting on proposed IFRS
standards and proposed differential standards
Model 3- Pros
►
►
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Strong linkage to IFRS- so a level of comparability with
U.S. public company financial statements and international
companies
Applies an approach already undertaken with U.S. GAAPsome differences for privates
Minimizes possible confusion stemming from two sets of
GAAP in the U.S.
Places greater emphasis on principle-based standards and
the need for professional judgment, with less reliance on
detailed rules
Model 3- Pros Cont.
► Reduces
the risk of different interpretations of
IFRS that apply equally to public companies and
private companies
► Needs of private company constituents would be
accommodated within a single set of accounting
standards
► Time and effort to prepare private company
financial statements reduced, compared to pubic
companies complying with full IFRS
Model 3- Cons
► Considered
a “dumb-downed” approach and
second class to full IFRS
► Confusion will result trying to incorporate
U.S. differential standards into IFRS
► Diminished comparability with companies
abroad
► Would be considered IFRS with a “local
flavor”
Model 4-Separate US Private
Company GAAP- Revised
Current U.S. GAAP is reviewed, modified, and
developed into a comprehensive and self
contained set of accounting standards for
private companies. This GAAP would be for
private companies with and without significant
external financial statement users, and would
be sensitive to the needs of owner managed
enterprises.
Model 4 in Operation
► An
accounting board would need to exist to review
and modify current U.S. GAAP
► Would need to be maintained and updated, similar
to the current process for setting U.S. GAAP
► Private company constituents would influence the
standard setting process by commenting on
proposed standards
► Identify a mechanism for funding the standard
setting board and its work
Model 4 Pros
► The
needs of U.S. private company financial
reporting constituents are prioritized
► Simplified, self-contained set of accounting
principles developed for private companies
► Avoid current problem of GAAP requirements for
public companies that lack relevance/decision
usefulness for private company financial reporting
constituents
Model 4- Pros Cont.
► Eliminate
needless accounting complexities and
costs for private companies
► Private company constituents already know U.S.
GAAP and therefore, intensive education or
training efforts would not be necessary
► No conversion costs
► Maintain industry-specific accounting guidance
► Time and effort to prepare private company
financial statements reduced
Model 4- Cons
► Not
based on IFRS-makes comparability
with U.S. public company and international
company financial statements more difficult
► Hampers credit rating agencies and lenders
trying develop cross border ratings
► Comparability with suppliers and other
business relationships overseas
Model 4- Cons Cont.
► May
not be helpful to equity investors
► Adds confusion to the marketplace
► Private companies wishing to “go public”,
would need to convert to IFRS
► More rules-based and less principles-based
► “Second class” compared to IFRS
► Students would have to learn two standards
Model 5- Separate U.S. GAAP Maintained and Updated in Future
► Current
U.S. GAAP would be maintained, as
is, for use by private companies
► Periodically literature updates for needed
changes and improvements specific to
private companies
► No initial review and modification of current
U.S. GAAP, as in Model 4
Model 5 in Operation
► An
accounting board exists to monitor
current U.S. GAAP and update it in the
future
► Private company constituents would
influence the updating process by
commenting on proposed revisions
► A mechanism for funding the board to be
identified
Model 5 Pros
Needs of U.S. private company financial reporting
constituents are prioritized
► Avoid requirements that lack relevance/decision usefulness
► Avoid any further needless accounting complexities and
costs
► No intensive education or training efforts would be
necessary
► No conversion costs
► Maintain industry-specific accounting guidance
►
Model 5 Cons
► Same
as Model 4 except maintaining current
U.S. GAAP, as is, does not allow for
modifications that would eliminate current
standards that lack relevancy and decision
usefulness for private company constituents
► Accounting students will be learning IFRS
WHAT DO YOU THINK??????
How Can You Participate?
► Become
a member of our Resource Groupsign-up on Web site and receive notification
of meetings and meeting summaries
► Resource Group will be tapped for special
task forces and input on projects
► Attend meetings and speak during open-mic
session
► Email chair with ideas and opinions
Questions?
www.pcfr.org
[email protected]