The Private Company Council was formed in September 2012, and it is making good progress on a new process designed to work collaboratively with the FASB in carving out exceptions or modifications of US generally accepted accounting principles (US GAAP) for private companies. Most notably, the Council has discussed a number of areas of accounting that may involve unnecessary costs and complexities for private companies, and it has agreed to proceed with several projects that may result in improvements in the near future. The Council has also tentatively agreed to revise and re-expose the draft of the private company decision-making framework. This Messenger summarizes the initial projects, reasoning and next steps.

1. March 2013
MHMMessenger
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M AY E R H O F F M A N M C C A N N P. C . – A N I N D E P E N D E N T C PA F I R M
A publication of the Professional Standards Group
Progress on Standard-Setting for Private Companies
The Private Company Council was formed in 3. Accounting for certain interest rate swaps with
September 2012, and it is making good progress on single counterparties
a new process designed to work collaboratively with
the FASB in carving out exceptions or modifications The fourth area was accounting for uncertain tax
of US generally accepted accounting principles positions. The Council decided not to consider
(US GAAP) for private companies. Most notably, exceptions or modifications at this time, primarily
the Council has discussed a number of areas of because the staff was unable to identify any alternatives
accounting that may involve unnecessary costs and to the current requirements or any dissatisfaction
complexities for private companies, and it has agreed on the part of the users of the financial statements.
to proceed with several projects that may result in But the Council said it is not closing the door on this
improvements in the near future. The Council has also topic. The members of both the Council and the FASB
tentatively agreed to revise and re-expose the draft of recognize the need to develop a process under which
the private company decision-making framework. This participants in the private company financial reporting
Messenger summarizes the initial projects, reasoning, process can submit input and suggestions, and they
and next steps. said they will consider the accounting for uncertain tax
positions if additional feedback provides grounds for
Initial projects doing so.
Four areas of focus were considered as potential Reasoning
areas in which fast improvements might be possible,
and the Council agreed to proceed with three of them. The key factors that persuaded the Council to take
The three approved areas are as follows: on the first three projects were unnecessary cost and
complexity and/or limited relevance for users of private
1. Accounting for identifiable intangible assets company financial statements. Specifically:
acquired in business combinations
• Unnecessary costs associated with accounting
2. Consolidating variable interest entities for intangibles. The staff’s research indicates
the accounting for identifiable intangible assets
acquired in business combinations is an area
involving considerable cost and limited value.
The cost reflects the required reporting of these
assets at their fair values. This typically entails the
need for difficult valuations and audits of those
valuations. The limited value refers to the facts
our roots run deep TM
that: (a) it is difficult to make a precise valuation of
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2. MHMMessenger
an intangible, and (b) users of financial statements due at a fixed rate. Often, the lender provides
often disregard the reported values or find the the fair value of the loan. A key question to be
reported values are not critical for their purposes. addressed is: When should interest rate swaps be
The potential solutions involve exceptions under considered in-substance fixed-rate debt?
which private companies would not need to
recognize some or all of these intangibles; instead As these projects evolve, the focus may expand.
they would allocate more of the purchase price to For example, the focus on intangibles may expand
goodwill. to include accounting for goodwill, and the focus on
interest rate swaps may expand to include some
• Unnecessary complexities associated with VIE aspects of hedge accounting that are troublesome
consolidation. The staff’s research highlighted for private companies. But the criteria seem clear
consolidations of variable interest entities (VIEs) for reviewing these and other potential areas for
as an area of accounting that adds complexity improvement in the future. The Council and the
and may not provide sufficient value to users of FASB are prioritizing areas of GAAP where there
financial statements to justify the complexity. This is evidence of unnecessary cost and complexity for
is especially true of the requirements involving private companies and/or a lack of relevance to users
consolidation of related-party leasing companies. of private company financial statements.
Lenders and other users of financial statements
have indicated that: (a) they do not find these Next steps
consolidations useful, (b) they do not object to a
GAAP exception report, or (c) they feel disclosures In addition to proceeding with the three projects
would suffice in lieu of consolidation. It is not clear described above, the Council has asked the staff to do
yet whether this project might lead solely to an research into the private company accounting issues
exception for this one narrow area or whether related to development-stage enterprises and stock-
there is a broader need to simplify all requirements based compensation. The Council also continues
for consolidation of variable interest entities. The to discuss the decision-making framework and the
Council will likely solicit feedback on the issues as definition of a nonpublic entity, and its members have
the project evolves. begun to provide the private company perspective on
projects already on the FASB’s agenda. To help carry
• Limited relevance of accounting for certain interest out these new responsibilities, the Council expects
rate swaps. The area of accounting for interest rate to put in place more formal processes for obtaining
swaps with single counterparties was selected feedback from participants in the private company
mainly for reasons related to its limited relevance financial reporting framework, and the revised
to users, rather than its cost and complexity. decision-making framework should be released for
Although the scope of the project is still evolving, public comment very soon. A preliminary prototype of
the initial focus is likely to be on exceptions or the framework is discussed in our MHM Messenger
modifications for private companies that have issued in June 2012 on the New Standard-Setting
financing arrangements under which they borrow Process for Private Companies.
at variable interest rates and repay the amount(s)
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3. MHMMessenger
For more information
MHM’s Professional Standards Group will continue
to monitor progress on private company standard-
setting. Our comment letter is available on the FASB’s
website.
If you have any specific questions, comments or
concerns, please share them with Ernie Baugh, Keith
Peterka, or James Comito of MHM’s Professional
Standards Group or your MHM service professional.
Ernie Baugh: ebaugh@mhm-pc.com, 423-870-0511
Keith Peterka: kpeterka@cbiz.com, 610-862-2744
James Comito: jcomito@cbiz.com, 858-795-2029
The information in this MHM Messenger is a brief summary and may not include all the details relevant to your situation.
Please contact your MHM service provider to further discuss the impact on your financial statements.
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