www.pwc.com/pcs An Unprecedented Shift in the Private Company Accounting Standard Setting Process A Conversation with the Private Company Council Chairman February 2014
PCC Chairman, Billy Atkinson On December 11, 2013, PwC s Private Company Services practice (PCS) in Detroit, MI convened local private company executives to participate in a dialogue with Private Company Council (PCC) chairman, Billy Atkinson, about private company accounting standards. Atkinson presented on the history of the PCC, its purpose, activities to date and the role of stakeholders. As the complexity of financial reporting has become an increasing concern for private company stakeholders in recent years, the conversation around accounting standards has gained importance, especially in Detroit where private companies are an essential driver of the economy, with automakers, suppliers and dealers dominating the 2013 Crain's Detroit Business Private 200 list - a list of the top privately held companies in metro Detroit, ranked by 2012 revenue. While the accounting standard details may be technical, the impact on private companies is clear: simpler accounting standards are designed to take less time and lower the cost of preparing financial statements. It also means greater clarity for users of financial statements including banks, private equity firms and law firms. Given the significance of the alternative standards, in his speech, Atkinson was quick to emphasize that private company stakeholders can play an important role in the standard setting process by approaching the Council with projects to add to the agenda. The Private Company Council The Private Company Council was formed in May 2012 to advise the Financial Accounting Standards Board (FASB) on the appropriate treatment for private companies of items under active consideration on the FASB s technical agenda. The PCC s purpose is to help address standards and rules that in the past have made financial reporting more complex and costly for private companies, while also adding to the relevance of the rules for private companies. The FASB is the designated private sector organization for establishing financial accounting standards that govern the preparation of financial reports by nongovernmental entities. It has a process for establishing standards that is independent and authoritative, with due process. The PCC serves as the primary private company advisor to the FASB on active FASB projects and is composed of private company practitioners, users and preparers. The PCC s proposed alternatives are based on the Private Company Decision-Making Framework, a set of criteria agreed upon with the FASB, and are subject to FASB endorsement and public due process. The PCC and FASB use the Private Company Decision- Making Framework as a tool to identify and provide alternatives within U.S. Generally Accepted Accounting Principles (GAAP) based on differential factors and to help The work of the PCC is an objective move to try to balance relevance and costs in private company GAAP financial reporting, while addressing the complexities that have led to such issues in the past. determine where guidance may differ between public and private companies. Since the event in December, the final framework was released in late December and is intended to reduce cost and complexity without adversely affecting the reporting of relevant information. PCC Activities to Date The PCC is one year into its work examining GAAP. Two new standards focused on goodwill and interest rates swaps were approved in late November 2013, and a third rule about Variable Interest Entity (VIE) was approved in January 2014. Below is a brief overview of each standard and key takeaways for private companies. Goodwill Atkinson shared that the purpose of the PCC s proposal on goodwill is to address the cost and complexity of the current goodwill impairment test, as well as current requirements that, in the Council s view, provide limited benefits to users and disregard goodwill and goodwill impairment losses in the PwC 1
analysis of financial condition and operating performance. Under the accounting alternative finalized by the FASB, private companies will amortize goodwill, test for impairment upon the occurrence of a triggering event and conduct a one-step impairment test at the entity or reporting unit level with an optional qualitative assessment. The alternative standard is effective prospectively for existing goodwill and new goodwill recognized in the first annual period beginning after December 15, 2014. Private companies are permitted to adopt the alternative goodwill standard early. Interest Rate Swaps The PCC examined interest rate swap standards after hearing from stakeholders that it was difficult to obtain fixed-rate borrowing, they had to enter into swaps to economically convert variable-rate to fixed-rate borrowing and they lacked the expertise to comply with hedge accounting. Overall, Atkinson noted that the PCC saw an issue of relevance vs. the cost of determining and presenting fair value of the swap for converting to fixed-rate borrowing. Under the PCC proposal that was finalized by the FASB in November, interest rate swaps meeting a detailed set of criteria would be eligible for a simplified shortcut model, which is intended to make it easier for swaps to qualify for hedge accounting. Swaps