by Karen Burns, an Assurance Partner at Sensiba San Filippo and the President of the East Bay Manufacturing Group
It’s tough being a midmarket business.
Accounting and reporting requirements can be a significant burden for start-ups and companies without the vast human and financial resources of larger enterprises. Luckily, one organization is hard at work trying to make things more manageable for these middle market companies: The Private Company Council (PCC).
What is the PCC?
Accounting standards are not intended to create difficulty for private companies. But with needs and profiles that differ from those of larger public companies, it can often feel that way to midmarket businesses as they struggle to meet burdensome compliance responsibilities designed with public companies in mind.
In order to address this problem, the PCC was established in May 2012.
The PCC works with the Financial Accounting Standards Board (FASB) to determine when and whether to modify U.S. generally accepted accounting principles (GAAP) for private companies.
Based on advice from business leaders and financial professionals, the PCC proposes alternatives to particularly cumbersome GAAP standards — which become accepted practice after input from multiple stakeholders and final FASB approval.
The 10-member PCC seeks ongoing input from private company CFOs, CPAs and representatives of financial institutions across the country to gain a clear understanding of the accounting challenges these businesses face. This input can come in the form of solicitations to comment, or regional roundtables.
What changes has the PCC already made?
Since its inception, the PCC has achieved several notable changes that deliver welcomed alternatives to many private companies.
For example, the FASB has approved a change that allows for alternative goodwill accounting. Beginning in calendar year 2015, if an entity chooses the alternative accounting option, goodwill can be amortized over 10 years — or less, if a shorter life is appropriate.
This is important because the goodwill generated from private company transactions does not often extend beyond 10 years, yet companies previously had to complete a complex calculation to test for impairment of value each year.
Another significant accomplishment is an easing of the guidance regarding consolidation of variable interest entities (VIE) under common control leasing arrangements. Also effective calendar year 2015, this change allows entities to elect not to apply VIE guidance — i.e. not to consolidate — when all of the following are true:
- Common control of the leasing entity exists
- Substantially all activity is limited to leasing
- The principal amount of obligation at inception does not exceed the value of the asset leased by the company from the lessor
If elected, the alternative rules must apply to all leasing arrangements that meet the above conditions.
What anticipated changes are in the PCC’s pipeline?
Recently, the PCC made additional recommendations to the FASB to ease the burden on midmarket businesses regarding:
- Simplifying hedge accounting
- Liabilities with characteristics of equity
- Presentation and display of income statement and cash flow
- Intangible assets, especially internally generated
Most of these topics were addressed in an Invitation to Comment (ITC) issued by the FASB in the fall of 2016, so it’s reasonable to hope for exposure drafts regarding potential accounting standard updates in the near future.
It’s easy for business leaders to regard those who set accounting standards as opponents because of their sometimes unnecessary complexity. While that’s understandable, the intent is to create transparency for the users of the financial statements.
With the PCC’s ongoing work, aided by input from CPA firms that understand the private company sector, accounting for this market segment may continue to become increasingly user-friendly.
Karen Burns is an Assurance Partner at Sensiba San Filippo and the President of the East Bay Manufacturing Group. She specializes in working with manufacturing companies, helping them to identify opportunities, challenges, and trends. You can reach Karen at 925.271.8700 or email@example.com.