During its past two board meetings, the FASB has reached tentative decisions on a definition of 'nonpublic entity.' This definition will be key to determining the scope of companies, commonly referred to as 'private companies,' that will be able to avail themselves of specific changes/exceptions to GAAP offered to private co's going forward and relates as well to the upcoming decision of the FAF (which oversees FASB) on how best to set standards for private companies, e.g. whether and how to implement its proposedPlan to Establish the Private Co Standards Improvement Council (PCSIC) (the 'FAF Plan'), a decision that is expected to be deliberated if not decided at the FAF's May meeting.
Definition of Nonpublic Entity (including as relates to conduits)
The defnition of nonpublic entities decided by FASB at its last two board meetings is as follows:
An entity that is required to file or furnish financial statements with the SEC for purposes of issuing securities to be traded in a public market should not be included in the definition of a private company. The Board also decided that a privately held financial institution should be included in the definition of a private company. (Source: FASB Summary of Board Decisions, April 25, 2012)
A for-profit entity that is a conduit bond obligor for conduit debt securities that are traded in a public market would not be deemed a private company for standard-setting purposes even if the entity otherwise meets the characteristics of a private company as defined in this project. (Source: FASB Summary of Board Decisions, May 2, 2012)
Fair Value Measurement Disclosures by Nonpublic Entities
In related news on the nonpublic entity front, FASB discussed at last week's meeting the subject of fair value measurement disclosures by nonpublic entities. From FASB's Summary of Board Decisions:
The Board discussed whether a narrative disclosure of the reasons for significant changes in the amount of assets and liabilities measured under Level 3 of the fair value hierarchy would be a cost-effective alternative to the existing requirement to disclose tabular reconciliations from the opening balances to the closing balances for (1) derivative assets and liabilities, (2) pension and postretirement plan assets, and (3) all other assets and liabilities measured under Level 3 of the fair value hierarchy on a recurring basis. The Board directed the staff to perform targeted outreach with preparers, CPA practitioners, and users of nonpublic entity financial statements to gather information about whether that alternative would be cost-effective, and to report its findings at a future Board meeting.
The Board decided that the scope of the project should exclude nonpublic entities for which substantially all assets are measured at fair value on a recurring basis.
The Board also decided that the scope of the project should exclude not-for-profit entities; however, the Board directed the staff to solicit input from stakeholders about that exclusion.
FASB decisions are tentative until released for public comment in an Exposure Draft of a proposed Accounting Standards Update (ASU), and after further deliberation by FASB, finalized in a final ASU describing changes to FASB's Accounting Standards Codification. Read more about FASB's project: Definition of Nonpublic Entity. Read more about the FAF Plan to improve private co standard-setting.
If you are a new reader of our blog, see also our prior post: FAF Posts Summaries of Comment Letters, Roundtables on Private Co Standard-Setting
SEC Items of Interest
You may also be interested in a recent speech by Carlo diFlorio at the Private Equity International Private Fund Forum, and the SEC's recent posting of its study on Capital Raising in the U.S.: The Significance of Unregistered Offerings Using the Reg D Exemption (posted on SEC website April 12, see related remarks from our Highlights from [PLI's] SEC Speaks) and the Final Report on the SEC Government-Business Forum on Small Capital Formation, posted on the SEC website on March 21.
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