The time is now! MACPA task force supports creation of private company standards board, says GAAP exceptions and modifications are essential to meet the needs of private company users of financial statements and reduce overly complex and unnecessary accounting standards.
A panel of task force members presented their report, recommendtaions and analysis at the MACPA CPA Summit on June 3, 2011 at the BWI Hilton Hotel in Maryland.
The report was accepted and endorsed unaimously by the MACPA Board the day before.
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MACPA Accounting Standards Task Force Report - CPAsummit2011
1. PRIVATE COMPANY
STANDARDS –
IS IT TIME?
Presentation for:
Maryland Association of CPAs
CPA Summit
June 3, 2011
BWI Hilton
2. Our Panelists
All members of the MACPA Private
Company Standards Task Force
Skip Falatko, CPA – MACPA
Art Flach, CPA – Grant Thornton
Joselin Martin, CPA – Hayles & Howe, Inc
Carl Kampel, CPA – Ellin & Tucker, Chtd
3. US Treasury
MD Comptroller
MD Comptroller
MD Comptroller
CAQ
Courtesy of the Maryland Association of CPAs – 2008 edition
Drawing by Carol Kirwan, CPA
4. Another way to look at standards & oversight
Public Company Private Company Int’l Company
Financial SEC FASB IASB
Reporting
FASB PCFRC IFRS & SME
Audit /Attest AICPA
Performance
Standards
PCAOB ASB, ARSC, IAASB
PRB
Code of AICPA AICPA
Conduct
PEEC PEEC
IFAC
CPA
State Oversight & Enforcement of CPA License
Licensure
5. The Players
SEC
FAF
BRP FASB GASB
PCFRC
& State Boards & State CPA
Societies
6. Additional Background Info
15,000 issuers and 28.5 million private companies
but GAAP driven by public company issues
Small businesses employ more than half of all
private sector workers
Private companies and their financial statement
users have information needs that are different
than public companies
8. Concerns About Private Company
Financial Reporting Include:
Too many GAAP-specific requirements not
useful or relevant for private companies
Greater FASB emphasis on public
companies
Increased cost, complexity, time-
consuming using full GAAP
Use of OCBOA raises the issue of what’s
“generally accepted”
9. U.S. Answer: Blue Ribbon Panel on
Private Company Financial Reporting
Address how accounting standards can best meet
private company financial statement users’ needs
Determine future of GAAP standard-setting process
for private companies
Sponsored by AICPA, FAF and NASBA
18 panel members: cross-section of financial
reporting constituencies, including
lenders, investors, owners, preparers and auditors
10. Blue Ribbon Panel’s Conclusions
A problem exists that needs resolution
Recommendation #1 - Enhance GAAP
for private companies by making
significant modifications, where
warranted
Recommendation #2 - FAF should
create a separate private entities
accounting standards board
11. Other Key BRP Recommendations
Framework for differential decision criteria
3-5 year sunset review to determine
effectiveness of new board
5-7 board members
$4-5 million annual budget
12. FAF “Working Group”
FAF created a “Working Group” on
March 4, 2011
Comprised of FAF Trustees and
FAF Staff
Added non-profits to the mix
13. 90.87% of MACPA members believe we need
Private Company Standards
Insights form the Spring & Fall, 2010 PIU / town hall meetings covering 2,000+ members
14. Judy O’Dell chair of FASB PCFRC
shared her perspective
The MACPA requested that private company’s be exempt from Fin 48 and Fin 46R
in September, 2008. The PCFRC’s recommendations were ignored by FASB.
