ADP Lunch & Learn Course Materials - …kapmarketing.net/SmartPros/ADP/Lunch-And-Learn/2016-17/WORKBOOK8.pdfADP Lunch & Learn Course Materials ... Determine the impact of GAAP alternatives

ADP Lunch & Learn

Course Materials

Simplified Accounting: On the Way to Little

GAAP?

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two 2. Simplified Accounting:

On the Way to Little GAAP?

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LearningObjectives:

SegmentOverview:

Field of Study:

RecommendedAccreditation:

RequiredReading(Self-Study):

Running Time:

VideoTranscript:

Course Level:

CoursePrerequisites:

Advance Preparation:

Expiration Date:

Accounting

August 31, 2017

Work experience in financial reporting or accounting, or an introductory course in accounting

None

1 hour group live2 hours self-study

Update

“Private Company Council Has Become a Catalyst for GAAPSimplification”By Edith Orenstein, for FEI DailyFor additional info, go to: http://daily.financialexecutives.org

See page 2–11.

See page 2–18.

35 minutes

For several decades, the accounting profession has beendiscussing the difficulties faced by private companies and theusers of their financial statements, often based on the increasedcomplexity of U.S. GAAP. In assessing the private companyalternatives to GAAP that have recently been instituted, expertcommentator John Fleming also evaluates whether we are on apath toward a system of “Big GAAP” and “Little GAAP.”

Upon successful completion of this segment, you should be able to:● Recognize why private companies, and their users, do not need

GAAP financial statements;● Identify the process used to develop, and approve, the use of

GAAP alternatives;● Determine the impact of GAAP alternatives on audit opinions

and review reports; ● Distinguish between the GAAP approach, and the GAAP

alternative, to the consolidation of commonly-owned entities.

A. Blue Ribbon Panel on Private CompanyStandards

1. AICPA

2. Financial Accounting Foundation

a. Parent of FASB

3. NASBA

B. Panel Recommendation for PrivateCompany Standards

1. Allow differences in GAAP, wherewarranted

2. Create independent board to resolvedifferences

C. New Group: Private Company Council(PCC)

D. PCC-Initiated Private CompanyAlternatives to GAAP

1. Intangible assets acquired incombinations

2. Goodwill subsequent to acombination

3. Variable interest entities (VIEs)

4. Interest rate swaps

E. U.S. GAAP Is Written To

1. Reflect the complexity of modernpublic companies

2. Meet the needs of users of publiccompany financial statements

F. U.S. GAAP Has Become MoreComplex as FASB Has

1. Moved to fair value measurementand disclosure

2. Converged its standards withinternational rules

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Outline

I. Private Company Standard Setting

A. Private Company Council Is Looking at

1. Existing GAAP

a. Where alternatives should bemade available

2. Proposed GAAP

a. Where relief should be given toprivate companies

B. The PCC’s “To Do” List

1. Already addressed

a. Goodwill impairments

b. Consolidation of VIEs

c. Business combinations

2. Should be addressing

a. Uncertain tax liabilities

b. Deferred taxes

c. Stock-based compensation

d. Private company disclosures

C. FAF Survey on Future of the PCC

1. Questionnaire’s assumption

a. That PCC’s work was alreadycompleted

2. Based on survey results, PCC willcontinue

a. Exploring GAAP alternatives

b. Proposing GAAP alternatives

D. Moving to Big GAAP, Little GAAP

1. Separate standards board for privatecompany accounting

a. Needed at outset

2. Aggressive attempt to simplify U.S.GAAP for private companies

a. Still needed now

II. Activities of Private Company Council

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A. To What Extent Does PCC Control ItsOwn Agenda?

1. Good news: PCC can determine

a. What issues to examine

b. What to recommend

B. Private Company Decision-MakingFramework

1. Acknowledges differences of privatecompanies

a. Size

b. User groups

c. Sophistication of accountingpersonnel

2. Applies those differences

a. To developing alternatives toGAAP for private companies

C. Definition of a Public Business Entity:ASU 2013-12

1. FASB added “public” definition toglossary

a. When it could not define “non-public entity”

2. Being a public entity for accountingpurposes may be different than

a. Legal purposes

b. Tax purposes

D. Disclosure Relief for PrivateCompanies

1. Pre-PCC: on

a. Segment reporting

b. Fair value disclosures

2. More emphasis needed now

a. On reduction of disclosures

III. Agenda of Private Company Council

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A. Special Purpose Framework, FormerlyKnown as OCBOA, Renamed

1. By Auditing Standards Board

a. For audit engagements

2. By ARSC for

a. Compilation engagements

b. Review engagements

B. PCC’s GAAP Alternatives = GAAP

1. If applied correctly, they result in an

a. Unqualified audit report

b. Unmodified compilation/reviewreport

“A private company can elect toapply one of more of the PCCalternatives. And if they applythem correctly, … you couldhave an unqualified auditopinion or an unmodifiedcompilation or review report.”

- John Fleming

C. Why Many Private Companies Don’tNeed GAAP Financial Statements

1. Net income is not a useful metricfor businesses that

a. Control the distribution of profits

b. Control the distribution of assets

IV. Impact of GAAP Alternatives on Auditing

A. Complex Implementation of FASBStandards for Private Companies

1. Revenue recognition: will requireadditional disclosures

a. Particularly for multiple revenuestreams

2. Lease accounting

a. Will put more operating leaseson balance sheet

B. GAAP Alternatives for RevenueRecognition and Lease Accounting?

1. PCC is unlikely to consideralternatives

a. Until after the standards’effective date

C. John Fleming’s Perspective

1. Accounting standards should reflectan organization’s performance

2. But an organization’s performanceshould not be affected

a. By accounting standards

D. Impact of Lease Accounting StandardWil

1. Affect a company’s

a. Debt covenants

b. Long-term agreements

2. Have an impact on company’sperformance metrics

3. Likely change how a companyacquires assets

V. PCC’s Impact on Recent Accounting Standards

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VI. GAAP Alternative for VIEsA. GAAP Requires Assessment of

Controlling Financial Interest with

1. Voting interest model, or

2. Variable interest entity (VIE) model

B. Private Company Consolidations

1. Use “variable interest entities” todetermine consolidation

a. Under FIN 46

2. Based on control

a. Rather than majority ownership

3. Requires consolidated financialstatements

a. Rather than combined or separatestatements

C. Consolidation of Commonly-OwnedEntities

1. Opposed by

a. Private companies

b. Third-party users

2. But was preferred GAAP approachby FASB in FIN 46

3. Until FASB accepted PCCalternative

a. ASU 2014-07

VII. Going Forward and Other AlternativesA. Accounting for Goodwill: ASU No.

2014-02

1. Private companies can amortizegoodwill

a. On a straight-line basis

b. Over 10 years

2. Many companies no longer performannual analysis

a. Of goodwill impairment

b. Unless there’s a triggering event

B. John Fleming’s Crystal Ball

1. A need for private company basis ofaccounting that’s understandable

a. To the organization

b. To its financial statement users

“The question is: in what formLittle GAAP, or what constitutesLittle GAAP, takes in the future.”

