The Pros and Cons of Setting Separate Private Company Essay Example for Free

The Pros and Cons of Setting Separate Private Company Essay With the development of world economy, U.S.GAAP becomes more and more complex to meet public companies’ needs. Private companies cost a great fortune to compliance with U.S.GAAP. So, setting public-private accounting standards is a different issue debated for decades. it goes without saying that setting new separate accounting standards have its advantages and disadvantages. Background In USA, there are a large number of nonpublic companies, much more than public companies. As time goes, deficiencies exist in current GAAP to meet nonpublic companies to make financial reporting. GAAP is extremely complex and onerous to nonpublic companies. Those private companies frustrated with being forced to spend a great amount of money on valuating intangible property, or spending hours on disclosures that users may not read. Therefore, private companies’ owners cry for a sufficient and appropriate accounting standards meet their needs. In Jun 2006, The AICPA advocated for the need for setting a differential private company standards. Then, the Private Company Financial Reporting Committee ( PCFRC ), overseen by FASB, was formed to modify private accounting rules for private company. However, FASB overruled the PCFRC’s recommendations numerous times. In this way, in early 2011, Blue Ribbon Panel ( a joint committee of the Financial Accounting Foundation ) recommended to establish an autonomous board, directly overseen by FAF, to set new accounting standards for private companies, instead of oversight by FASB. Later in the year, the FAF overruled blue ribbon panel recommendation and proposed a new †Private Company Standards Improvements Council†(PCSIC), which can recommend changes and exceptions to standards FASB issued for private companies. But FASB still have final say by ratifying The PCSIC suggests. After that, the AICPA have announced its disappointment about FAF disallowed establish Separate private accounting standards. And according to the new Deloitte survey, more than half of medium and small sized companies (respondents) believe there should be separate standards. So, the battle isn’t end! The pros of setting private company accounting standards First of all, unlike big GAAP, a small GAAP for nonpublic company can simplify private company reporting. With the development of world economy, U.S.GAAP become more and more complex to meet large multinational corporations’ and public corporations’ needs. However, many of those requirements are irrelevant to private companies. Users probably won’t use much of information accountants prepared according to U.S.GAAP. Comparing with large companies, small companies compile those standards are expensive and time consuming. GAAP compliant financial statements are growing disproportionately compare with the benefits of providing such financial statements to users of private company. So GAAP is not an ideal framework for financial reporting for private company. While, separate private accounting standards would limit unnecessary information, reduce costs. Additionally, according to American Law, GAAP must be followed by public companies, those trade their securities in public market, but not obligatory to nonpublic companies, they prepare financial statements based on other accounting standards for their users. In this way, some of private companies strictly follow GAAP, some of them follow GAAP to a certain extent, others avoid GAAP altogether by choosing other account system. This can cause several problems. For example the reliability of the accounting information cannot be guaranteed since different kinds of reference standards private companies choose. The increasing difficulties for users compare with competitors in same industry. The Cons of setting private company accounting standards To begin with, private company might go public. If a private company comply with high quality GAAP from it started, going public won’t be hampered to this company. However, if a private company adopts private accounting standards, instead of GAAP, the company must adjust its account according with GAAP before come in to market, and, without doubt, have less chance go public. In addition, the economics of a transaction should be accounted for in the same manner by all entities. In an economic transaction, events and circumstances are same to seller and buyer, regardless of whether entity is pubic company or not. So, the manner of recognition and measurement in the transaction should not be influenced by its size, its status as a private entity, or its sources of capital. Moreover, if separate private company accounting standards are set, there is no way to compare private company financial statements with public company financial statement. Under a single set of U.S.GAAP, financial users, like investors and business owners, can easily compare their financial statements with similar entities’ financial statements in the same industry, which can provide great value. Finally, Complexity of GAAP is a problem for all companies, whether public or private. The compliance burden falls proportionally to private company, because they have fewer resources and some of GAAP exempt to them. It is also complexity to public companies. So if public companies have to endure this, then so should private companies. Bibliography 1. Norris, Floyd. Proposal Would Create New Accounting Standard-Setter for Private Companies. The New York Times. The New York Times, 04 Oct. 2011. Web. 13 Oct. 2012. 2. Hood, Tom. Private Company GAAP? Time to Pay Attention. Macpa. Macpa.org, 07 Dec. 2010. Web. 13 Oct. 2012. 3. Pounder, Bruce. The Big Risks of Little GAAP Accounting CFO.com. CFO.com. CFO.com, 2 Dec. 2010. Web. 13 Oct. 2012. 4. Zanzig, Jeffrey S, and Dale L. Flesher. GAAP Requirements for Nonpublic Companies. Nysscpa. Nysscpa.org, May 2006. Web. 13 Oct. 2012. 5. Small or Mid-Size Private COmpanies Indicate Preference for Separate Accounting Standards: Deloitte Survey. Galegroup.com. Investment Weekly News, 8 Aug. 2009. Web. 13 Oct. 2012. 6. Beckwith, George. Is a separate FASB for private company GAAP coming? Financial Executive Oct. 2010: 66+. Academic OneFile. Web. 14 Oct. 2012.