15. MACPA’s response
MACPA sent comment letter to FAF on
December, 2010 for initial survey
MACPA Chair Kimberly Ellison-Taylor
appoints special Accounting Standards
Task Force
Accounting Standards Task Force held
meetings from Jan – Apr, 2011
16. MACPA Accounting Standards Task
Force – The power of “We”
Chair:
Art Flach Grant Thornton Public accounting firm
MACPA Facilitators:
Tom Hood MACPA CEO & Executive Director Non-Profit
Jackie Brown MACPA COO Non-Profit
Skip Falatko MACPA CFO Non-Profit
Task Force Members:
Ernie Paszkiewicz Gross Mendelsohn & Assoc. Public accounting firm
Rob Tuggle BB&T Banking
Bill Ziegler BB&T Banking
Carl Kampel Ellin & Tucker Public accounting firm
Joselin Martin Hayles & Howe Private company
Liz Gantnier Stegman & Co. Public accounting firm
Bob Tarola Right Advisory Public company consultant
Mike Manspeaker Smith Elliott Kearns & Company, LLC Public accounting firm
Ken Kelly McCormick Public company
Don McConnell KCI Private company
Jim Canalichio Dixon Valve Company Private company
Jim Jenkins Stout Causey & Horning Public accounting firm
Al DeLeon DeLeon & Stang Public accounting firm
Debra Busk DeLeon & Stang Public accounting firm
Charles Postal Santos, Postal & Co. Public accounting firm
Jim McKinney University of Maryland Educator
OJ Phillips Small Business Administration Government
19. Draft conclusions – approved by
MACPA Board
Private Company Standards need to be
addressed (costs, complexity, OCBOA)
Current structure is not working –
PCFRC recommendations were not
addressed, prior studies indicate issue
Other jurisdictions around the world
recognizes needs of private company
users are different
20. TASK FORCE ISSUES
Concept of differences in recognition and
measurement
Separate Board
Funding source to ensure independence
Collaboration with FASB
How much divergence
Disparity of interests, small vs. large
21. TASK FORCE ISSUES
Effect of increasing complexity
Revenue Recognition
Leases
IFRS
Is it too much?
How does everyone become knowledgeable –
Bankers, sureties and other users
22. TASK FORCE ISSUES
What is the future role of the FASB?
Input and support to IASB.
Advancing considerations of U.S.
perspectives
Incorporating IFRS into U.S. GAAP through
an endorsement process
Educating U.S. constituents about IFRS
23. New Developments
AICPA launches Private Company
Standards resource center
http://www.aicpa.org/privateGAAP
FASB offers webcast: FASB Update for
NonPublic Entities (Private Companies)
Our view is that we applaud the efforts of FASB to focus on needs of private
companies and that there was a formal structure with the PCFRC that was
ignored. It is time to give this new approach a chance with a re-visit in five (5)
years.
24. Conclusion
On June 2, 2011 the MACPA Board of
Directors unanimously adopted the
report & recommendations of our
Accounting Standards Task Force,
urging FAF to move forward with the
separate Private Company Standards
Board and the recommendations in
their Blue Ribbon Panel report.
MACPA Announcement
http://www.macpa.org/Content/26146.aspx
MACPA whitepaper can be viewed & downloaded here:
http://www.slideshare.net/thoodcpa/macpa-private-company-standards-whitepaper
25. Next Steps
Distribution and
communication
Education & awareness of our
members and the small
business community
Make our voices heard at the
FAF
26. Skip Falatko, CPA
Director of Finance
Maryland Association of CPAs
Business Learning Institute
(443) 632-2322
E-mail skip@macpa.org
Web http://www.macpa.org
Blogs http://www.cpasuccess.com
http://www,bizlearningblog.com
27. Tom Hood, CPA.CITP
CEO
Maryland Association of CPAs
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Editor's Notes
The current U.S. financial regulatory system has relied on a fragmented and complex arrangement of federal and state regulators—put into place over the past 150 years—that has not kept pace with major developments in financial markets and products in recent decades. As the nation finds itself in the midst of one of the worst financial crises ever, the regulatory system increasingly appears to be ill-suited to meet the nation’s needs in the 21st century. Today, responsibilities for overseeing the financial services industry are shared among almost a dozen federal banking, securities, futures, and other regulatory agencies, numerous self-regulatory organizations, and hundreds of state financial regulatory agencies. Much of this structure has developed as the result of statutory and regulatory changes that were often implemented in response to financial crises or significant developments in the financial services sector. For example, the Federal Reserve System was created in 1913 in response to financial panics and instability around the turn of the century, and much of the remaining structure for bank and securities regulation was created as the result of the Great Depression turmoil of the 1920s and 1930s.