- John Fleming

C. Going Forward, Accountants Must

1. Pay attention to changes

2. Support their clients

3. Be involved with classroomactivities

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1. John Fleming highlights why it is sodifficult for many private businesses tocomply with U.S. GAAP. Do you agreeor disagree with his analysis? Why? Towhat extent do your clients issue GAAPfinancial statements?

2. To what extent do your small businessclients rely on outside lenders andsureties? To what extent do they haveminority investors? How will those“stakeholders” influence the decision ofwhether or not to use GAAP alternatives?

3. John Fleming remains committed to thenotion of a separate basis of accountingfor private companies. Do you agree ordisagree with his viewpoint? Do youbelieve in the “inevitability” of a BigGAAP, Little GAAP?

4. To what extent have your clients beeninterested in the Financial ReportingFramework for Small and Medium-SizedEntities? For what reasons? How did, orwill, a transition to FRF for SMEs affectyour workload?

5. John Fleming expresses a desire for thePrivate Company Council to moreaggressively emphasize an elimination ora reduction of the GAAP disclosures thatare required of private companies. Doyou agree or disagree with his opinion?Which current disclosures would you liketo see modified or eliminated?

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2. Simplified Accounting: On the Way to Little GAAP?

● As the Discussion Leader, you shouldintroduce this video segment with wordssimilar to the following:

“In this segment, John Fleming assessesthe private company alternatives toGAAP that have recently been institutedand also evaluates whether we are on apath toward a system of ‘Big GAAP’ and‘Little GAAP ‘”

● Show Segment 2. The transcript of thisvideo starts on page 2–18 of this guide.

● After playing the video, use the questionsprovided or ones you have developed togenerate discussion. The answers to ourdiscussion questions are on page 2–8.Additional objective questions are onpages 2–9 and 2–10.

● After the discussion, complete theevaluation form on page A–1.

Discussion Questions

You may want to assign these discussion questions to individual participants before viewingthe video segment.

Instructions for Segment

Group Live Option

For additional information concerning CPE requirements, see page vi of this guide.

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Discussion Questions (continued)

6. The program reviews how the PrivateCompany Council developed a GAAPalternative for the consolidation ofcommonly-owned entities. Howsignificant is the issue of variableinterest entities to your clients? To whatextent do they take advantage of theGAAP alternative?

7. John Fleming states that most privatecompanies no longer perform an annualanalysis of goodwill impairment, unlessthere has been a triggering event. Towhat extent are your clients concernedwith accounting for goodwill? Do theynow amortize goodwill over ten yearsor less?

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1. John Fleming highlights why it is sodifficult for many private businesses tocomply with U.S. GAAP. Do you agreeor disagree with his analysis? Why? Towhat extent do your clients issue GAAPfinancial statements?● Participant response is based on your

clients’ structure and financialreporting needs, on your practice andthe services you offer, as well as onyour perspective and experience.

2. To what extent do your small businessclients rely on outside lenders andsureties? To what extent do they haveminority investors? How will those“stakeholders” influence the decision ofwhether or not to use GAAPalternatives?● Participant response is based on your


3. John Fleming remains committed to thenotion of a separate basis of accountingfor private companies. Do you agree ordisagree with his viewpoint? Do youbelieve in the “inevitability” of a BigGAAP, Little GAAP?● Participant response is based on your


4. To what extent have your clients beeninterested in the Financial ReportingFramework for Small and Medium-Sized Entities? For what reasons? Howdid, or will, a transition to FRF forSMEs affect your workload?● Participant response is based on your


5. John Fleming expresses a desire for thePrivate Company Council to moreaggressively emphasize an eliminationor a reduction of the GAAP disclosuresthat are required of private companies.Do you agree or disagree with hisopinion? Which current disclosureswould you like to see modified oreliminated?● Participant response is based on your


6. The program reviews how the PrivateCompany Council developed a GAAPalternative for the consolidation ofcommonly-owned entities. Howsignificant is the issue of variableinterest entities to your clients? To whatextent do they take advantage of theGAAP alternative?● Participant response is based on your


7. John Fleming states that most privatecompanies no longer perform an annualanalysis of goodwill impairment, unlessthere has been a triggering event. Towhat extent are your clients concernedwith accounting for goodwill? Do theynow amortize goodwill over ten years orless?● Participant response is based on your


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1. According to John Fleming, currentGAAP:

a) is too complex for privatecompanies.

b) does not provide value-addedinformation to third-party users.

c) is designed specifically for publiccompanies.

d) all of the above

2. In terms of the process used to developPCC alternatives, John Fleming notesthat:

a) the FAF is the body that needs toapprove PCC alternatives.

b) FASB hands down the PCC’stechnical agenda.

c) agenda topics are created based onthe PCC’s feedback from publicoutreach.

d) all of the above

3. John Fleming would like the PCC tofocus more of their energy on:

a) recognition.

b) disclosures.

c) measurement.

d) the Private Company Decision-Making Framework.

4. Which of the following would a bankerevaluating a private company generallybe interest in seeing?

a) net income

b) cash flow statement

c) goodwill calculations

d) consolidated VIEs where a real estatecompany is involved

5. If a private company elects to use a PCCalternative:

a) the company can still receive anunqualified audit opinion.

b) the company must apply all the PCCalternatives.

c) the company would be considered tobe using a special purposeframework.

d) the company must implement thechange retroactively.

6. With respect to the upcoming leasingand revenue recognition standards, thePCC:

a) is not likely to offer any relief toprivate companies for these topics.

b) is in the process of obtainingfeedback from the public in thisregard.

c) will wait until after implementationbefore addressing any relief forprivate companies.

d) is likely to clash with FASBregarding private company concerns.

7. The PCC alternative for FIN 46provides that:

a) in certain situations, companies donot have to evaluate whether anentity constitutes a VIE.

b) consolidation is still necessary, butdisclosures have been minimized.

c) consolidation is only necessary whenan operating company and a realestate company are commonlyowned.

d) both stand alone and consolidatedfinancials must be provided.

You may want to use these objective questions to test knowledge and/or to generate furtherdiscussion; these questions are only for group live purposes. Most of these questions are basedon the video segment, a few may be based on the required reading for self-study that starts onpage 2–11.

Objective Questions


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Objective Questions (continued)

8. Which of the following is NOT one ofthe PCC alternatives?

a) accounting for goodwill

b) accounting for uncertain taxpositions

c) simplified hedge accounting forcertain interest-rate swaps

d) simplified VIE guidance forcommon control leasingarrangements

9. According to the required reading,how will the PCC be structuredorganizationally?

a) It will now have twelve members.

b) It must include two FASBmembers.

c) It will include the FASB technicaldirector.

d) It will have ten members,representing preparers, users, andpractitioners.

10. As a result of the FAF’s review on thePCC:

a) the PCC will have much lessautonomy going forward.

b) the PCC will double its budget.

c) the PCC will establish a TechnicalAgenda Consultation Group.

d) the PCC will report directly to theFAF.

