On December 23, 2013 the Financial Accounting Standards Board (FASB) issued the Private Company Decision Making Framework for Private Companies (Guide) as well as Accounting Standards Update 2013-12 Definition of a Public Business Entity (ASU 2013-12). The completion of these projects represents an important step in the development and implementation of alternatives within US generally accepted accounting principles (GAAP) for private companies by assisting the FASB and the Private Company Council (PCC) in defining both the framework under which such proposed alternatives should be evaluated as well as defining the scope of those entities that may elect to adopt such alternatives.

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January 2014
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M AY E R H O F F M A N M C C A N N P. C . – A N I N D E P E N D E N T C PA F I R M
A publication of the Professional Standards Group
Private Company Decision Making Framework and Definition of a Public
Business Entity
On December 23, 2013 the Financial Accounting
Standards Board (FASB) issued the Private Company
Decision Making Framework for Private Companies
(Guide) as well as Accounting Standards Update 201312 Definition of a Public Business Entity (ASU 201312). The completion of these projects represents an
important step in the development and implementation
of alternatives within US generally accepted accounting
principles (GAAP) for private companies by assisting
the FASB and the Private Company Council (PCC)
in defining both the framework under which such
proposed alternatives should be evaluated as well as
defining the scope of those entities that may elect to
adopt such alternatives.
Decision Making Framework for Private
Companies
Known informally as “the Guide,” the framework
identifies factors that cause the needs of financial
statement users, along with the cost-benefit analysis
for financial reporting, to differ for private companies
as compared to those of public entities. The five
differential factors include the a) number of primary
users and their access to management b) investment
strategies of primary users, c) ownership and capital
structure, d) accounting resources, and e) manner in
which preparers learn about new financial reporting
guidance.
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The differential factors will be used by the PCC as
they propose and evaluate alternatives within GAAP
for private companies. The Guide further highlights
several important guidelines for private companies
to consider when deciding whether to elect the
alternatives approved by the FASB:
1. Evaluate if an accounting alternative may
be elected independently of others. A private
company will be permitted to select the alternatives
that it deems appropriate to apply, and there will
generally be no requirement to apply all available
recognition and measurement alternatives for
private companies. But it is important to evaluate
the terms of each alternative as the FASB and
the PCC may require that application of certain
alternatives within recognition and measurement
in one area of accounting be linked together with
the application in another area.
2. Ensure appropriate disclosures are made of
private company accounting alternatives.
Private companies that apply alternatives
within recognition and measurement guidance
should disclose that fact in the notes to the
financial statements so that users of the financial
statements understand that one or more areas
of the company’s financial statements are not
presented on a comparable basis with those of
public companies or of other private companies
that elected not to apply the alternatives within
GAAP.
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3. Check with the users of the financial
statements. Although the FASB has issued
a definition of a public business entity to help
determine which entities are within the scope
of the Guide, the FASB acknowledges that
decisions about whether an entity may apply
permitted alternatives within GAAP are ultimately
determined by regulators, lenders and other
creditors, or other financial statement users that
require GAAP financial statements. As a result,
private companies may want to check with users
of the financial statements before electing any
alternative accounting treatments.
Definition of a Public Business Entity
The definition of a public business entity was designed
to identify the types of entities which are considered
to be public business entities, and therefore, are not
subject to consideration and evaluation for potential
accounting alternatives in accordance with the criteria
outlined in the Guide. An entity may only apply the
accounting alternatives available to private entities if
it does not meet any of the criteria that define a public
business entity.
The Guide does not address not-for-profit entities and
employee benefit plans as they are not included in the
definition of a business entity. The FASB and PCC
will decide whether an accounting alternative should
apply to such entities on a case by case basis.
Types of Entities that are Public Business Entities
Any entity that meets any one of the five criteria of a
public business entity is considered a public business
and cannot elect accounting alternatives available
to private companies which are established after
December 2013. These five criteria encompass a
wide range of entities, therefore, before electing an
accounting alternative available to private companies,
an entity will need to carefully evaluate whether it
qualifies as a public business entity for the financial
statements being issued (as discussed below, an
entity may meet the definition of a public business
entity in one instance and a private company for
another).
Regulated Entities (Criteria 1 or 2): An entity
that is required to provide GAAP prepared financial
statements to the Securities and Exchange
Commission (SEC) or file GAAP prepared financial
statements with a regulator under the Act is a public
business entity. Such entities include all entities
required to file GAAP prepared quarterly and annual
reports with the SEC as well as registered brokers and
dealers. In addition, an entity that elects to voluntarily
file with the SEC is considered a public business
entity.
Five Criteria that define a Public Business
Entity (ASU 2013–12)
Criteria 1: “It [the entity] is required by the U.S.
Securities and Exchange Commission (SEC) to file
or furnish financial statements, or does file or furnish
financial statements (including voluntary filers), with the
SEC (including other entities whose financial statements
or financial information are required to be or are included
in a filing).”
Criteria 2: “It [the entity] is required by the Securities
Exchange Act of 1934 (the Act), as amended, or rules or
regulation promulgated under the Act, to file or furnish
financial statements with a regulatory agency other than
the SEC.”