Let me set the stage for you. This is an issue that impacts vast reaches of the U.S. economy. Only about 15,000 companies are registered with the Securities and Exchange Commission, but there are 28.5 million private businesses, according to the U.S. Census Bureau (this number excludes non-profits which would not be covered by current proposed changes in private company reporting). Yet U.S. GAAP is driven by issues that occur in the capital markets to address the needs of public companies and their stockholders. So, standards developed for 15,000 companies have to be applied to many of the nation’s 28.5 million private businesses that prepare U.S. GAAP financial statements. In recent years, accounting and reporting guidelines too often have lacked relevance and have become unnecessarily complex. The result is that too much of what’s included in current financial statements is not useful to private company owners, lenders or investors. Anything that hinders small businesses has a profound impact on the U.S. economy. According to the U.S. Small Business Administration, small businesses employ more than half of all private sector workers in the United States and are responsible for 44% of the private payroll. They have generated 64% of the new jobs created during the past 15 years. Many of these companies are small and medium-sized organizations that report to a narrow range of financial statement users, such as lenders, venture capitalists and insurers.
In 2004, the AICPA undertook a research effort to definitively assess what constituents thought about the problem after hearing concerns from CPAs and others for decades. The AICPA’s Special Task Force on Private Company Financial Reporting (also known as the “Castellano Task Force”), after getting responses from more than 3,700 lenders, investors, business owners, financial managers and public accounting practitioners, found that too many GAAP-specific requirements are not useful or relevant to private company constituents. A majority of each group who had an opinion believed it would be useful if underlying accounting in GAAP reporting were, in certain instances, different for non-public companies. The task force published its report in early 2005, underscoring the need and urgency to address private company reporting. Two examples cited as offering many private company financial statement users little benefit while costly to implement are: the interpretation formerly known as FIN 48, on uncertainty in income taxes, and FIN 46R, related to consolidation of variable interest entities. Many private company constituents say both are causing unnecessary challenges for private companies and demonstrate why private companies are spending quite a bit of their time and money complying with accounting standards that relate to information that may never actually be used by anyone reading their financial reports.
What was the U.S. response? In 2010, the AICPA, the Financial Accounting Foundation and the National Association of State Boards of Accountancy formed the Blue Ribbon Panel on Private Company Financial Reporting. (FAF oversees the Financial Accounting Standards Board and the Governmental Accounting Standards Board.)The panel’s mission was different from those of prior committees or groups created to study the issue because it looked at the standard-setting process from a policy level, rather than at specific changes to individual standards. This was a significant departure from the past. It was about exploring whether and how there should be a standard-setting process that recognizes there are differences between public and private companies.The panel chair was Rick Anderson, CPA, CEO of Moss Adams LLP and a former member of the FAF Board of Trustees. The other 17 members represented a top level cross-section of financial reporting constituencies, including lenders, investors, owners, preparers and auditors. AICPA President and CEO Barry C. Melancon, CPA, served on the panel. Five meetings were held in 2010 and the panel completed its report with recommendations for change in January 2011. The report was given to FAF at that time.
The report had other recommendations as well: To determine when there should be differences for private companies in the standards, the panel recommended that a framework with decision criteria be developed against which standards would be compared. It also outlined a process for exposure of proposed standards. Another recommendation is that the new standard-setting structure and process be reviewed after 3 to 5 years to determine if it is working as effectively and efficiently as it should. The FAF would at that point determine if the changes are performing as intended, and whether additional structural modifications are necessary.The number of board members of the new board was proposed for between 5 and 7.The panel’s staff estimated the cost of the new board at approximately $4-5 million annually and suggested ways of funding it.
In 2004, the AICPA undertook a research effort to definitively assess what constituents thought about the problem after hearing concerns from CPAs and others for decades. The AICPA’s Special Task Force on Private Company Financial Reporting (also known as the “Castellano Task Force”), after getting responses from more than 3,700 lenders, investors, business owners, financial managers and public accounting practitioners, found that too many GAAP-specific requirements are not useful or relevant to private company constituents. A majority of each group who had an opinion believed it would be useful if underlying accounting in GAAP reporting were, in certain instances, different for non-public companies. The task force published its report in early 2005, underscoring the need and urgency to address private company reporting. Two examples cited as offering many private company financial statement users little benefit while costly to implement are: the interpretation formerly known as FIN 48, on uncertainty in income taxes, and FIN 46R, related to consolidation of variable interest entities. Many private company constituents say both are causing unnecessary challenges for private companies and demonstrate why private companies are spending quite a bit of their time and money complying with accounting standards that relate to information that may never actually be used by anyone reading their financial reports.