In up confusion of users of the financial

In the article “The Private Company
Council”, the author discusses the formation of the PCC, Private Company
Council. The author illustrates that the purpose of establishing the PCC is to
provide a different set of financial reporting standard for private companies
in the United States. The major argument in the article is that if the FASB has
the privilege to override decisions made by PCC.

 

The author suggests two opposing point of
view on the establishment of the PCC. While some people believe that PCC would
be beneficial because private companies have different needs of financial
reporting than public companies. Having a separate standard-setting body would
save time and money to comply financial statements for private companies. A
simpler and compact financial statement would be present to users of financial
statements of private companies. On the other hand, the Big Four states that
there are no significant distinctions between the two. Some parties view that
the PCC is a way for private companies to bypass the complexity of complying
under GAAP. Brennan refers advocates of the PCC “wanted the brand value of GAAP
without the burdens of compliance” (Remanna, and Vicbira, 2013). He worries
that setting up exceptions would impair regular GAAP brand. There should be
some kind of labels to differentiate regular GAAP-based financial statements from
GAAP alternative-based. It would give a notice that the financial statements
are not complied with regular GAAP standards. Therefore, it would clear up
confusion of users of the financial statements.

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According to Financial Accounting
Standards Board, FASB, four public meetings were held prior to the creation of
the PCC was approved in May, 2012. In October 2012, Financial Accounting
Foundation, FAF, proposed the structure for PCC, which would reduce the
responsibility of FASB over privately held companies in the United States.
There are nine to twelve PCC members selected by FAF. The current PCC Chair,
Mr. Candace Wright, is expected to work with FASB to ensure the PCC operates to
fasten the procedure of setting financial reporting provisions for private
companies. Corresponding to FASB, “The PCC will review and propose alternatives
within GAAP to address the needs of users of private company financial statements”
(FASB, 2013). With that being said, the PCC is created to make changes to GAAP in
order to better fit the users of financial statements of private companies.
However, at least two-thirds of all PCC members has to agree for a GAAP
alternative to forward to the FASB for approval.

 

In December 2013, the Private Company
Decision-Making Framework was issued, which is aimed to evaluate the financial
accounting reporting for private companies. It is about “whether and in what
circumstances to provide alternative recognition, measurement, disclosure,
display, effective date, and transition guidance for private companies
reporting under U.S. GAAP” (FASB, 2013). The fundamental objective of this
guide is to explain when it is acceptable for the PCC to modify GAAP. The
different needs of users of public and private company financial statements
becomes the critical consideration. Users of private company financial
statements usually do not request the complex and in-depth information, such as
stock price valuation and capital market fairness, which is presented in public
company financial statements. As a result, with a separate set of financial
reporting standard would decrease the time and costs preparing the financial
statements.  

 

Besides the Private Company
Decision-Making Framework, FASB also issued an update of Definition of a Public
Business Entity. The definition is revised to help distinguish private
companies from public companies. It determines which entity would report its financials
in accordance with GAAP and which would follow GAAP alternative made by the
PCC.  

           

            An example of
GAAP alternatives is the goodwill accounting alternative. FASB issued
Accounting Standard Update in 2014 about accounting for goodwill. This update simplifies
goodwill accounting for private companies in the United States while meets the
needs of users of financial statements. It allows private companies to amortize
goodwill on a straight-line basis over a period not more than ten years. Furthermore,
annual impairment testing is not required anymore. Instead, a private company
can have the option to test goodwill for impairment either at the entity level
or the reporting unit level. The accounting alternative on goodwill reduces
time spent to measure impairment for private companies that carry goodwill as
companies would test impairment less frequently.