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Self-Study Option

Required Reading (Self-Study)

Instructions for Segment

PRIVATE COMPANY COUNCIL HAS BECOME A CATALYST FORGAAP SIMPLIFICATION

By Edith Orenstein, for FEI DailyFor additional info, go to:http://daily.financialexecutives.org

Not long ago, some feared the PrivateCompany Council (PCC) would takeGenerally Accepted Accounting Principles(GAAP) down the path of destruction. Now,the PCC’s efforts are at the leading edge ofthe Financial Accounting Standard Board’ssimplification efforts aimed at all companies– public and private.

Rising from a recommendation of a blueribbon panel on private company standard-setting published in 2010, the FinancialAccounting Foundation (FAF) formed thePCC in 2012, to advise the FASB onwhether exceptions or modifications –known officially as “alternatives” – toexisting nongovernmental U.S. GAAP arenecessary to address the needs of users ofprivate company financial statements.

Essentially, the PCC will:

a) identify, deliberate, and vote on anyproposed changes, which will be subject toendorsement by the FASB, and thensubmitted for public comment before beingincorporated into GAAP; and

b) also will serve as the primary advisorybody to the FASB on the appropriatetreatment for private companies for itemsunder active consideration on the FASB’stechnical agenda.

The FAF deliberately decided to form anadvisory council to FASB to avoid theperception or reality of two different sets ofGAAP; colloquially referred to as “BigGAAP” (public companies) and “LittleGAAP” (private companies).

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1. Viewing the video (approximately 30–35 minutes). The transcript of thisvideo starts on page 2–18 of this guide.

2. Completing the Required Reading (approximately 25–30 minutes). TheRequired Reading for this segment starts below.

3. Completing the online steps (approximately 35–45 minutes). Pleasesee pages iii to v at the beginning ofthis guide for instructions oncompleting these steps.

When taking a CPA Report segment on a self-study basis, an individual earns CPE credit bydoing the following:

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The End of the World?

Some still remain concerned that the“alternatives” granted to private companies,as recommended by the PCC and endorsedby FASB, run the risk of a dual GAAPsystem in the U.S. Most notably, the PublicCompany Accounting Oversight Board’s(PCAOB) Director of Research and AnalysisGreg Jonas cited this concern about privatecompany alternatives potentially leading to aseparate set of GAAP, with Jonas callingthat a “world-class bad idea.”

Of course, the FASB, along with manyprivate company observers, don’t see it thatway. Jeff Mechanick, FASB’s assistantdirector for nonpublic entities, refutes theidea that the fruits of the PCC’s labors willbe to cause a chasm in GAAP.

“The PCC was established to avoid thecreation of a ‘Big GAAP’ and a ‘LittleGAAP,’” says Mechanick. Acknowledgingthe work of the PCC, whose membersinclude financial statement preparers, usersof financial statements and auditors, headds: “I believe the PCC has madesignificant progress in helping the FASBdevelop alternatives within a single GAAPthat maintain or improve the usefulness andrelevance of GAAP for private companiesand their financial statement users, whilereducing the cost and complexity ofpreparing and auditing the statements.”

PCC as a Catalyst for FASBSimplification

“Furthermore, the PCC has been a catalystfor the FASB’s broader efforts to simplifyGAAP for the benefit of all FASBstakeholders, including public companies,not-for-profit organizations, and employeebenefit plans,” Mechanick says, referencingFASB’s Simplification Initiative, one ofFASB Chairman Russell Golden’s majorgoals.

Indeed, FASB has placed on its agenda anumber of projects to examinesimplifications for all of its constituents –public and private companies as well asother nonpublic, nongovernmentalorganizations – following from the PCC’s

detailed examination and deliberation ofissues as to the cost and complexity ofcertain measurement or disclosurerequirements in U.S. GAAP, vs. the benefitor usefulness of that information.

So far, four final standards have been issuedspecifically as a result of FASB’sendorsement of PCC recommendations, withthe most recent standard (AccountingStandards Update No. 2014-18 on BusinessCombinations, issued by FASB on Dec. 23,2014. Listed below are the ASUs issued todate resulting from PCC consensuses:

● Update No. 2014-18 – BusinessCombinations (Topic 805): Accounting forIdentifiable Intangible Assets in a BusinessCombination (a consensus of the PrivateCompany Council)

● Update No. 2014-07 – Consolidation(Topic 810): Applying Variable InterestEntities Guidance to Common ControlLeasing Arrangements (a consensus of thePrivate Company Council)

● Update No. 2014-03 – Derivatives andHedging (Topic 815): Accounting forCertain Receive-Variable, Pay-Fixed InterestRate Swaps – Simplified Hedge AccountingApproach (a consensus of the PrivateCompany Council)

● Update No. 2014-02 – Intangibles –Goodwill and Other (Topic 350):Accounting for Goodwill (a consensus ofthe Private Company Council)

Asked to describe what he thinks has beenthe biggest achievement of the PCC so far,FASB’s Mechanick replies, “The GAAPalternatives on Goodwill (amortization andsimplified impairment testing) and VariableInterest Entities (VIEs) – the exemption formany lease arrangements between entitiesunder common control, are proving to beespecially useful for many privatecompanies.”

“Overall, though,” says Mechanick, “I thinkthe biggest achievement of the PCC hasbeen its role in helping the FASB root outand avoid unnecessary complexity in GAAPfor all companies and organizations that useit.”

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PCC’s Work to Continue

At the beginning of 2016, the parentorganization – the Financial AccountingFoundation (FAF) – announced that thePCC will continue exploring potentialalternatives to financial reporting standardsfor private companies and will expand itsadvisory role on standards FASB isdeveloping. The continued exploration ofpotential private company alternatives couldbe interpreted as a shift in direction from theFAF in early 2015 that called for acontinued transition for the PCC into a bodythat primarily provides input on FASBagenda projects.

FAF asked for comment on whether the“look-back” phase of considering possibleGAAP alternatives for private companieswas complete or nearly complete. Somecomment letter writers, including theAICPA, wrote that the PCC’s work onprivate company alternatives was not closeto being finished. AICPA President andCEO Barry Melancon, CPA, CGMA, andthen-AICPA board Chair Tommye E. Barie,CPA, wrote a May 8 letter to the FAFtrustees: “Consistent with how the PCC wasestablished, FASB and PCC must bepartners in deciding when differences inGAAP are appropriate. The PCC cannotbecome merely an advisory body to FASB.”

A review report on the PCC released inearly 2016 by FAF – which is also FASB’sparent body – confirmed that the work onalternatives should continue. The report alsodescribed various mechanisms throughwhich the PCC will assist FASB indeveloping its standards. “Part of the goal isto work more collaboratively on the frontend with the FASB,” said Candace Wright,who replaced Billy Atkinson as the PCCchair in January 2016.

The report calls for: PCC and FASBmembers and staff to communicate regularlywith one another on FASB projects.Establishment of project-specific workinggroups at the discretion of the PCC chair toadvise FASB on the impact its proposalsmay have on private companies. Theseworking groups would include PCCmembers and perhaps non-PCC members.These working groups would also be

expected to provide a clear explanation toprivate company stakeholders about thePCC’s input on FASB agenda projects, aswell as an explanation of FASB’sconsideration of that input.

