The time is now! An MACPA task force supports creation of private company standards board, says GAAP exceptions and modifications are essential. This whitepaper was unanimously approved and adopted by the Board of Directors of the Maryland Association of CPAs on June 2, 2011. After three months of study and debate, the MACPA task force concluded that the needs of private companies or nonpublic entites have not been considered by FASB in their standard setiing activities resulting in overly complex and costly standards that do not benefit the users of those financial statements. This whitepaper present the research, analysis, and recommendations of the MACPA Task Force.

1. Private Company Standards: Responding to the
Reporting Needs of Private Companies and the
Users of Their Financial Statements
Maryland Association of
Certified Public Accountants, Inc.
A Report from the MACPA Accounting Standards Task Force
May 27, 2011
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2. Executive summary
The suitability of Generally Accepted Accounting Principles (GAAP) for private companies has
been a matter of debate and study for more than 30 years. Numerous task forces, committees,
and studies have been formed or undertaken over the years to address private company standards
with minimal accomplishments.
The concerns of private company preparers, users, and auditors center on:
 the costs of GAAP private company financial statements, which often exceed the
benefits;
 lack of relevance to users;
 increasing complexity of standards and the pace of change; and
 increasing use of “other comprehensive basis of accounting” (OCBOA), viewed as a
symptom of the problem.
In 2009, the Financial Accounting Foundation (FAF), the parent organization of the FASB,
formed the Blue Ribbon Panel on Standard Setting for Private Companies (BRP) with
representatives from the AICPA and the National Association of State Boards of Accountancy
(NASBA). In January 2011 the BRP issued a report calling for exceptions and modifications to
GAAP to better meet the needs of private companies. In addition, the BRP report called for a
separate standards board to develop those exceptions and modifications to GAAP.
The MACPA’s Accounting Standards Task Force (Task Force), created by the MACPA Board of
Directors in October 2010, has met to review and discuss the history of private company
standards and formulate a response to the BRP’s report. The private company standards issue has
been reviewed and discussed with more than 1,500 MACPA members at town hall meetings
throughout Maryland over the past year. More than 90 percent of members polled at those
meetings believed GAAP modifications and exceptions for private companies are the best
solution to the problem. The MACPA Task Force responded to the BRP’s report and offered
additional suggestions and comments. The Task Force’s response to the BRP report can be
summarized as follows:
 The Task Force agreed that the current structure does not properly address private
company standards and needs to be improved.
 The Task Force agreed that the FASB has not demonstrated an ability to address the
needs of private companies.
 The Task Force agreed that a separate board for private companies is warranted. A
majority of the Task Force wanted the separate board to have ultimate authority over
standards decisions for private companies. Two dissenters felt the FASB should have
“veto power” over standards changes proposed by the new committee. The principle of
“distinct but linked” with a parallel and joint process to avoid unnecessary divergence
was viewed as critical to the process.
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3.  The Task Force agreed that a “sunset” provision of five years, during which the new
private company board would be evaluated, would be appropriate with the understanding
that the five-year term begins with the formation of the new board.
 The Task Force viewed the development of a differential framework for developing
exceptions and modifications to extended GAAP as an essential element of the new
board’s work and critical to the successful development of private company standards.
 The Task Force agreed that a proper cost-benefit balance is critical to the success of the
new private company standards while taking into account the relevance to the financial
statement users.
 The Task Force agreed that a single source of GAAP is imperative and would be codified
in the same manner for private and public companies, with private company exceptions
noted and contained within the respective pronouncements.
History and background
The Financial Accounting Standards Board (FASB) was created in 1973 to establish and
improve standards of financial accounting and reporting by non-governmental entities. Those
standards, known as “generally accepted accounting principles” (GAAP), are the widely
accepted set of accounting standards and rules used by non-governmental entities for reporting
financial information.
Private company accounting standards have been the topic of debate in the United States for
almost 40 years. There have been 12 separate studies, reports, or formal recommendations that
have been made, with the most recent recommendations made in January 2011.
The FASB’s most recent formal research on the needs of private companies took place in 1983,
with discussions by others occurring several years before. Since then business, finance, and
economics have expanded globally and have become exponentially more complex. Accounting
standards that have developed in response to these changes have become increasingly divergent
from the needs of users of private company financial statements, examples of which include
accounting for variable interest entities, uncertain tax positions, fair value measurements, and the
level of detail associated with certain disclosures.
