Private companies are calling for their own accounting playbook.
While privately held companies easily make up the majority of businesses in the U.S., they still are governed by the same set of basic accounting standards as huge public companies such as Boeing Co. or IBM Corp.
Scrapbooking stores, corner Thai restaurants and venture-backed startups say that’s not fair.
The issue has been discussed in the accounting industry for years. Accountants and private companies say the standard set of regulations aren’t just pointless—they increase costs and burden private companies with time-consuming accounting hassles.
Until now, the issue hasn’t moved toward a fix.
In May, the American Institute of Certified Public Accountants’ governing council said it would work with the Financial Accounting Standards Board to evaluate potential changes to generally accepted accounting principles, known as GAAP, that govern financial reporting.
This could result in changes to GAAP for private companies, an official said.
“We were hearing from our members more and more,” said Dan Noll, director of accounting standards for the American Institute of Certified Public Accountants. “We decided we better check on this.”
Private and public companies don’t face the same issues and shouldn’t live under the same GAAP rules, critics say.
Shareholders own public companies and have a right to see details of their investment. But private companies typically have just a few investors and have to show their results to a handful of people, such as bankers or venture investors.
In a recent survey by the American Institute of Certified Public Accountants, 29% of private companies said they don’t release financial statements at all because they do so little borrowing or have so few outside investors.
The survey also revealed a dozen requirements under GAAP that respondents said had “low” relevance or usefulness.
“From a broad perspective, GAAP’s financial (reporting) was found to be rated fairly high on an overall basis,” Noll said. “Then, when you got into the details, what we found was that too many financial results were not useful.”
Rick Rayson, managing partner with Deloitte & Touche LLP in Costa Mesa, said it makes sense to review some GAAP rules for private companies. There should be a review of standards for some private companies that have limited distribution of their financial reports.
For those companies that show their financials to few people, “probably all of the public company disclosure requirements are not necessary,” he said.
Still, some worry that different accounting standards for private and public companies could create confusion.
“In broad terms, yes, it would be a concern,” said Jim Kolar, managing partner of PricewaterhouseCoopers LLP in Irvine. “You have to see how it plays out (though).”
A task force formed by the American Institute of Certified Public Accountants last year argued for some changes.
“GAAP currently is not adequately meeting the distinctly different needs of private company constituents,” a task force report said.
GAAP standards are applied to private companies to give outside stakeholders, such as bankers, a good picture of a company’s finances.
The principles don’t vary, so stakeholders don’t have to worry that “net profit” or “asset value” is different from one company to the next.
GAAP rules govern everything from recognizing assets and liabilities to the notes attached to a financial statement.
For the most part, the standards are applied the same way to public and private companies.
Although basic accounting principles such as how revenue is recognized isn’t up for review, other rules under consideration include how to account for stock options.
“Private companies have a difficult time applying fair-value standards for things like stock options,” said Wayne Pinnell, managing partner for Haskell & White LLP in Irvine. “They don’t have traded securities.”
Yet for all its support, there are some concerns about shaking up the GAAP requirements too much.
Investors, analysts or even bankers could struggle to size up private and public companies operating in the same industry.
“It could create some confusion,” Pinnell said. “I think it’s a double-edged sword.”