Organizationally, the PCC will remain a 10-member group with three preparers, threeusers, and three practitioners, besides thechair. In addition, the PCC will establish aTechnical Agenda Consultation Group,which will include two FASB members, theFASB technical director, and some PCCmembers. The consultation group willdiscuss whether it is more efficient andeffective for the PCC or FASB to take thelead on potential projects. After consultingwith the group, the PCC will decide whetherto add a project to its technical agenda.

The review report is the result of a formal,three-year review that was mandated whenFAF created the PCC in 2012. So far, thePCC has created four GAAP alternatives forprivate companies, addressing accountingfor intangible assets in a businesscombination; applying variable-interestentity guidance to common-control leasingarrangements; accounting for goodwill; andcreation of a simplified hedge accountingapproach to accounting for certain interest-rate swaps.

According to new chair Wright, she doesnot have “a list of issues for possible GAAPalternatives. I really don’t have apreconceived idea or notion of what needsto be done.” She added that her mainonboarding task is: “I am listening. I amlistening to the current PCC members andthe outgoing PCC members, who all havedone a tremendous job, and we will worktogether to determine whether there areareas we need to focus on going forward.”She stressed that outreach will be a big partof the PCC’s role: “We will be participatingin outreach to other private companystakeholders that the FASB actuallyperforms, so that the FASB adequatelyconsiders private company issues.”

Those with a long memory may recall thatthe PCC succeeded the earlier PrivateCompany Financial Reporting Committee(PCFRC) and was given the ability to voteon changes that it would then recommend to

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FASB. It was established after the FAF,along with the American Institute of CPAsand the National Association of State Boardsof Accountancy, set up a Blue-Ribbon Panelon Standard Setting for Private Companies.The AICPA had pushed for an independentstandard-setting board for privatecompanies, but in the end the new PCC wasgiven some autonomy, while still leaving theactual standard-setting role with FASB.There were some fears expressed by theAICPA, NASBA and outgoing PCCchairman Billy Atkinson that the groupmight lose some of its autonomy at theconclusion of the three-year review, but thenew report seems to indicate the PCC willcontinue to play an important role in settingstandards, albeit with some new proceduresthat may even strengthen the group.

Partner Insights: What’sThis?

In her interview, Candy Wright indicatedthat she intends to carry on the work startedby her predecessor. “I’m hoping that we’rejust going to continue to build on the goodfoundation that the PCC has laid over thelast three years working with the FAF andthe FASB.” Specifically, she indicated:“There have been some updated proceduresthat the PCC will be following. I think thoseare going to improve the timeliness of ourinput into the FASB’s projects. We’rehoping to do that on a more real-time basisas part of our advisory role to provide theinput during the deliberations so that we canhave influence on the final outcome of thestandard that the FASB might issue, and wewill also participate in project-specificworking groups that are managed andadvised by the FASB. But we will have aninput as far as private companies and theimpact that the proposed standard mighthave as the working group moves forward toadvise the FASB.”

The updated procedures mainly focus on theway in which the PCC provides FASB withprivate company perspectives on the FASB’sactive agenda projects, and on how the PCCcommunicates those perspectives to itsstakeholders.

The FAF trustees amended theResponsibilities and Operating Proceduresof the PCC to reflect several improvementsand issued a final report that concluded itsthree-year review of the PCC and itsoperations. The objective of the review wasto determine whether the PCC is meeting itsprimary responsibilities and mission, andprovide an assessment of the PCC’scontinuing role and effectiveness.

In the course of the review, the FAF trusteesreceived more than 50 comment letters fromvarious stakeholders, including the AICPAand NASBA, that provided input on thePCC’s effectiveness, accomplishments androle in improving financial accounting andreporting standards for private companies.

“Most stakeholders expressed support forthe PCC and agreed that it has beensuccessful in addressing the needs of usersof private company financial statements,while reducing costs and complexity forpreparers,” said FAF chair Jeffrey J.Diermeier in a statement. “Stakeholders alsosuggested improvements – includingincreased transparency around the PCC’sviews on active FASB agenda projects, andmore robust communication of those viewsto the FASB and the public.”

After considering stakeholder feedback, theFAF Trustees made the following decisions:

● PCC maintains the ability to proposeprivate company alternatives: The PCC willmaintain the ability to develop proposedaccounting alternatives using the guidanceprovided in the “Private Company Decision-Making Framework: A Guide for EvaluatingFinancial Accounting and Reporting forPrivate Companies.”

● PCC should increase the effectivenessof its advisory role: As the number of PCCprojects addressing existing GAAP declines,the PCC’s advisory role to the FASB onactive FASB projects and GAAP as a wholeis expected to consume a greater percentageof the PCC’s time. To increase the PCC’seffectiveness in providing the FASB withprivate company perspectives on the FASB’sactive agenda projects, the trustees said:re

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* Project-specific working groups,which may include non-PCC members,should be established at the discretion of thePCC chair so that PCC members caneffectively advise the FASB on the impactits proposals may have on privatecompanies.

* The PCC’s input on FASB agendaprojects (including an explanation of theviews of its members) should be articulatedclearly and communicated to privatecompany stakeholders, along with FASB’sconsideration and disposition of that input.

* The FASB and the PCC shouldensure that stakeholders are kept informedin a timely and transparent manner aboutPCC and FASB activities related to privatecompanies.

● PCC to establish a technical agendaconsultation group: A PCC TechnicalAgenda Consultation Group should beestablished, comprising two FASBmembers, the FASB technical director, and asubset of PCC members, to discuss whetherit is more efficient and effective for the PCCor the FASB to take the lead on a potentialproject and add the project to its technicalagenda. After consulting with the PCCconsultation group, the PCC will decidewhether to add a project to its technicalagenda.

● PCC will retain its size andcomposition: The PCC will retain its sizeand composition (the chair, three users, threepreparers, and three practitioners); and theterm lengths of its members. To establish anorderly rotation and maintain appropriatecontinuity on the PCC, six of the existingPCC members were appointed to a secondterm and those terms were staggered.

● PCC oversight to begin transition: TheTrustees’ Private Company ReviewCommittee will begin to transition its PCCoversight responsibility to the Trustees’Standard-Setting Process OversightCommittee in 2016. The Trustees expect thatthe Oversight Committee will assume PCC

oversight responsibility no later than the endof 2017.

According to chair Wright: “There are anumber of projects that the FASB has on itsagenda already that we are currentlyproviding input into. There’s the wholesimplification issue that the FASB isworking on, and we are actively providinginput into those initiatives that the FASBhas. For any other projects that the FASBneeds input regarding private companies andhow it might impact them, the PCC will bethe body that the FASB will go to get thatinput.”

In some cases, projects that started out withthe PCC as ones where stakeholders thoughtaccounting simplifications should be madefor private companies became larger projectsthat FASB took on for simplifying standardsfor both private and public companies.Wright intends to maintain the PCC’sinvolvement in looking for areas whereimprovements can be made for privatecompany accountants.

“We’ll always be on the lookout for areaswhere there might need to be a privatecompany alternative for a particularstandard,” she said. “We have several thatwe are working on with the FASB now.There has been no formal recommendationor anything on those from the PCCperspective. We are in our initial stages. Weperform outreach to other private companystakeholders, and the PCC is activelyinvolved in that with the FASB. That is alsoone of our goals, to broaden that outreach tothe other private company stakeholders todetermine if there are other areas wherethere needs to be a focus and an alternativefor private companies, so that is part of whatwe will be focusing on going forward.”

