1. 1 Private Company Financial Reporting Brief History of Efforts in U.S.

2. 2 1974 – AICPA Titled Committee on GAAP for Smaller and/or Closely Held Businesses. CPA focused - Discussion Paper (138 responses); extensive member forums. DP Question 1 – “Are any differences in the application of GAAP appropriate?” Direct contact with users? CPAs said user needs not met and financials too complex for users. Said statistical summary of responses “not helpful.”

3. 3 1974 – AICPA (cont) RECOMMENDATIONS FASB provide differential disclosures. No differential recognition and measurement. RESULTS FASB complied in certain standards (e.g., earnings per share).

4. 4 1981 - AICPA Titled Special Committee on Accounting Standards Overload. Offshoot of broader 1978 study by AICPA Special Committee on SMEs. Formed “to study alternate means of providing additional relief from accounting standards which are not cost-effective for small businesses.”

5. 5 1981- AICPA (cont) Discussion Paper proposed conclusions and recommendations. Basis was from SME Committee conversations with AICPA members. Direct contact with users? FASB and AcSEC wrote comment letters. Final Overload Committee report differed in some aspects from its DP.

6. 6 1981 – AICPA (cont) RECOMMENDATIONS FASB reconsider certain standards. FASB simplify standards by avoiding complex and detailed rules (principles-based in today’s lingo?). Promote/elevate income tax basis as a substitute for GAAP. Differential recognition and measurement. FASB study user needs. Others.

7. 7 1981 – AICPA (cont) RESULTS FASB research effort – see next slide. Otherwise…..

8. 8 1983 - FASB Titled Invitation to Comment: Financial Reporting by Private and Small Public Companies. IC developed with advisory group that included AICPA-related committee members. 800 responses – 193 users (including 154 “lending officers and analysts in commercial banks”).

9. 9 1983 – FASB (cont) IC had different sections for various constituents. Good questions posed to users and others; dialogue and push-back missing though. Related efforts around this time included Lou Harris surveys and a research study with over 70 interviews and use of questionnaires.

10. 10 1983 – FASB (cont) FINDINGS CPAs perceive lenders’ needs differently than lenders do. Creditors needs and decision-making processes are basically the same for private and public companies. Users need complete GAAP financials that are audited or reviewed. Cost/benefit equation differs based on company size.

11. 11 1983 – FASB (cont) FINDINGS (cont) 60% of practitioners supported different measurement in certain instances; financial managers split; only 9% of users supported. GAAP financials important tool for banks even though they can get info directly from companies. Not clear if 70 interviews supported these.

12. 12 1983 – FASB (cont) RESULTS FASB formed small business advisory group as sounding board for each standard-setting effort. Others.

13. 13 1996 – AICPA Titled Special Task Force on Standards Overload Focus groups of CPAs Report made to PCP Executive Committee Concluded there is an accounting standards overload problem Relied on previous studies Cited reasons why problem not solved

14. 14 1996 – AICPA (cont) RECOMMENDATIONS Solution rests in existing GAAP framework Increase small firm input in standard- setting process (including representation on FAF and FASB) Literature simplification and codification Disclosure guidance for OCBOA financials Others

15. 15 1996 – AICPA (cont) RESULTS “Principle-based” standards should result in simplified standards? Codification improvements – original pronouncements identify related AICPA and EITF literature; FASB-AICPA agreement on CD-ROM licensing.

16. 16 2005 – Report of the PCFR Task Force Broad-based statistical and non-statistical outreach to over 3,700 key constituents, including to over 650 users. Archived web site http://www.aicpa.org/Professional+Resour ces/Accounting+and+Auditing/Accounting +Standards/Private+Company+Financial+ Reporting.htm

17. 17 2005 Report Findings “Attributes” of GAAP reporting have high value according to all constituents (e.g., common language, consistency, etc) Too many GAAP-specific requirements lack relevance or decision usefulness according to all constituents A majority of each of the constituent groups who had an opinion believe it would be useful if underlying accounting in GAAP reporting were different, in certain instances, for public vs. non- public companies

18. 18 2005 Report Conclusions GAAP for private companies should be developed based on concepts and accounting that are appropriate for the distinctly different needs of constituents of that financial reporting Fundamental changes should be made in the current GAAP standard setting process to ensure that the financial reporting needs of private company constituents are met