meeting the criteria would qualify for hedge accounting, and thus, while still required to be recorded on the balance sheet at fair value, the change in fair value would be recorded as an adjustment to other comprehensive income and not to interest expense. The alternative interest rate swaps standard is effective for the first annual period beginning after December 15, 2014 and early adoption is permitted. Variable Interest Entity (VIE) Often, an operating company, which is the reporting entity, leases property from a separate legal entity, which is under common control (the leasing company ). Under current GAAP, even though the operating company does not have a direct ownership in the leasing company, it is often concluded that the operating company should consolidate the leasing company, because it has either an explicit or an implicit variable interest in the leasing company and it is determined to be the primary beneficiary in the arrangement. The PCC found that lenders said they do not find consolidating a leasing company with an operating company to be useful and applying VIE guidance can be costly and complex to implement. According to Atkinson, lenders reported that the guidance was difficult to follow and fragmented, and the application of the guidance often required costly outside resources. The PCC revised, then reapproved an accounting alternative that would offer private companies an exemption from applying the VIE consolidation model to certain common control leasing arrangements at its January 28, 2014 meeting. The approved alternative is now subject to final endorsement by the FASB. If endorsed, a final Accounting Standards Update (ASU) would likely be issued in the first half of 2014, and early adoption would be permitted. Conclusion The PCC and FASB are seeking input from private company stakeholders to reduce the cost and complexity of GAAP reporting without sacrificing the relevance of the information, and public feedback helps influence the final standards. The work of the PCC is an objective move to try to balance relevance and costs in private company GAAP financial reporting, while addressing the complexities that have led to such issues in the past, said Atkinson. As private companies review their needs and future plans, we encourage them to provide their thoughts on current proposals and ideas for our agenda by submitting comment letters, emailing us and attending outreach and Town Hall meetings. From left to right: David VanEgmond (PwC Partner), Kirsten Schofield (PwC Partner), Michael Marcero (PwC Partner), Billy Atkinson (PCC Chairman), Jackie Goforth (PwC Partner), Mike Page (PwC Partner) and Mike Sobolewski (PwC Partner) PwC 2
Understanding more about the unprecedented efforts to enhance financial reporting for private companies is an important first step for businesses with a focus on growth. Engaging with the standard setting bodies and business advisors to reduce the complexity of financial reporting and navigate compliance with the standards can have a significant business impact for privately held companies. Additional Resource To learn more about the PCC and its proposals, as well as how PwC is advising its private company clients, please visit: http://www.pwc.com/us/en/cfo direct/publications/privatecompany-reporter/index.jhtm Guests mingling at the M@dison Building, located in downtown Detroit, MI PwC 3
www.pwc.com/pcs About PwC s Private Company Services Located in all major US markets, PwC s Private Company Services (PCS) is a national practice comprised of more than 170 partners who provide customized tax, audit and advisory services to private companies, their owners and high net worth individuals. More than 60 percent of America s largest private companies are PCS clients*, who span a broad scope of sectors and industries ranging from manufacturing to retail to industrial to professional services. A hallmark of PCS is a robust thought leadership program that provides clients with timely, thought-provoking information to help manage and grow their businesses and wealth. To contact a PCS professional near you, please visit www.pwc.com/pcs or contact: Mike Marcero Office: +1 313 394 6538 Email: michael.h.marcero@us.pwc.com PricewaterhouseCoopers LLP 500 Woodward Avenue, Detroit, MI 48226 David VanEgmond Office: +1 313 394 6531 Email: david.a.vanegmond@us.pwc.com PricewaterhouseCoopers LLP 500 Woodward Avenue, Detroit, MI 48226 * Forbes 2013 List of Largest Private Companies 2014 PricewaterhouseCoopers LLP. All rights reserved. PwC refers to the United States member firm, and may sometimes refer to the PwC network. Each member firm is a separate legal entity. Please see www.pwc.com/structure for further details. This proposal is protected under the copyright laws of the United States and other countries. This proposal contains information that is proprietary and confidential to PricewaterhouseCoopers LLP, and shall not be disclosed outside the recipient's company or duplicated, used or disclosed, in whole or in part, by the recipient for any purpose other than to evaluate this proposal. Any other use or disclosure, in whole or in part, of this information without the express written permission of PricewaterhouseCoopers LLP is prohibited. 2014 PricewaterhouseCoopers LLP, a Delaware limited liability partnership. All rights reserved. PwC refers to the