The PCC recently convened a PrivateCompany Town Hall Meeting in conjunctionwith the AICPA’s Controllers Conference inOrlando, Fla. The PCC plans to continueholding similar town hall meetings to getinput from stakeholders on issues that mightface them from a private company financialreporting perspective, and also seek input ontheir projects and FASB projects that mighthave private company interests as well.

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g Members of the PCC are alreadyparticipating in the joint Transition ResourceGroup that FASB and the InternationalAccounting Standards Board have set up forimplementing the revenue recognitionstandard.

Going forward, the PCC will have moreformalized processes to vote and provideinput on FASB projects as a result of thechanges from the three-year review.

“We’re going to have a PCC TechnicalAgenda Consultation Group that willcomprise both the PCC and FASBmembers,” said Wright. “That group willdiscuss whether it’s more efficient andeffective for the PCC or the FASB to takethe lead on a potential project and add theproject to the technical agenda. We will bein communication to make sure that effortsare not being duplicated and that we’retaking the most efficient route.”

Wright anticipates her group will maintainits role in the standard-setting process.

“What I would hope is that we continue tobe a sounding board for the FASB to makesure that private company issues andconcerns are expressed and that we wouldprovide them with any insight that theymight need to consider private companystakeholder issues,” she said. “There are alot of private companies out there and a lotof broad perspectives that the committee canbring. I would hope that the dialoguecontinues to provide communication to theFASB so that those considerations can bedealt with while they’re deliberating theirstandards.”

Private CompanyAlternatives To BecomeMore Accessible

Private company financial reportingalternatives will become more accessibleunder a PCC decision endorsed by FASB inDecember 2015. FASB endorsed the PCC’sconsensus to remove the effective datesfrom four GAAP alternatives that weredeveloped by the PCC. This paved the wayfor the drafting of an Accounting Standards

Update (ASU) for vote by written ballot thatwould formally remove the effective dates.

Removing the effective dates would allowprivate companies to forgo an initialpreferability assessment that otherwisewould have been required under Topic 250,Accounting Changes and Error Corrections,when the alternatives were initially elected.Effective dates will be removed from:

● ASU No. 2014-02, Intangibles –Goodwill and Other (Topic 350):Accounting for Goodwill;

● ASU No. 2014-03, Derivatives andHedging (Topic 815): Accounting forCertain Receive-Variable, Pay-Fixed InterestRate Swaps – Simplified Hedge AccountingApproach;

● ASU No. 2014-07, Consolidation(Topic 810): Applying Variable InterestEntities Guidance to Common ControlLeasing Arrangements; and

● ASU No. 2014-18, BusinessCombinations (Topic 805): Accounting forIdentifiable Intangible Assets in a BusinessCombination.

FASB also endorsed the PCC’s decisions toindefinitely extend the transition guidance ofthe four ASUs and to require privatecompanies electing one or more of thealternatives to make the change using theoriginal transition provisions included inthose ASUs for the first year applied. Underthis guidance, the accounting alternativeswithin ASU No. 2014-02, ASU No. 2014-03, and ASU No. 2014-07 must be appliedas of the beginning of the first annualreporting period in which each alternative iselected. The accounting alternative withinASU No. 2014-08 must be applied as of thefirst in-scope transaction in the annualreporting period in which the alternative iselected.

Going ForwardAccounting and reporting for privatecompanies continues to evolve – boththrough the efforts of the Private CompanyCouncil (PCC) and new guidance from theFASB.

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gThe good news: The PCC has beensuccessful in representing the perspectivesof private company stakeholders andaddressing private company concernsregarding U.S. GAAP. It has demonstratedpassion for change, and its level ofengagement and willingness to act hashelped reduce the complexity of financialreporting for private companies and theirfinancial statement users, and has compelledfurther thinking on reducing complexity forfinancial reporting as a whole.

The challenge: Going forward, the PCC canhave the greatest impact by focusing on itsadvisory role to the FASB in the context ofongoing standard setting. But to be effective,the PCC will need to maintain a high levelof engagement with the FASB. The speedwith which the board is moving to reducecomplexity means that timely perspectivesfrom private company stakeholders isessential.

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Video Transcript


SURRAN: For several decades, the accounting profession has been discussing theproblems faced by private companies and the users of their financialstatements, caused mainly by a lack of relevance – as well asunnecessary complexity – in too many places in U.S. GAAP. Viewerswill recall that the Blue Ribbon Panel on Standard Setting for PrivateCompanies – formed by the AICPA, the Financial AccountingFoundation and the National Association of State Boards of Accountancy– came out with two significant recommendations that wouldpermanently change private company financial reporting:

First, allowing differences in existing and future GAAP where warranted;and

Second, creating an independent board to set or resolve those differences.

Since 2012, that “semi-independent” board – the Private CompanyCouncil, or PCC – has a number of accounting alternatives to U.S.Generally Accepted Accounting Principles, including:

One, accounting for intangible assets acquired in business combinations;

Two, accounting for goodwill subsequent to a business combination;

Three, variable interest entities; and

Four, certain types of interest rate swaps.

So, the question for the accounting profession remains: Are we movingto a system of standards with a “Big GAAP” and a “Little GAAP”?

QUINLAN: That’s certainly a perennial question by our viewers, Becky. And here,with the answer, is longtime expert commentator, John Fleming. It’sgreat to see you, John.

FLEMING: Mike, it is great being here again. Thank you for having me.

QUINLAN: Over the past few years, we’ve heard criticisms that GAAP is toocomplex and onerous, and lacks relevance, for small businesses. I assumethat you’ve heard – or made – those complaints, too.

FLEMING: Well, quite frankly, Mike, GAAP is not written for private companies. Itis written for public companies. And of course, public companies, as youknow, are much larger than your traditional private company. So, whenwe take a look at the thousands of pages of U.S. GAAP, they arereflecting the complexity that you will see in a larger company. And,quite frankly, that makes sense. But when we look at smaller companies,particularly those that are privately owned – commonly owned by twobrothers or three sisters or whatever it might be – they are generally notlooking at the large number or a large group of different users. When youare looking at a smaller company, you are looking at the bank, maybeyou are looking at a bonding company. There could be a passive ownersomeplace, but the users are very limited. So, when FASB creates GAAPto meet the multiple needs of many different user groups, those types ofstandards do not really work well for private companies.

And what we have seen, over the past probably 10 or 12 years, is a prettysignificant movement away from U.S.GAAP for private companies toincome tax basis. And that is a result of so many private companies

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simply being unable to deal with the complexities associated with U.S.GAAP, as it is written and as we know it today.

QUINLAN: Correct me if I’m wrong, John, but the topic of “big GAAP” versus “littleGAAP” is not a new issue for the accounting profession. It resurfacesperiodically, doesn’t it?

FLEMING: Gosh, Mike, it has been just a series of discussions over the years of “BigGAAP, Little GAAP.” I can remember getting out of college in 1970,when we were assigned to serve certain clients and some of those clientswere very small. The complaining that was taking place from thoseclients about the complexity of GAAP at that time. And I can tell you thatGAAP was not that complex in 1970, certainly not as compared to what itis today. We certainly have had that “Big GAAP, Little GAAP” discussionfor a very, very long time.

