This post has been updated. See the clarification at the bottom.
Rising from a recommendation of a blue ribbon panel on private company standard-setting published in 2010, the Financial Accounting Foundation (FAF) formed the PCC in 2012, to advise the FASB on
whether exceptions or modifications to existing nongovernmental U.S. Generally Accepted Accounting Principles (U.S. GAAP) are necessary to address the needs of users of private company financial statements. The PCC will identify, deliberate, and vote on any proposed changes, which will be subject to endorsement by the FASB and submitted for public comment before being incorporated into GAAP. The PCC also will serve as the primary advisory body to the FASB on the appropriate treatment for private companies for items under active consideration on the FASB’s technical agenda.
The FAF deliberately decided to form an advisory council to FASB to avoid the perception or reality of two different sets of GAAP; colloquially referred to as "Big GAAP" (public companies) and "Little GAAP" (private companies), as noted in this
Oct. 2011 article by Floyd Norris of the NYT. Former FASB Chairman Bob Herz wrote about this topic in
When Accounting Standards Diverge in April, 2014 in Compliance Week.
The End of the World?
Some remain concerned that the "exceptions" granted to private companies as recommended by the PCC, and endorsed by FASB, run the risk of a dual GAAP system in the U.S. Most notably, the Public Company Accounting Oversight Board's (PCAOB) Director of Research and Analysis Greg Jonas cited this concern about private company excpetions potentially leading to a separate set of GAAP, with Jonas calling that a "world class bad idea" as quoted by David Katz in CFO.com last month.
The FASB, and many private company observers, don't see it that way.
Jeff Mechanick, Assistant Director - Nonpublic Entities, refutes the idea that the fruits of the PCC's labors will be to cause a chasm in GAAP.
"The PCC was established to avoid the creation of a 'Big GAAP' and a 'Little GAAP,'" says Mechanick. Acknowledging the work of the PCC, whose members include financial statement preparers, users of financial statements and auditors, he adds, " I believe the PCC has made significant progress in helping the FASB develop alternatives within a single GAAP that maintain or improve the usefulness and relevance of GAAP for private companies and their financial statement users, while reducing the cost and complexity of preparing and auditing the statements."
PCC as a Catalyst for FASB Simplification
"Furthermore, the PCC has been a catalyst for the FASB’s broader efforts to simplify GAAP for the benefit of all FASB stakeholders, including public companies, not-for-profit organizations, and employee benefit plans," Mechanick says, referencing FASB's Simplification Initiative, one of FASB Chairman Russell Golden's major goals.
Indeed, FASB has placed on its agenda a number of projects to examine simplifications for all of its constituents - public and private companies and other nonpublic, nongovernmental organizations - following from the PCC's detailed examination and deliberation of issues as to the cost and complexity of certain measurement or disclosure requirements in U.S. GAAP, vs. the benefit or usefulness of that information.
So far, four final standards have been issued specifically as a result of FASB's endorsement of PCC recommendations, with the most recent standard (Accounting Standards Update No. 2014-18 on Business Combinations, issued by FASB in time for holiday gift-giving season, on Dec. 23, 2014. Listed below are the ASUs issued to date resulting from PCC consensuses:
Update No. 2014-18—Business Combinations (Topic 805): Accounting for Identifiable Intangible Assets in a Business Combination (a consensus of the Private Company Council)
Update No. 2014-07—Consolidation (Topic 810): Applying Variable Interest Entities Guidance to Common Control Leasing Arrangements (a consensus of the Private Company Council)
Update No. 2014-03—Derivatives and Hedging (Topic 815): Accounting for Certain Receive-Variable, Pay-Fixed Interest Rate Swaps—Simplified Hedge Accounting Approach (a consensus of the Private Company Council)
Update No. 2014-02—Intangibles—Goodwill and Other (Topic 350): Accounting for Goodwill (a consensus of the Private Company Council)
Asked to describe what he thinks has been the biggest achievement of the PCC so far, FASB's Mechanick replies, "The GAAP alternatives on Goodwill (amortization and simplified impairment testing) and Variable Interest Entities (VIEs) - the exemption for many lease arrangements between entities under common control, are proving to be especially useful for many private companies."
"Overall, though," says Mechanick, "I think the biggest achievement of the PCC has been its role in helping the FASB root out and avoid unnecessary complexity in GAAP for all companies and organizations that use it."
Clarification: In the fourth paragraph of this post a reference is made to "exceptions." Technically, these are “alternatives” not exceptions, as described verbatim in the standards. Alternatives are a longstanding fixture in certain standards, such as depreciation, and with the word "exception" causing a particular meaning causing a qualified audit opinion.