The efforts expended over the past 40 years to make private company accounting standards more
relevant to its users had varying degrees of success, and generally culminated in
recommendations or creations of advisory-level committees that lacked authoritative status.
In 2004, the American Institute of Certified Public Accountants (AICPA) established the Private
Company Financial Reporting Task Force (PCFRTF), chaired by Jim Castellano of the
accounting firm RubinBrown. The report issued by the PCFRTF, known as the “Castellano
Report,” was completed in 2005 (see Resources for further details). The Report concluded users
of private company financial statements have different needs from users of public company
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4. financial statements; GAAP exceptions and Other Comprehensive Basis of Accounting
(OCBOA) should not be the resolution to the private company financial reporting problems; and
fundamental changes should be made to the current standard-setting process.
Subsequently, in 2006 the FASB established the Private Company Financial Reporting
Committee (PCFRC) to further improve its current standard-setting process. The PCFRC’s
primary objective is to provide recommendations to the FASB as the FASB sets accounting
standards for privately held enterprises. In addition, PCFRC members focus on how standard-
setting affects day-to-day technical activities and procedures from a cost/benefit perspective. The
establishment of the PCFRC was significant in that, unlike prior efforts, the FASB was to
specifically address and articulate within the literature of each subsequently issued accounting
standard, whether differences should exist for private companies and state the basis for its
conclusion. Based on private company stakeholders’ comment letters, feedback from MACPA
members and the work of this Task Force, the work of the PCFRC was viewed as not fully
achieving its intended goal due to the FASB’s unwillingness or inability to consider and approve,
where appropriate, the possibility of measurement, recognition, and presentation differences for
private company financial reporting.
On Sept. 8, 2008, the Maryland Association of Certified Public Accountants (MACPA), joined
by 10 other state CPA societies, wrote to Chairman Bob Herz of the FASB and requested that the
FASB accept the recommendations from the PCFRC and exempt private companies from the
provisions of the proposed Interpretation No. 48 – Accounting for Uncertainty in Income Taxes,
An Interpretation of FAS Statement No. 109. The FASB acted with an extended implementation
deadline of one year for private companies and non-profits and a modification to the disclosure
requirements but declined to exempt private companies from the new interpretation. The result
was an implementation delay and a modification to the disclosure requirements, which provided
only limited relief for private companies and non-profits.
In 2009, the Financial Accounting Foundation (FAF), the parent organization of the FASB,
formed the Blue Ribbon Panel on Standard Setting for Private Companies (BRP) with the
AICPA and NASBA. The mission of the BRP was to address how accounting standards can best
meet the needs of users of U.S. private company financial statements.
On Aug. 5, 2010, the BRP published a list of questions requesting input from the public. The
common issues and concerns cited by the respondents were as follows:
 Private company financial statements often lack relevance to users.
 Standards have become increasingly complex.
 The pace of the standard-setting process has increased.
 Costs often exceed benefits.
 There has been an increase in qualified opinions and use of OCBOA basis statements in
order to avoid the complexities of GAAP.
Our experience in Maryland is consistent with the feedback from the respondents to the BRP.
Our fall 2010 town hall meetings reached approximately 1,500 CPAs, with 90.87 percent
indicating support for GAAP modifications and exceptions for private companies.
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5. The BRP issued a report in January 2011 concluding that there are urgent and growing systemic
problems that need to be addressed in the current U.S. system of standard setting. The BRP
recommended that there be exceptions and modifications from extended GAAP to better meet
the needs of private companies and the users, preparers, and auditors of their financial
statements. In addition, the BRP recommended that a separate private company standards board
be established to develop and implement those exceptions and modifications.
On March 4, 2011, FAF announced “the formation of a Trustee Working Group to address the
important topic of accounting standards for nonpublic entities.” The FAF news release stated that
“the Working Group will conduct outreach to stakeholders in various ways, including roundtable
meetings, surveys, and meetings with advisory and constituent groups and others. In conjunction
with obtaining input on the scope of the issues and concerns to be addressed, the Trustees also
will seek input on suggested improvements, including the solutions recommended by the Blue-
Ribbon Panel.”
