Private company financial reporting
Private company financial reporting is on the agenda again. A blue-ribbon panel of experts is studying the issue of standards setting for private companies. The panel was formed in response to the growing concern about the relevance of today's accounting standards for reporting entities that do not file financial statements with the SEC. Grant Thornton LLP welcomes the establishment of the blue-ribbon panel to study the issues facing private companies and urges that the scope be expanded, if possible, to include the interests of not-for profit organizations.
Differential reporting has been studied repeatedly, and to date the concept has been rejected. But there is reason to believe that the blue ribbon panel may make a different recommendation this time around. In July 2009 the IASB issued IFRS for SMEs which permit differential reporting for eligible entities. Several other countries are examining the issue. This paper outlines the case for a reexamination of private company accounting standards. It also examines how gradual changes to the financial reporting model have altered the very nature of financial statements, driving a wedge between the objectives of financial reporting for publicly traded companies and those of private companies. Those differences can lead to different costs and benefits. The paper notes how the focus of financial reporting has shifted over time from reporting net income to future cash flows. A model designed for users trading in highly liquid capital markets may be increasingly costly for private companies to implement with fewer benefits to the reporting entity or its investors.
The paper concludes that while the best outcome perhaps would be a single objective and a single set of standards for all entities, the unique needs of the global capital markets and their importance may indicate that a different set of standards for investors and creditors in those markets may be the best solution to meet their needs. Other types of entities may be better served by accounting standards that are more focused on accountability.
