AICPA wades into FASB, SEC waters with guidance on public business entities
The AICPA recently weighed in on the thorny issue of determining which entities meet the Financial Accounting Standards Board’s definition of “Public Business Entity.” The determination is key, since only PBEs may avail themselves of the deferred effective dates and ‘private company alternatives’ (simplified accounting and disclosure) offered to private companies by the FASB as acceptable alternatives within U.S. Generally Accepted Accounting Principles (U.S. GAAP).
The AICPA’s new guidance, issued as Technical Questions and Answers Section 7100, Definition of a Public Business Entity (the TQA), wades into choppy waters alongside several speeches and statements by staff of the U.S. Securities and Exchange Commission, and a recent Accounting Standards Update issued by the FASB.
Simplification: It’s complicated The FASB's efforts to make private company accounting more useful ramped up with the formation of its Private Company Council in 2012. Analogous to the Conceptual Framework which forms the foundation for FASB's standard-setting initiatives, the FASB published two documents to guide the PCC: a Private Company Decision-Making Framework, and Accounting Standards Update (ASU) 2013-12: Definition of Public Business Entity.
Rather than relying on traditional definitions of ‘public’ vs. ‘private’ company, which historically centered on whether the entity floated any publicly traded debt or equity securities, FASB’s definition of a PBE consisted of a five-criteria test, with an entity being deemed a PBE if it met any one of five criteria. Additionally, the following paragraph gave preparers' pause:
An entity may meet the definition of a public business entity solely because its financial statements or financial information is included in another entity’s filing with the SEC. In that case, the entity is only a public business entity for purposes of financial statements that are filed or furnished with the SEC.
Substance vs. form: Unanticipated consequences Questions about interpreting FASB’s definition of PBEs date back a few years, as evidenced by initial guidance issued by AICPA's Center for Plain English Accounting in 2014.
An issue that appeared increasingly concerning was whether FASB’s definition of PBEs swept in many more private companies than were anticipated, viewed by some as an unanticipated consequence.
In response, SEC staff issued a statement at a July, 2017 meeting of FASB’s Emerging Issues Task Force, and FASB memorialized the SEC staff statement by issuing ASU 2017-13.
In October, the AICPA issued its 23-page TQA on PBEs, addressing a multitude of issues.
As noted in an accompanying statement, AICPA staffer Jason T. Brodmerkel said, “The importance of organizations getting this right in such a dynamic atmosphere is key. Our efforts have included working hand in hand with many experts with a goal of helping professionals avoid costly implementation issues that could arise if entities misinterpret PBE status.”
Are we there yet? Significantly, the SEC staff statement in July was specifically scoped to the definition of PBEs with respect to the delayed effective date available to private companies (non-PBEs) on FASB’s major new standards on revenue recognition and leases.
Some may view the remarks of Jonathan Wiggins, Associate Chief Accountant, at the 2016 AICPA conference on current SEC-PCAOB developments, as potentially acknowledging the need to reconsider the definition of PBE more generally.
Additionally, some comment letters sent by audit firms, industry associations and others on recent SEC rulemaking efforts on disclosure effectiveness have referenced the need to look at the definition of PBEs and requirements relating to private companies’ use of PCC alternatives prior to being acquired by a public company, or going public, and burdens of requiring retroactive adjustments for those prior periods.
Will we see further statements or rulemaking from the AICPA, SEC or FASB on PBEs? Time will tell.