1. Private Company Financial Reporting

2. Why the Effort? Given - Private companies importance to U.S. economy Given – Growing concerns about GAAP expressed by practitioners and other stakeholders’ of private company reporting Task Force Goal - Discover the truth Underlying Principle - Protecting GAAP as the gold standard for financial information Given - Private companies importance to U.S. economy Given – Growing concerns about GAAP expressed by practitioners and other stakeholders’ of private company reporting Task Force Goal - Discover the truth Underlying Principle - Protecting GAAP as the gold standard for financial information

3. Task Force Mission Determine whether or not general purpose financial statements of private, for-profit entities, prepared in accordance with generally accepted accounting principles (GAAP), meet the needs of all constituents of that reporting. Understand whether or not the cost of providing all that is required in GAAP financial statements is justified by the related benefits to private company constituents. Determine whether or not general purpose financial statements of private, for-profit entities, prepared in accordance with generally accepted accounting principles (GAAP), meet the needs of all constituents of that reporting. Understand whether or not the cost of providing all that is required in GAAP financial statements is justified by the related benefits to private company constituents.

4. Scope For-profit, privately-held companies No size limitation Grassroots outreach is U.S. focused With understanding of what has been done internationally NOT about broader-based information needs, such as non-financial performance indicators For-profit, privately-held companies No size limitation Grassroots outreach is U.S. focused With understanding of what has been done internationally NOT about broader-based information needs, such as non-financial performance indicators

5. Task Force Composition Users Former standard setter (FASB/FASAB) Owners/financial executives Academic Practitioners Users Former standard setter (FASB/FASAB) Owners/financial executives Academic Practitioners

6. Target Key Constituents External users – investors, lenders, sureties Business owners and management Non-management owners Practitioners Others External users – investors, lenders, sureties Business owners and management Non-management owners Practitioners Others

7. Accomplishing Mission Discussion Paper Focus groups Research Key: neutral; hard-driving; and factual summaries of viewpoints. Discussion Paper Focus groups Research Key: neutral; hard-driving; and factual summaries of viewpoints.

8. Survey Approach Random telephone sampling Broad outreach for any and all Questions same in both survey forms Independent market research firm Random telephone sampling Broad outreach for any and all Questions same in both survey forms Independent market research firm

9. Random & Broad Outreach Survey 3,709 in total 653 users 1212 owners and financial managers 1,702 practitioners 142 other 3,709 in total 653 users 1212 owners and financial managers 1,702 practitioners 142 other

10. Participating Organizations Lenders American Bankers Assoc America’s Community Bankers Assoc Commercial Finance Assoc Risk Management Assoc Various state banking organizations Investors/owners National Federation of Independent Business National Venture Capital Assoc Sureties Nat’l Assoc of Surety Bond Producers Surety Society of America Lenders American Bankers Assoc America’s Community Bankers Assoc Commercial Finance Assoc Risk Management Assoc Various state banking organizations Investors/owners National Federation of Independent Business National Venture Capital Assoc Sureties Nat’l Assoc of Surety Bond Producers Surety Society of America

11. Participating Organizations (cont) Preparers Association for Financial Professionals Financial Executives International Financial Executives Network Group NFIB US Chamber of Commerce Practitioners State Societies General FASB Federal Reserve Board Preparers Association for Financial Professionals Financial Executives International Financial Executives Network Group NFIB US Chamber of Commerce Practitioners State Societies General FASB Federal Reserve Board

12. TF 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. (One exception – sureties in broad outreach) “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. (One exception – sureties in broad outreach)

13. Detailed Findings Comparisons External Stakeholders Q16a: Average rating of value of private company GAAP financial statements in ability to use them: As a tool in making investment or credit decisions For Scientific: n=99 for Creditor/Lender, 101 for Investor/Venture Capital, and 95 for Surety/Bonding. For Broad Outreach: n=211 for Creditor/Lender, 40 for Investor/Venture Capital, and 91 for Surety/Bonding. [Findings are based on the average scores on a scale of 1 (Low) to 3 (High)] Random Broad Outreach

14. Relevance/Decision Usefulness of specific GAAP requirements by mean scores. Table is sorted in descending order for Owner/Manager firms with less than $5 Million in revenue. Owner/Manager by Revenue (Millions) Practitioners by Number of Partners External Stakeholders by Type of Firm <$5M $5- $25M>$25M 5 or less6-1011-20 21 or more Creditor/ Lender Investor/ Venture Capital Surety/ Bonding Accrual basis of accounting Cash flow statement Comprehensive income measurement Classification of liabilities & equity Fair value basis of measuring assets & liab. Post retirement and retirement plans Deferred income taxes Leases Guarantees Intangibles Variable interest entities Share-based payments Medium/High Relevance (above 2.0) Medium Relevance (2.0) Low Relevance (less than 2.0) Specific GAAP Requirements -- Random

15. Would it be useful if the underlying accounting in GAAP reporting were different, in certain instances, for public vs. non-public companies? Business & Industry RandomBroad Outreach Detailed Findings Comparisons

16. Would it be useful if the underlying accounting in GAAP reporting were different, in certain instances, for public vs. non-public companies? Practitioners Detailed Findings Comparisons RandomBroad Outreach

17. Would it be useful if the underlying accounting in GAAP reporting were different, in certain instances, for public vs. non-public companies? External Stakeholders Detailed Findings Comparisons RandomBroad Outreach

18. 1983 FASB Survey Results on Differences Question “Should GAAP permit certain areas to be measured differently by private companies than by public companies?” Practitioners – yes (57%); no (28%) Managers – yes (35%); no (37%) Users – yes (9%); no (65%) “Should GAAP permit certain areas to be measured differently by private companies than by public companies?” Practitioners – yes (57%); no (28%) Managers – yes (35%); no (37%) Users – yes (9%); no (65%)

19. Random1983 Would it be useful if the underlying accounting in GAAP reporting were different, in certain instances, for public vs. non-public companies? External Stakeholders Detailed Findings Comparisons

20. TF Conclusions 1) 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.

21. TF Conclusions (cont) 2) Although GAAP exceptions and other bases of accounting are being used and are sometimes appropriate, the TF does not believe that these exceptions and other bases of accounting are the best response to the findings identified in this study.

22. TF Conclusions (cont) 3) 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.

23. TF Recommendation Collaborative effort with key constituents Outreach to FAF/FASB Collaborative effort with key constituents Outreach to FAF/FASB

24. Recent Developments AICPA Board supports TF findings and conclusions AICPA governing council supports via resolution Working group with FASB AICPA Board supports TF findings and conclusions AICPA governing council supports via resolution Working group with FASB

25. FASB/AICPA Working Group Discussed several model processes by which possible differences can be identified Discussed criteria by which differences would be appropriate Any model process would be exposed to the constituents of private company reporting Discussed several model processes by which possible differences can be identified Discussed criteria by which differences would be appropriate Any model process would be exposed to the constituents of private company reporting

26. Next Steps Working group to reach agreement on details of proposed model process Discussion by AICPA and FASB leadership Exposure to constituents of private company reporting Working group to reach agreement on details of proposed model process Discussion by AICPA and FASB leadership Exposure to constituents of private company reporting

27. What do you think?