GAAP now contains a new definition for what constitutes a ”public business entity,” and standard setters have some final criteria for when differences in accounting standards might be warranted for entities that are not public.
The Financial Accounting Standards Board has issued an update to its Accounting Standards Codification to define a public business entity in its master glossary and has issued its final Private Company Decision-Making Framework. The framework is a guide for evaluating accounting and reporting issues for private companies to help determine when differences might be appropriate.
The definition of a public business entity says an entity is considered public when it is required to file or furnish financial statements with the Securities and Exchange Commission or is required by the Securities Act of 1934 to file or furnish financial statements with another regulatory body. It's also public if it is require to file or furnish financial statements with any regulatory agency at home or overseas before issuing securities, or it has securities that are traded, listed, or quoted on an exchange or over the counter. A entity is not be public if its securities are subject to contractual restrictions and it is not required to prepare GAAP financial statements under a legal, contractual, or regulatory requirement.
The definition takes effect with the next update to accounting standards that uses the definition, and it will only affect new accounting pronouncements going forward. “It's important to note the definition does not affect existing requirements, but it will apply to new guidance,” says FASB member Hal Schroeder in a brief videocast explaining the new definition and private company guide. “The effective date will be established concurrently with the first update that uses the new definition.” FASB also published a summary description of the new definition and the guide.
FASB and its Private Company Council also finalized the guide they have committed to following in determining where and why accounting differences might be warranted for non-public, or private, entities. The guide says standard-setters should take into account factors such as the number of people or groups who rely on financial statements and their access to management to ask questions, the investment strategies of those users, the ownership and capital structures of private entities, their accounting resources, and the manner in which preparers learn about new financial reporting guidance. Rule makers could consider differences in recognition and measurement, disclosures, presentation, effective dates, and transition methods.
“The Guide will help the FASB and the PCC identify opportunities for private companies to reduce the complexity and costs of preparing financial statements in accordance with U.S. GAAP,” said FASB Chairman Russ Golden in a statement. “Defining a public business entity will help clarify the Guide's scope, while also addressing stakeholder concerns with the inconsistency and complexity of having multiple definitions of ‘nonpublic entity' and ‘public entity' within GAAP.”
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