Internationally, standards setting bodies are wrestling with the same issue. Most notably, Brazil,
Argentina, and Hong Kong have adopted International Financial Reporting Standards (IFRS) for
Small and Medium-sized Entities (SMEs) with the United Kingdom scheduled to implement it in
2012.
MACPA Accounting Standards Task Force
At its October 2010 meeting, the Board of Directors of the MACPA recognized the need to
inform members and the Maryland financial community of the need for changes in private
company financial reporting and approved the formation of the MACPA Accounting Standards
Task Force (Task Force). The Board directed the Task Force to study current issues in
accounting standards, inform the Maryland financial community of the issues surrounding
private company standards, comment on the private company financial reporting standards issue,
and provide input into satisfying the needs of private companies and the users of their financial
statements. The Task Force participants were selected in December 2010. The Task Force
includes representatives of CPA firms, public and private companies, as well as representatives
from banking, education, and government. Four Task Force meetings have been held to date in
Columbia, Md.
Criteria for evaluating reform proposals
We focused our efforts on finding solutions and making recommendations that would be
meaningful to preparers, auditors, and users of private company financial statements. To evaluate
our recommendations in this report, we developed and considered the following criteria:
Will the recommendations and comments:
 Improve the relevance of financial statements for users?
 Improve the cost-benefit ratio of private company accounting standards?
 Minimize complexity of financial statements for users, preparers, and auditors?
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6. Reform matters for consideration: Scope of this document
The Task Force focused on the January 2011 Report to the Board of Trustees of the FAF by the
Blue Ribbon Panel on Standard Setting for Private Companies (BRP). Our approach is to
comment on the recommendations outlined in the report, raise pertinent questions on the
structure and processes being followed, and provide suggestions from our perspectives as
preparers, auditors, and users of financial statements. This report is the work of the Task Force
and is for the use of the MACPA Board of Directors, MACPA members, and the financial
community in Maryland.
Task Force response to the BRP recommendations
The Task Force, in carefully reviewing and deliberating the recommendations of the Blue
Ribbon Panel, has made the following resolutions:
1) The Task Force agreed that the current structure does not properly address private
company standards and needs to be improved. The Task Force was dismayed that a
broad section of private companies, both large and small, are not using GAAP,
viewing it as too complex and expensive to implement. The Task Force concluded that
the use of OCBOA is not an acceptable alternative to GAAP.
2) The Task Force agreed that the FASB has not demonstrated an ability to address the
needs of private companies as evidenced by the inability of the PCFRC to effect
meaningful change.
3) The Task Force agreed that a separate board for private companies is warranted. The
principle of “distinct but linked” with a parallel and joint process to avoid unnecessary
divergence was viewed as critical to the process. A majority of the Task Force wanted
the new board to have ultimate authority over private company standards decisions.
Two Task Force members dissented; they stated that a separate board is needed but,
concerned about excessive standards divergence, felt separate private company
standards board recommendations should be subject to the final approval of the FASB,
much like the Emerging Issues Task Force (EITF) is structured.
4) The Task Force agreed a “sunset” provision of five years would be appropriate, with
the understanding that the five-year term begins with the formation of the new board.
The sunset provision is critical to evaluate whether the new structure is adequately
addressing the shortcomings of the current system and to make changes as necessary
to further address the needs of private company stakeholders. One factor to use in
judging the level of success will be whether usage of OCBOA diminishes after
implementation of private company modifications and exclusions are implemented.
5) The Task Force viewed the development of a differential framework for developing
exceptions and modifications to extended GAAP as an essential element of the new
board’s work and critical to the successful development of private company standards.
The Task Force felt it is important to identify in advance the attributes that will drive
differences between public company and private company standards. For instance,
when are differences appropriate, under what circumstances are differences allowed, if
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7. and how will private company standards interfaces with International Financial
Reporting Standards (IFRS) for Small and Medium-sized Entities (SMEs)? The Task
Force also agreed the differential framework should be made available for public
comment and approved by the FAF.
6) The Task Force agreed a proper cost-benefit balance is critical to the success of the
new private company standards while taking into account the relevance to the financial
statement users. At the same time, the Task Force recognizes the level of complexity
of the underlying accounting (for instance, accounting for derivatives), will have a
bearing on the complexity of the standard.
7) The Task Force agreed that a single source of GAAP is imperative and would be
codified in the same manner for private and public companies, with private company
exceptions noted and contained within the respective pronouncements. The Task Force
believes such codification is essential to allow for full understanding for preparers and
auditors of financial statements.