Those discussions have “gotten legs” in recent years as FASB has movedto issues such as fair value, where there is a fair amount of complexityand note disclosures.

More recently, the changes FASB has made with the IASB in convergingstandards, so that there are limited differences between the two.

That has created additional complexity associated with U.S. GAAP thatjust raised to the table again the issues of “Big GAAP, Little GAAP” overwhat is an appropriate basis of accounting to use if you are a privatecompany.

QUINLAN: Let’s make sure I understand the structure. For the past decade, FASB hasconvened a Private Company Financial Reporting Committee and, now,the Private Company Council. Remind me: does the PCC work for FASB,or does it advise the FASB, or both?

FLEMING: Well, it actually does both, Mike. The Financial Accounting Foundation isthe umbrella organization for both FASB and GASB. And the PrivateCompany Council, which was created a couple of years ago, serves as anadvisory group to FASB with the goals of, one, taking a look at existingGAAP and determining whether there may be situations where certainalternatives could be made available to a private company and still be onGAAP.

So, the first goal is taking a look at existing GAAP.

The second goal of the PCC is taking a look at proposed GAAP todetermine whether or not there might be situations in a proposed standardwhere there could be some relief made or given to private companies, interms of avoiding some of the complexity that maybe within that givenproposed standard.

The PCC by itself is an advisory board though. It is not a standard settinggroup. It makes recommendations to FASB. FASB goes through itsnormal due process to determine whether these recommendations shouldconvert themselves into an accounting standard or not. But the advisorynature of the PCC is a little bit more significant today than the PrivateCompany Financial Reporting Committee was some years ago.

QUINLAN: Just review the history for me, John, if you don’t mind. There’s beencontinuing controversy over the PCC ever since this group wasrecommended by the so-called Blue Ribbon Panel, hasn’t there?

FLEMING: Well, the controversy, I think, has more to do with the topic areas thatsome believe should be addressed, versus the topic areas that the PCCmay have addressed already.

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consolidation of variable interest entities. They have addressed businesscombinations.

And while those topics are all relevant, there are others who believe thatthere should be other topics that they are also addressing, such as:uncertain tax liabilities; such as deferred taxes; such as stock-basedcompensation; and the broader issue of the extent of disclosures that arerequired by a private company, really has not been addressed by thePrivate Company Council. And I think many believe that the disclosureissue may be a more significant issue for private companies thannecessarily only looking at measurement and recognition issues.

QUINLAN: Well, the FAF Board of Trustees recently conducted an assessment of thePCC based on its first three years of operation. Does the “boss” thinktheir advisers have met their primary responsibilities and mission?

FLEMING: Mike, the easy answer is, “Yes, they do.” But in that survey that they didin order to reach that conclusion, they used a questionnaire that went outto, I am not sure how many people. I did receive a copy of thequestionnaire. I did complete it.

And in that questionnaire, the nature of the question seems to assume thatthey thought the PCC was done. Now, I cannot speak for them.

But in looking at the questions in that questionnaire, I concluded that theywere asking them almost as if to say: “Okay, we’re now done with this.Let’s go do something else.”

And I think the feedback they received was that the PCC is not done. ThePCC still has a fair amount of challenges ahead in the future.

And so, I think that may have changed their mindset a little bit based onthe feedback they received. And I think we will see the PCC continuingto look at issues certainly the next three or four years as opposed to, Ithink, what some may have thought, that they would be done by now.

QUINLAN: Well, more importantly, have they lived up to YOUR expectations, John?

FLEMING: Well, it is interesting, Mike, as to what an individual’s expectations maybe, specifically mine. Back to the comments about “Big GAAP, LittleGAAP,” it was my hope at the time that what would ultimately resultfrom this Blue Ribbon process was a standard-setting initiative directlyfocused on private companies. Now, that has not happened. We do nothave a separate private company accounting standards board.

And there are probably a variety of reasons why we do not. But if you areasking me what my expectations were: my expectations were that therewould be a more aggressive attempt to simplify U.S. GAAP for privatecompanies, even to the point of creating a different basis of accountingfor private companies that would allow them to basically comply withGAAP, but comply with GAAP in a manner that would be moreappropriate for the private company and more useful for the user.

I am not sure we are there yet. I think we still have a long way to go as towhether we have, let’s call it, a completely separate set of accountingstandards that private companies could refer to. Because even though wehave a variety of alternatives now, and we will continue to have morealternatives, keep in mind that we are still looking at thousands andthousands of pages of U.S. GAAP. And most private companies do nothave sophisticated accounting personnel within their organization to applynot only the complex standards, but also to figure out the alternatives that

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the PCC has recommended to FASB, and what the impact of thosealternatives may be on the financial statements for the privatecompanies.

QUINLAN: What you’re saying, I think, John, is that it may be necessary, at somepoint in the future, to change or modify the roles and responsibilities ofthe PCC.

FLEMING: I believe, Mike, that is correct. I believe that what we are doing now isequivalent to a band aid. And I think we need a more aggressiveapproach to create appropriate accounting standards for privatecompanies.

QUINLAN: I suppose I should know the answer, but: To what extent is the PCC incontrol of its own technical agenda?

FLEMING: Well, for the most part, the PCC captures feedback from public hearings,they evaluate that feedback, and they create agenda topics. Certainly, theFASB always has the final say on what those agenda topics may be.

But for the most part, the PCC has the ability to determine what issues itwill take a look at and what issues it will recommend to FASB. Andkeep in mind also: at the end of the day, FASB still has to say “yes.” So,even though the PCC can have their own agenda topics, the FASB willmake the final decision as to whether or not one of these alternativesgoes forward or not.

QUINLAN: In discussing their future agenda, the PCC made reference to the PrivateCompany Decision-Making Framework. Is that something that ourviewers should know about?

FLEMING: The decision-making framework for private companies simplyacknowledges that private companies are different.

They are different in terms of size. They are different in terms of usergroups. They are different in terms of sophisticated accountingpersonnel. They have a variety of differences that should be reflected bynot only the Private Company Council, but also in the current way thatwe are issuing standards and should be reflected by FASB. So, thatframework does not say anything that is not, or was not, known aboutthe differences between private companies and public companies. Itsimply acknowledged those differences.

And given those differences, they are using that information to determinewhen, and of what type, should there be alternatives for privatecompanies.

I think that is a positive. I believe recognizing upfront that there aredifferences enables us to move forward and look at what thosedifferences can be in terms of a standard setting approach. And I thinkthat is helpful. And in terms of does the Private Company Decision-Making Framework create anything that somehow was not knownbefore? No, it is just an acknowledgement of what I think we all knew atthe time.

QUINLAN: You mentioned the standards issued by FASB. And the board issued anASU a few years ago on the definition of a “public business entity.” Iassume there were no surprises, were there?

FLEMING: No, Mike. What the FASB initially tried to do was to define a “non-public entity.” The reason for that: if the private company accountingrecommendations are put in place, then only private companies or non-

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pt public companies can apply these alternatives. So, the initial thought

was: “Let’s define a non-public entity.” And FASB had some difficultydoing that. It was not as easy as I think they thought it was going to be,simply because of the broad nature of different kinds of non-publicentities.

