Strategy

Regulatory, Accounting Hurdles Facing Private Companies


by FEI Daily Staff

Private companies face a plethora of regulatory, legislative and accounting challenges as they wind up the current year and face 2015.

Sessions at Financial Executive International’s Private Company Forum event in Chicago last week kicked off with a long list of policy and regulatory challenges the community will need to overcome in the next several years.

Implementation of the Affordable Care Act (ACA) and the possible penalties for non-compliance will be something that many attendees will need to address in the next three years, said J. David Johnson, vice president, senior healthcare consultant with Sibson Consulting.

“The key takeaway, this is a big deal happening in 2018 and don’t wait until 2017,” Johnson said. “Now is the time to begin asking your advisors what to do.”

Johnson explained two important penalties employers face for noncompliance with the ACA: the “coverage penalty” under section 4980HB and the “affordability penalty” under section 4890HA. Each section carries its own severe monetary penalties, often with complicated implementation formulas and with no offsets — such as tax deductibility — to lessen the blow for any companies falling short of implementation.

Andrew Wheeler, principal at FaegrBD Consulting, explained some of the regulatory and legal issues  private companies face related to environmental- and energy-related risks. When dealing with those issues, Wheeler explained that is essential to discern between “emergency risk” versus a “planned risk.”

An emergency risk is responding to events like an oil spill, while planned risks are regulatory and legislative exposures that many companies need to manage strategically over a longer period. Wheeler added that when it comes to environmental issues, emergency risks can from many different places.

“An emergency risk is not always your risk, they can be your vendors or suppliers,” he said.

Aaron Klein, Director, Financial Regulatory Reform Initiative, Bipartisan Policy Center, added his take on the different in the ways the 2008 financial crisis continues to impact the economy, with a particular focus on the Dodd Frank Wall Street Reform and Consumer Protection Act.

Klein explained that while private companies may not like dealing with the legilsation’s regulatory fallout, it remains one of the more popular reactions to the Great Recession. “Out of the policy initiatives following the financial crisis, including the ACA -- [Dodd Frank] polls between 55 and 75 percent,” he said. “The American public is still really made about what happened in the financial crisis and they wanted us to make sure that it doesn't happen again.”

Odds of significant corporate tax reform were also discussed. “Republicans are winning on [the political tax reform approach of] don’t treat the headache, treat the tumor that is causing the headache, while the Administration may decide to make tax reform is a legacy issue, but only corporate tax reform,” explained Andrew Prior, managing director of PWC. “But either way tax reform is over when you get to the end of calender year 2015 because of the elections.”

Accounting and FASB

In the day's closing session, panelists discussed recent efforts to simplify the accounting options available to private companies and the differences they have from their publicly traded counterparts.

Billy Atkinson, chairman of FASB's Private Company Council, said the organization's mandate is to offer alternatives that help reduce the cost and complexity of accounting standards for private companies, and to offer alternatives for U.S. GAAP standards that may not be relevant to private company shareholders, lenders or other stakeholders.

"The PCC helps set a stage and establish a procedure for FASB to think about the needs of private companies before promulgating new standards," Atkinson said.

The Financial Accounting Foundation (FAF) established the PCC in late 2012 to collaborate with FASB to identify situations where modifying U.S. GAAP to meet the needs of private companies makes sense.

The PCC's efforts fit within the broader context of FASB's simplification projects. Under the standard-setting process, the PCC reviews suggestions from financial statements preparers, users and auditors, and collaborates with the FASB staff to research issues and potential alternatives.

If PCC takes on a project, it will develop recommendations for an alternative accounting approach that is ultimately reviewed by FASB for potential adoption.

So far, successful PCC efforts have addressed private company alternatives for goodwill, common control leasing and interest-rate swap accounting. Ongoing projects include identifiable intangible assets and stock-based compensation.

Kirsten Schofield, a PwC assurance partner, suggested private companies consider their strategic plans as well as the accounting implications as they decide whether adopting an alternative standard is in the company's medium to long-term interest.

"If you're considering the election of an alternative standard talk to your accountants and lenders before you make a final election," Schofield said. "If you think you're going to remain a private company, you could be a good candidate for these alternatives. If you think you may become a public entity in the near future, and would have to unwind an alternative, you may not be a good candidate."