Private companies are getting a pass on some of the more detailed disclosures required about investments held in their employee benefit plans because complying could force them to disclose proprietary information.

The Financial Accounting Standards Board is expected soon to issue a final update to accounting standards giving nonpublic employee benefit plans an indefinite deferral on disclosures of certain quantitative information about the inputs used to arrive at fair value measurements for investments held in their plans. The deferral is meant to enable private companies to keep private the information that they consider in arriving at “Level 3” fair value measurements for those securities.

The deferral will apply to employee benefit plans that hold investments in the plan sponsor's own nonpublic entity equity securities, including securities of nonpublic affiliated entities. The deferral will not apply to plans that are subject to the filing requirements of the Securities and Exchange Commission.

The concern on the part of private companies came to FASB's attention when three advocacy groups -- the National Center for Employee Ownership, the Employee-Owned S Corporations of America. and the ESOP (Employee Stock Ownership Plan) Association -- asked FASB to consider some relief because they were concerned that requiring private companies to make disclosures about unobservable, Level 3 inputs would force them to disclose information they intend to keep private.

“These disclosure requirements can give insight to the operations of the company, its financial condition, and the process and methodology for determining the fair value of the employer securities,” the three groups wrote to FASB. “These disclosures would provide the public with information regarding private ESOP companies that otherwise would not be available. Collectively, these disclosures could allow readers to recreate a financial picture of the company.”

FASB received plenty of comment letters supporting the deferral, but the Department of Labor did not support FASB's plan. The DOL told FASB that the incorrect valuation of private company employer securities is one of the most common fiduciary violations it sees in ESOPs. The DOL's Employee Benefits Security Administration has seen abuses reflecting flawed valuation methodologies, internally inconsistent valuation reports, the use of unreliable and outdated financial data, and apparent manipulations of data and valuation methodologies, wrote Phyllis Borzi, DOL assistant secretary. “These problems are particularly serious in ESOPs because they are designed to invest primarily in employer stock,” she wrote. FASB's proposal appears to be based on “generalized and undocumented concerns about public dissemination of financial statements," she continued. “We question the merit of these concerns.”

FASB Chairman Leslie Seidman said in a statement FASB's decision is responsive to private company stakeholders, “addressing their concern that certain disclosure requirements would potentially provide proprietary information when their employee benefit plans' financial statements are posted on the plan regulator's website.” FASB and its overseer, the Financial Accounting Foundation, have taken heat from private company advocates for failing to adequately consider the needs of private companies when setting accounting standards. FASB's new Private Company Council was formed in part to address that concern.