So, they chose to define a public entity, which basically is an entity thathas to file with the SEC or some type of regulatory body. And thatallowed them to say: “If you’re not a public entity, then you’re a non-public entity,” rather than trying to define what a non-public entity is.

So, right now, they have taken a look at that issue of the definition of apublic entity. I think they are going to probably provide a little bit morecriteria leading to what would be a public entity for accounting purposes.And I say it that way because, it is a public entity for accountingpurposes, but it may not be a public entity for legal purposes. And it maynot be a public entity for tax purposes. But certainly from an accountingperspective, they are going to come up with a definition that will make iteasier to identify who is public. Therefore, if you are not a public entity,you would be allowed to take advantage of the PCC alternatives.

QUINLAN: Years ago, John, you told me that SFAS No. 131 – now known as ASCTopic 280 – required companies to report their financial information bybusiness segments. But, I recall, that disclosure mandate was onlyapplicable to publicly traded companies. As a result of the PCC, are weseeing more situations like that now? Or has the PCC been stressing areduction, rather than an elimination, of disclosures?

FLEMING: As I said earlier, Mike, the whole issue of disclosures has not quitegotten the attention of the PCC, as some of us think it should have had.The segment-reporting disclosure was one of the first times that theFASB actually provided some relief for private companies in that theysaid: “Only public companies have to make the segment disclosure.”They went on at a later date to also provide some relief for privatecompanies in certain fair value disclosures.

But both of those circumstances took place before the PCC was created.So, these were not PCC initiatives. The PCC, for the most part, has beenfocusing on measurement and recognition differences, not disclosuredifferences.

And many of us believe that there should be an effort to take a look atthe disclosures required for private companies. And there should be someattempt to reduce those disclosures that are not helpful to third-partyusers of the private company financial statements.

QUINLAN: Now that we’ve had a few years of PCC alternatives, I suppose that Ishould ask you: does use of these alternatives have an impact on theperformance standards? I mean, is it still considered a GAAP – ratherthan an OCBOA – audit or review, if you follow the PCC alternatives?

FLEMING: Mike, the use of a PCC alternative does not create, as you say, anOCBOA or special purpose framework.

QUINLAN: We’ve been discussing these topics for a number of years, so I shouldprobably know the answer myself by now, John. What’s the difference –or is there a difference – between what I called “an OCBOA” and youcalled “a special purpose” framework?

FLEMING: Mike, a couple of years ago, the Auditing Standards Board, as part of itsclarified auditing standards, decided the phrase “OCBOA” – or Other

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pt Comprehensive Basis of Accounting – was not clear enough to some

users as to exactly what that was referring to. They were particularlyconcerned about the word “other.” They did not have any framework fordescribing “other.” So, they took a look at what the international folksdo. And the international folks referred to a basis of accounting that isnot international GAAP as a “special purpose framework.”

And what the Auditing Standards Board decided to do for its auditingstandards is refer to basis of accounting other than GAAP as specialpurpose frameworks. Going forward, the AICPA’s ARSC committee forcompilation and reviews chose to do the same thing.

So, that literature also refers to special purpose frameworks.

QUINLAN: So, let me ask you specifically: can a business receive an unqualifiedopinion, or an unmodified report, if it uses the private companyalternatives to GAAP?

FLEMING: It is still GAAP. The way this has been set up, a company can elect – thatis, a private company can elect – to apply one or more of these PCCalternatives. And if they apply them correctly and everything else isokay, the performance standards would be exactly the same for thatsituation as they would for any other situation, meaning you could havean unqualified audit opinion, or you could have an unmodifiedcompilation or review report, if you have applied the alternativesappropriately.

So, when we look at the PCC, it is strictly accounting. And theperformance standards do not change, or have not changed, based on anyof the PCC initiatives.

QUINLAN: You began by referring to typical private businesses. The lenders to thosesmall businesses would really like to see a cash-flow statement and anincome tax return. Does it really make a difference to them if the clientproduces GAAP statements rather than an FRF for SMEs?

FLEMING: I think the answer to your question is: yes, bankers do care about cashflow statements. Yes, they do care about the filed income tax returns.They also care about sales growth. And they care about a variety of otheraspects of financial information. But if you are looking at a privatecompany, oftentimes a third-party user does not care much about netincome. Net income really is not very relevant. You cannot spend netincome. It is a performance metric for public companies and a usefulone. But for private companies, particularly when the private companyhas pretty much control over how it distributes profits and how itdistributes any kind of assets it may have, really net income is just notthat meaningful a number.

I have had clients around the country who would not know GAAP, if youpaid them to know GAAP, because they do not have to. They simply donot do anything that is reflective of GAAP financial statements. I havesaid on this program before, that there are some around the country,when they hear the word, “Gap,” they think of the clothing store. Theyare not really thinking about Generally Accepted Accounting Principles.They are thinking about Gap. And that is the reality in many, many partsof this country.

QUINLAN: I’m curious, John: are there likely to be any accommodations for privatecompanies when the revenue recognition standard goes into effect andwhen the lease accounting standard is finalized this year?

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provide complications for all companies. But probably more so, forprivate companies, because of two things.

One, the revenue recognition standard is going to require substantialadditional disclosures beyond what any private company has written inthe past as it relates to revenue. And those companies, as privatecompanies having multiple revenue streams, are going to have extensivenote disclosures for revenue.

The second issue is the lease accounting standard, which is going torequire operating leases that are more than one year in length go on thebalance sheet, meaning you will be debiting a right-of-use assets andcrediting a lease payment liability, for the present value of the paymentswithin the lease term.

And that will restructure significantly many company balance sheets.Again, probably a greater impact on private company balance sheetsbecause of the addition of the assets and the corresponding liabilities,which are today in a note disclosure. So, when we are looking at thosetwo standards, the obvious question, as you are asking: is the PCC goingto take a look at those two standards, and determine that there may becertain alternatives that might be available to private companies for theapplication of those two standards? And I think the answer right now tothat question is “no.”

I think they are going to wait until such time as the effective date for bothstandards has occurred, and they are able to evaluate the difficultiescompanies are having in applying the two standards. And only at thattime might they sit down and come up with certain relief alternatives forprivate companies.

I believe that, for the foreseeable future, there will be no private companyalternative for the revenue recognition standard and for the leaseaccounting standard.

Whether that changes down the road, I cannot predict. But I do not thinkright now that they are looking at any type of current topic that they aregoing to spend some time focusing on, and then coming up with possiblealternatives.

QUINLAN: You’ve taught me well in the past, John: accounting principles shouldn’tdrive business decisions. But what about in this situation? Accounting hasto accurately reflect a business’ operations, doesn’t it?

FLEMING: The comment that I have made in the past that accounting standardsshould not drive business decisions, I think, is a valid comment.

I think accounting standards should be reflecting the performance of anorganization. The organization’s performance should not be impacted byan accounting standard.

When we look at the lease accounting standard that will be out shortly, itis putting operating leases on the balance sheet, whether that is a good orbad decision. But putting operating leases on the balance sheet means thatwe are going to completely restructure balance sheets for companies thatdo a significant amount of leasing.

