FEI Committee On Private Company Standards Responds To Blue Ribbon Panel
Sept. 16, 2010
On Sept. 15, 2010, FEI's Committee on Private Company Standards filed a comment letter in response to questions posed by the Blue Ribbon Panel on Standard Setting for Private Companies. (In December 2009, responding to feedback from many of America’s private companies, and to a recommendation made by the Private Company Financial Reporting Committee (PCFRC), the American Institute of Certified Public Accountants (AICPA), the Financial Accounting Foundation (FAF) and the National Association of State Boards of Accountancy (NASBA) announced the establishment of a “blue-ribbon panel” to address how U.S. accounting standards can best meet the needs of users of private company financial statements.)
The responses to the questionnaire will assist the panel in discussing how accounting standards can best meet the needs of U.S. users of private company financial statements and making recommendations thereon to the FAF Board of Trustees.
Summary of the questions and key points from the responses of CPC-S as follows:
1. Question: Briefly describe how you use GAAP financial statements in your decision-making concerning private companies. CPC-S Response: The most common use for GAAP financial statements is to evaluate the credit worthiness of customers. Not usually for firm value and exit value. We also use it for evaluation of cash flow from operation and the projections previously made. However, audited GAAP financial statements are secondary to other financial information that we are readily able to obtain if we choose to request such information for our own decision-making purposes.
2. Question: Issues or concerns that you may have with respect to the relevance of the information contained in those statements? CPC-S Response: For private investors or creditors, the operations of the business and its stewardship responsibilities are more relevant information, not the value of the company. These requirements can be obfuscated by revaluation adjustments to fair market values.
3. Question: Issues or concerns with current U.S. GAAP as those standards apply to private company financial statements. Are those issues or concerns confined to one or more specific standards, or are they more systemic? Are those issues or concerns largely confined to private companies, or are they broader? CPC-S Response: We don’t believe it is possible to create a one-size-fits-all set of standards that is relevant to all users. The problem is systemic. Complexity is a real problem for everyone but public companies enjoy access to public capital as a benefit. Private companies and their users do not receive the benefits but have the same costs, which often are higher as a percentage of revenues.
4. Other key points:
Makes the case for separate private company standards more imperative.
The idea of "except for" opinions or OCBOA statements results in a higher cost of capital.
We believe there should be a set of standards that will allow for the "gold standard stamp of GAAP" and a clean opinion that is accessible to all companies at a reasonable cost.
As of Sept. 16, 84 comment letters (responses to the questionnaire) have been posted on the FASB's Web site so far; it is likely that others that came in very recently (such as FEI's) are in the process of being posted. The comment deadline was Sept. 15.
Prepared Sept. 15, 2010 by Ron Wei, manager of Financial Research and Policy, FEI. This summary does not represent FEI opinion unless specifically noted above.