Criteria 3: “It [the entity] is required to file or furnish
financial statements with a foreign or domestic regulatory
agency in preparation for the sale of or for purposes of
issuing securities that are not subject to contractual
restrictions on transfer.”
Criteria 4: “It [the entity] has issued, or is a conduit bond
obligor for, securities that are traded, listed, or quoted on
an exchange or an over-the-counter market.”
Criteria 5: “It [the entity] has one or more securities that
are not subject to contractual restrictions on transfer, and
it is required by law, contract , or regulation to prepare
U.S. GAAP financial statements (including footnotes)
and make them publicly available on a periodic basis (for
example, interim or annual periods). An entity must meet
both of these conditions to meet this criterion.”
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Entities whose financial statements are included in an
SEC filing of another public business entity are also
considered public business entities. These include
entities that are considered significant equity method
investments of a registrant, entities significant to
and and/or being acquired by an SEC registrant, as
well as all other entities whose financial statements
are required to be filed with a registrants financial
statements under Regulation S-X, Rule 3-09 Separate
Financial Statements of Subsidiaries Not Consolidated
and 50 Percent or Less Owned Persons, Regulation
S-X Rule 3-05 Financial Statements of Businesses
Acquired or to Be Acquired, and Regulation S-X, Rule
4-08(g) Summarized Financial Information. However,
an entity that does not otherwise meet the definition of
a public business entity except for the inclusion of its
financial statements in another public business entity is
only considered a public business entity for purposes
of the publicly available financial statements. If the
entity also prepares financial statements unrelated
to the public business entity, for purposes of those
financial statements, the entity would be considered a
private business entity, and therefore could elect the
applicable accounting alternatives.
Entities with unrestricted securities (criteria 3 or
5): The term securities, is a broad term encompassing
both debt and equity instruments, and an entity with
outstanding unrestricted securities or preparing
to issue unrestricted securities should evaluate
whether it is a public business entity. An entity that
is preparing to issue unrestricted securities and as a
result is required to provide GAAP prepared financial
statements to a regulator is considered a public
business entity.
An entity, other than a not-for-profit or employee benefit
plan, with outstanding unrestricted securities may be
a public business entity even if its securities are not
publicly traded if the entity is required to prepare GAAP
financial statements and distribute them publically on
a periodic basis. This criterion includes those entities
The FASB is considering a potential future project to
conform existing definitions within GAAP to the revised
definition of a public business entity provided by ASU
2013-02, as well as the explicit inclusion or exclusion
of not-for-profit and employee benefit plans from the
scope of alternatives available to private entities.
Financial institutions may also be excluded from certain
alternatives regardless of whether they do or do not meet
the definition of a public business entity.
Other considerations may include potential deferred
effective dates of future Accounting Standards Updates
for entities that do not meet the definition of a public
business entity or for entities that are only public business
entities as a result of being a conduit bond obligor.
that by law, contract or regulation are required to post
GAAP financial statements on a website or to provided
GAAP financial statements to the public upon request.
Thus an entity required to make financial statements
available upon request from the public that has not
in the past made them publicly available, because
they have not previously been requested, would be
considered a public business entity. However, if such
an entity is not required to issue a full set of GAAP
financial statements, for example a balance sheet
only, statements without full disclosures, or a Report
of Condition and Income (Call Report), would not
be considered GAAP financial statements and thus,
would not be a public business entity under criteria 5.
In certain instances, an entity may issue restricted
securities, yet not be considered a public business
entity. Qualifying restrictions would permit an entity
to control a transfer within a secondary market.
Entities with restrictions on their securities that permit
the entity to control the transfer of the security, such
that they can effectively limit the type and number of
investors, would not be considered a public business
entity under criteria 3 or 5.
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Conduit bond obligor (Criteria 4): A conduit bond
obligor is an entity that has had securities issued on
its behalf by a governmental entity. Conduit bond
securities are typically called revenue bonds or
certificates of participation, but encompass any similar
debt. These securities are in the name of the issuing
governmental entity, however the governmental entity
has very limited obligations related to repayment of
the debt (for example limited to payments received
by the governmental entity from the conduit bond
obligor). In addition, the conduit bond obligor is the
party responsible for financial reporting related to
the issued security. If the conduit bond obligation is
traded, listed, or quoted in a public market (including
exchanges, as well as over the counter markets), the
conduit bond obligor meets the definition of public
business entity.
Subsidiaries: The consolidation of a public business
entity by a privately held company that does not meet
the definition of a public entity does not change its
status as a private entity. However, the qualifying
subsidiary would be considered a public business
entity for purposes of stand-alone financial statements.
Similarly, a private business entity that is a subsidiary
of an entity considered to be a public business entity
is not considered a public business entity for the
purpose of preparing separately issued stand-alone
financial statements.
For more information
If you would like to discuss this further, please contact
James Comito of MHM’s Professional Standards
Group at jcomito@cbiz.com or 858.795.2029.
The information in this MHM Messenger is a brief summary and may not include all the details relevant to your situation.
Please contact your MHM auditor to further discuss the impact on your audit or audit report.
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