And what that is going to do is impact debt covenants and other long-term agreements. It is going to impact significantly the performancemetrics for those companies. And it is likely also to change the nature ofhow companies acquire certain assets.

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that companies are not going to be as willing to lease an asset, and paythe high implied interest rate in that leased asset, when it can go out andborrow the money at a lower cost and buy the asset on their own.

So, when we talk about the issue of accounting standards impactingbusiness decisions, the lease standard specifically is going to impactperformance metrics to a very large degree. And it is going to change thenature of how companies acquire assets in that they are not going to beacquiring them as frequently through leasing transactions, instead theyare going to acquire them more as a purchase transaction.

QUINLAN: Thanks, John. We’ll return to your commentary in a minute.

SURRAN: Under current U.S. GAAP, a company is required to consolidate an entityin which it has a controlling financial interest.

The assessment of “controlling financial interest” is performed undereither a voting interest model or a variable interest entity – known as VIE– model. But to determine which model applies, a company preparingfinancial statements must first determine whether it has a variableinterest in the entity being evaluated for consolidation. Is it reallypossible for a private company to elect not to apply VIE guidance?

QUINLAN: I see that the PCC also provided a GAAP alternative in the area ofconsolidations. I’m curious, John: why is that of concern? Do that manyprivate companies really have consolidation issues?

FLEMING: Mike, the whole consolidation issue that specifically has impactedprivate companies has been a byproduct of the Enron fraud, which wasnow 15 years ago. But the accounting response to the Enron fraud wasthe old FIN 46, the interpretation related to consolidation. And that FIN46 created a phrase called “variable interest entities.” And the purpose ofthe interpretation was to expand the basis for determining whetherCompany A should consolidate Company B, which at that time wasbased on majority ownership.

But FIN 46 created the concept of control. And if Company A controlsCompany B, then Company A should consolidate B even though it maynot have majority ownership.

Well, how that impacted private companies over the years was in acircumstance when you have common ownership. So, commonownership could result in owning two, three, four, five different entities.And in the past, what most of those private companies did is they wouldeither prepare separate company financial statements.

Or based on the user’s needs, they may have prepared combinedfinancial statements. But they rarely prepared consolidated statementsback then.

Because the theory was: if I have two or three or four affiliated entitiesunder common ownership, entity A does not have ownership of B; entityB does not have ownership of C; etc. So, lacking majority ownership ofthe other entity, consolidation would not follow. Well, when the FIN 46standard came out and moved that to control, all of sudden the wholeconcept of common ownership changed because, due to the related-partynature of the ownership of these various entities, the consolidationstandard said: “It’s possible that company A, due to the commonownership, could have control of B, or could have control of C, whichwould then drive consolidation if B or C were variable interest entities.”

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pt If you can think of this almost as a triangle, Mike, where you have

common ownership at the top of the triangle. You have an operatingcompany on the left side, you have a real estate entity on the right side,and a lease in between.

So, the lease is for the entire building or most of the building. Theownership of the two entities separated them for tax purposes or estateplanning purposes or liability purposes. And as a result of FIN 46, theoperating company, due to the common ownership, had to consolidatethe real estate LLC almost every time. And in most instances, thecompany did not want to do that. The third-party user did not want to doit, because the third-party user did not have recourse to one of the set ofassets, and now they are being consolidated into one financial statement.And the only folks that seemed to want to do this consolidation wasFASB.

And over the years, it was troublesome. We saw a lot of GAAPdepartures. We saw a lot of folks go to income-tax basis in order to avoidhaving to consolidate the other entity. And finally, the PCC made arecommendation that, if certain criteria are met – which is basically thetriangle I referred to a moment ago – then you do not have to evaluatethe real estate LLC to determine if it is a variable interest entity. And ifyou do not have to evaluate it, then you do not have to consolidate it.

So, that relief, if you will, or that alternative was available last year. Andfor the most part, almost every company that had the opportunity to takeadvantage of that alternative, did so.

It was a very, very popular alternative that was made available by FASB,based on a recommendation by the PCC.

And today, we rarely get into discussions of consolidating variableinterest entities at the private company level, because so many havechosen the alternative that they no longer have to focus on thatconsolidation.

QUINLAN: Since you mentioned “goodwill,” John, remind me: the PCC also focusedits attention on the testing of goodwill for impairment, didn’t it?

FLEMING: Yes, it did. The goodwill impairment test in GAAP is a very difficultimpairment test for a private company to perform.

It is a very difficult calculation for private companies who do not havesophisticated accounting personnel within their organization. Theyfrequently outsource it. Therefore, they have to pay thousands of dollarsto have somebody do it. And then, when the financial statements areprovided to a third party, normally a bank, what the banker does is takesout his or her red pen, and crosses out the line for goodwill, because itgenerates no future cash flows. So, they are not really interested in it. So,it gets prepared because the bank requires it. And then the banker ignoresit and the company is paying thousands of dollars that have it done.

So, ultimately, the PCC recommended that a company could choose notto do the goodwill impairment he goodwill debit is woefullyundervalued.

But apart from that, there is not a need to do an ongoing annualimpairment test anymore. And this is also, as I said, very popular forcompanies that have material goodwill debits on their balance sheet.

QUINLAN: Our producer always asks you to bring your crystal ball with you, John,and I see that – as always – you didn’t disappoint him this month. Is this

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pt the final solution? Are we moving toward a “big GAAP” and a “little

GAAP”?

FLEMING: Well, as we discussed previously, I think it is inevitable that will have a“Big GAAP, Little GAAP.” While the format is questionable, I believethat there is no question that there is demand at the private companylevel for a basis of accounting that not only does the companyunderstand, but also a basis of accounting that the users can understandand quickly do an evaluation of the organization.

Current U.S. GAAP makes it very difficult to do. So, I believe, yes, therewill be a “Big GAAP, Little GAAP.” The question is: what will the formtake for what constitutes little GAAP in the future?

QUINLAN: You’re correct, John: this discussion has already gone on for years, if notfor decades. Tell me, what should our viewers be doing now?

FLEMING: The only real answer, Mike, to that question is paying attention to thechange as it takes place, and is trying to support all those folks who areinvolved in any type of accounting transaction, and making sure that theyhave the support they need to do what they need to do given thesechanges. And I think we are probably going to have a need at some pointin the future for more involvement, if that is the right word, with facultyand classroom activities by companies that are within geographic area ofthose colleges and universities.

Yes, we have internships today. Yes, we have some part-timeopportunities for students today. Yes, we have some folks from theoutside come and speak to students in the classroom. And all of that isgood. But I think there needs to be more of that. And I think there needsto be more of a partnership with employers in a given businesscommunity where these universities may be located.

QUINLAN: John Fleming, thanks – as always – for bringing us up to date.

FLEMING: Mike, thank you. It is my pleasure being here.

Documents

ADP Lunch & Learn Course Materials - …kapmarketing.net/SmartPros/ADP/Lunch-And-Learn/2016-17/WORKBOOK8.pdfADP Lunch & Learn Course Materials ... Determine the impact of GAAP alternatives