Other recommendations and concerns:
In considering the issues related to private company accounting standards, the Task Force makes
the following recommendations or raises the following areas of concern:
 The Task Force recommends that principles and structure be put in place to ensure
collaboration between the FASB and the new private company board. The Boards need to
be distinct but linked. Public company/private company divergence should be limited
with both boards being compatible and collaborative.
 The funding of the new board needs to be structured to ensure independence. The Task
Force questioned how the new board would be funded and whether the source of that
funding would have an impact on the development of private company standards.
 Consideration should be given to the impact on private companies of International
Financial Reporting Standards convergence and the development of IFRS for small and
medium-sized entities (SME).
 Concern was expressed about the disparity of interests between small, medium, and large
private companies. The Task Force recommends that all entities that are eligible to use
private company GAAP have the option to use extended GAAP, allowing the flexibility
to respond to the needs of the users of the financial statements.
 The Task Force suggested that consideration be given to the academic community when
offering subscription-based standards resources to ensure the maximum number of
students have inexpensive access to standards materials as these changes are
implemented.
 The Task Force noted a real need to inform the financial community and the broader
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8. business community about these changes to private company standards once they are
implemented.
Conclusion
The Task Force concludes that the time is right to establish a separate board for private company
accounting standards that will develop exceptions and modifications to GAAP for private
companies. It is clear private company stakeholders see a need to improve standards for private
companies. The increasing use of OCBOA calls into question what is generally accepted and is
symptomatic of the problems with private company standards. Any further studies should be
limited to determining how the recommended changes can be implemented and not continuing to
study whether changes are needed. The Task Force looks forward to the implementation of these
recommendations to improve private company accounting standards.
Approval
The Task Force report was formally accepted and endorsed by the Maryland Association of
CPAs Board of Directors on June 2, 2011 in a unanimous resolution.
For more information about the Task Force Report and Process:
MACPA Announcement http://www.macpa.org/Content/26146.aspx
Contacts:
Skip Falatko, CPA – MACPA Committee Liaison – skip@macpa.org
Tom Hood, CPA.CITP – MACPA CEO – tom@macpa.org
Disclaimer
The opinions expressed in this document reflect the personal views of the Task Force members
and don’t necessarily reflect the viewpoint of their employers.
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9. Task Force Members
Chairman: Organization: Segment:
Arthur E. Flach, CPA Grant Thornton, LLP Public Accounting
Members:
Debra G. Busk, CPA DeLeon & Stang Public Accounting
James F. Canalichio DVCC, Inc. Private Company
Allen P. DeLeon, CPA, PFS DeLeon & Stang Public Accounting
James D. Jenkins, CPA SC&H Group, LLC Public Accounting
Carl Kampel, CPA Ellin & Tucker, Chartered Public Accounting
Kenneth A. Kelly, Jr., CPA McCormick & Co., Inc. Public Company
Michael P. Manspeaker, CPA Smith Elliott Kearns & Co., LLC Public Accounting
Hayles & Howe, Inc.
