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PCBB Banc Investment Daily February 20, 2013
Banc Investment Daily
February 20, 2013

PRIVATE COMPANY COUNCIL

You may not know it, but the Federal income tax began 100 years ago this year (1861), when Abraham Lincoln needed money for the Civil War. This first tax of 3% lasted until 1866 when it was repealed by Congress. Then, in 1894, Congress tried to bring back the tax, only to have the Supreme Court rule it was unconstitutional. After a constitutional amendment, it was finally made final. Things sure have changed from those early days when the tax code was only 38 pages (it is now about 74,000 pages long). As this shows, we certainly seem to adapt to rules and regulations, but we don't always like them. Along similar lines, consider that in May of last year, FASB announced the creation of the Private Company Council (PCC) as part of an effort to better understand the impact of accounting rule on public and nonpublic entities. FASB even went so far as to say private companies have been negatively impacted by costly and complex rules that have forced them to hire outside assistance (such as valuation consultants), incur added cost and deal with cumbersome models. This forces material changes to systems, controls and processes and creates challenging audit reviews (as it increases time spent on audits and boosts costs). It may shock you, but the PCC's aim is to reduce cost and complexity, while ensuring relevant information is still reported. By acting as an advisor to FASB, the PCC will propose changes to current technical accounting literature in an effort to ensure consistency and reduce complexity. The PCC is not intended to create a completely new set of rules, but rather FASB recognizes users of financial statements have different needs, depending on whether the company's stock trades publicly (for which providing an alternative to focus on certain areas becomes imperative) or not. For this reason, the PCC has considered various financial statement users, talked to company management, looked at investment strategies, capital structures and accounting resources. These are all areas where nonpublic firms focus differently vs. public peers. In its first meeting held late last year, the PCC identified four projects that will receive its initial focus. These are: consolidation of variable interest entities, accounting for "plain vanilla" interest rate swaps, accounting for uncertain tax positions and the fair value of intangible assets (other than goodwill) acquired in business combinations. Exposure drafts and the PCC's Final Conceptual Framework chapter will be released in 2Q of this year. The PCC is also expected to meet five more times during the rest of 2013. Beyond the creation of the PCC, FASB continues to make progress in rulemaking for nonpublic entities. Just this month for example, FASB issued guidance to clarify requirements to disclose the level of fair value hierarchy (Level 1, 2 or 3) does not apply to private companies and nonpublic not-for-profits for items where fair value is disclosed, but are not measured at fair value in the financial statements. This addressed concerns that some nonpublic entities might not qualify for the disclosure exemption and could include loans, bank debt and other obligations. As both the PCC and the FASB continue to work on projects targeting private companies, one can hope it will reduce the burden on community banks over time. As simplified or clarified information is shared, the accounting bodies will hopefully reach consistency and transparency in standard setting. Once that is paired up with a cost efficient framework, these goals will no longer be considered mutually exclusive.