The BRP panel was reviewing issues regarding the setting of accounting standards within the private sector. The panel recommended introducing enhancements that would be aimed at establishing an accounting standard-setting mechanism seeking to maintain a higher level of financial reporting for business entities irrespective of their capital structure. However, the panel suggested allowing for potential differences, where necessary, such as in recognition, measurement, disclosure, and presentation areas.
As it is stated in the Report to the Board of Trustees of the Financial Accounting Foundation:
The panel also recommended that establishing a separate private entity standards board under the FAF with its oversight powers was necessary to ensure that sufficient and appropriate modifications and exceptions are provided for both new and existing regulations (p. 2).
The new body was recommended to work with the FASB to achieve the expected standards.
Additionally, all panel members proposed the creation of a different framework responsible for decision setting criteria. This framework was to help facilitate the setting of standards and make appropriate and justifiable modifications and exceptions. Moreover, “the panel recommended FAF and FASB to take short-term and transitional actions to facilitate a smooth transition to pave way for the new board” (Report, 2).
The most overriding recommendation provided that private company accounting standards should be based on the US GAAP existing standards. However, this had to be done with modifications and exceptions that would lead to the provision of financial statements that offer decision-useful and relevant information to serve the needs of users in a cost-effective manner.
A small group of the BRP members held a contrary point of view regarding decisions reached. The minority group held the view that FAF should not set up a new board. Instead, the group proposed allowing enough time to establish whether the changes recently introduced in FASB processes and staffing had improved the systemic aspects of complexity, relevance, and costs of given standards. Secondly, the minority group proposed the restructuring of the board and its practices to facilitate the preparation of accounting procedures that met the needs of private companies and end-users. The dissenting voices also raised the question of having cost-effective financial systems for both those using and preparing the financial statements.
The minority group felt that the idea of creating a separate board was premature at the time since the changes the FASB was implementing other measures. Coupled with this, there were uncertainties concerning the future role of the same body in public companies that remained ambiguous. Further, the members felt that FAF was in a position to hold FASB accountable, as it played an oversight role in standards and cost-benefit balances.
Further, the dissenting members suggested the opinion that FAF should examine the composition of FASB with a view of making the necessary adjustments necessary to guarantee that the board has members with reasonable experience in private companies’ standard-setting process.
A cost-benefit approach takes into consideration such issues as costs used in the preparation of reports and the actual usage of the financial statements. Regarding the benefits equation, the main attention was on whether the end-users were able to make sound decisions using the given information. Moreover, these users were expected to have access to company management groups to facilitate the process of getting the additional information. This is an important consideration because, in the end, somebody is interested in the worth of the information that accrues from the financial preparation and reporting standards.
A very important issue, which emerges from the BRP recommendations, is based on the establishment of a different framework that enables private companies accounting standards-setting board to evaluate if the modifications and exceptions are necessary. The BRP held the view that the set standards would guide the evaluation of whether the proposed differences are appropriate instead of applying the standards uniformly. However, it is necessary to define what issues are different in the proposed mechanism. I find that this is the aspect that needs to be discussed in-depth, as there is no clear provision outlining the differentials.
The move by the panel to seek the provision of decision-useful information is an important aspect. This view is held since it is an issue of interest for investors to access truthful information. This information is important when making investment choices and, as a result, its value cannot be overestimated. However, the idea that company’s information is available to potential competitors may not augur well with some firms, as such, it is likely to work against their business aspirations.
According to the recommendations, the established board should consist of members from the private sector working with the FASB. Additionally, the new board was to conduct research and offer opportunities to the private sector to give feedback. It is critically important to seek feedback from the private sectors since they are an affected party given the prevailing panel recommendations. However, precaution measures are necessary to be taken in order to avoid the private sector infiltrating the FASB and have recommendations that favor the private sector, as opposed to the intended groups which are the consumers as well.
I agree with the position of the minority group regarding the issue of setting up a new board. Since the FASB had introduced new measures in recent times, it was necessary to take some time and wait to establish the outcomes. By moving on and suggesting the creation of a new board without allowing for the new measures to come into effect, it amounts to impatience and unprofessionalism. This view is held since the decision to establish a new board and ignoring recommendations of a body like FASB reflects wastage of time and money, and disrespect for decisions. In short, this would lead to setting a bad precedent of making decisions and failing to follow them. Since FASB was charged with the same responsibility of setting standards, it was only logical to restructure this body instead of establishing another one. This view is held since making such a move was tantamount to setting a parallel body doing the same activities. As the minority suggested, it was necessary to introduce changes to the FASB in order to institute the sought alterations to the private sector standard setting. Additionally, the dissenting view, as underscored by Teri Lombardi Yohn, the BRP recommendation regarding Private Company Financial Reporting alludes to the establishment of different standards for private companies, and a distinct board that sets standards was flawed. The question here rests on the wisdom in having separate entities setting standards. Such a move may be important only if strict measures are put in place to draw the distinction line regarding the roles of the two boards. This possibility, in my view is highly unlikely, since duplication of roles is highly likely.
“Report to the Board of Trustees of the Financial Accounting Foundation.” Blue-Ribbon Panel on Standard Setting for Private Companies. 2011. Web.