Joselin R. Martin, CPA KCI Technologies, Inc. Private Company
Donald A. McConnell, CPA University of Maryland Private Company
James J. McKinney, CPA Gross, Mendelsohn & Associates, Education
Ernest J. Paszkiewicz, CPA P.A. Public Accounting
Small Business Administration
Oliver J. Phillips Santos, Postal & Company, PC Government
Charles B. Postal, CPA Branch Banking & Trust Co. Public Accounting
Robert L. Tuggle Branch Banking & Trust Co. Banking
William Ziegler, CPA Banking
MACPA Staff: MACPA
Jacqueline E. G. Brown MACPA Non-profit
Francis J. Falatko, Jr., CPA MACPA Non-profit
J. Thomas Hood, III, CPA Non-profit
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10. Resources
AICPA: “Private company financial reporting panel starts work”
http://www.macpa.org/Content/23457.aspx
AICPA Private Company Standards Resource Center
http://www.aicpa.org/privategaap
AICPA Private Company Financial Reporting Task Force Report (known as the
“Castellano Report”), Feb. 28, 2005
http://www.aicpa.org/InterestAreas/AccountingAndAuditing/Resources/AcctgFinRptg/A
cctgFinRptgGuidance/DownloadableDocuments/Report_Draft_Final.pdf
Blue Ribbon Panel on Standard Setting for Private Companies: “Report to the Board of
Trustees of the Financial Accounting Foundation,” January 2011
http://www.accountingfoundation.org/cs/ContentServer?site=Foundation&c=Document_
C&pagename=Foundation%2FDocument_C%2FFAFDocumentPage&cid=11761581813
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Kennard S. Brackney and R. David Mautz, Jr.: “The Private Company Financial
Reporting Committee - A New Voice in FASB’s Process,” NYSSCPA, July 2008
http://www.nysscpa.org/cpajournal/2008/708/infocus/p14.htm
CPASuccess.com: “What is one thing almost all CPAs agree with?” Jan. 28, 2011
http://www.cpasuccess.com/2011/01/this-time-its-real-private-company-standards-time-
to-pay-attention.html
CPASuccess.com: “Private company GAAP? Time to pay attention,” Dec. 7, 2010
http://www.cpasuccess.com/2010/12/private-company-gaap-time-to-pay-attention.html
Government Accountability Office: “A Framework for Crafting and Assessing Proposals
to Modernize the Outdated U.S. Financial Regulatory System,” January, 2009
http://www.gao.gov/new.items/d09216.pdf
House Bill 3763 (the "Oxley Bill”), United States House of Representatives, Feb. 5, 2002
http://www.gpo.gov/fdsys/pkg/BILLS-107hr3763ih/pdf/BILLS-107hr3763ih.pdf
Marie Leone: “A one-two accounting punch? Next year U.S. public companies will find
out if they have to adopt international accounting standards – just as they are
implementing a host of new FASB rules,” CFO.com, May 18, 2010
http://www.cfo.com/article.cfm/14496195
MACPA: “Financial reporting committee names founding members,” March 6, 2007
http://www.macpa.org/Content/23173.aspx
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11. MACPA letter to Tim Woo, FAF/FASB - “Blue-Ribbon” Panel written submissions from
constituents, Sept. 15, 2010
http://dl.dropbox.com/u/20948371/Tim%20Woo%20-
%20MACPA%20Letter%20to%20FAF%20Blue%20Ribbon%20Committee.doc
MACPA letter to Bob Herz, chairman of FASB: “Support of PCFRC’s positions on
FASB Interpretation No. 48 & FASB Interpretation No. 46(R),” Sept. 4, 2008
http://dl.dropbox.com/u/20948371/FASB%20Chairman%20Bob%20Herz%20-
%202008%20Comment%20letter.doc
Edith Orenstein: “FEI CPC-S releases working draft on private company accounting,”
Financial Executives International, May 19, 2010
http://www.accountingweb.com/blogs/edith-orenstein/fei/fei-cpc-s-releases-working-
draft-private-co-accounting
Bruce Pounder: “How not to create private company GAAP: A favored approach to
establishing "little GAAP" for private U.S. companies is way off target,” CFO.com, Jan.
6, 2011
http://www.cfo.com/article.cfm/14548290
Private Company Financial Reporting Committee (PCFRC) meeting:
Judy O'Dell (PCFRC chair), who is a participating observer on the BRP, provided the
PCFRC with an overview of the first meeting of the BRP, April, 2010
http://www.pcfr.org/downloads/PCFRC_April_2010_final_meeting_highlights.pdf
Private Company Financial Reporting Committee: Recommendations and other letters to
FASB
http://www.pcfr.org/recommendations.html
The Sarbanes-Oxley Act of 2002, 107th United State Congress, July 30, 2002
http://www.gpo.gov/fdsys/pkg/BILLS-107hr3763enr/pdf/BILLS-107hr3763enr.pdf
Senate Bill 2673 (the "Sarbanes Bill"), United States Senate, June 25, 2002
http://frwebgate.access.gpo.gov/cgi-
bin/getdoc.cgi?dbname=107_cong_bills&docid=f:s2673pcs.txt.pdf
Bill Sheridan: “CPAs take next step in private company debate,” ledgerlink.monster.com,
Dec. 24, 2009
http://ledgerlink.monster.com/training-accounting/articles/506-cpas-take-next-step-in-
private-company-debate
Small Business Administration Office of Advocacy: “The impact of regulatory costs on
small firms,” September 2010
http://archive.sba.gov/advo/research/rs371tot.pdf
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