FASB Proposes Changing Public Entity Definition
August 7, 2013
A proposed Accounting Standards Update (ASU), issued by the Financial Accounting Standards Board (FASB) on August 7, suggests a single definition of a public business entity for use in U.S. generally accepted accounting principles (GAAP). The proposal would amend the Master Glossary of the Accounting Standards Codification and exclude all not-for-profits (NFPs) from the definition of a public business entity for all future standard setting.
The impetus behind the draft guidance began with the formation of FASB's relatively new Private Company Council (PCC) and the requisite for a private company decision-making framework. The private company framework will consist of a "Guide for Evaluating Financial Accounting and Reporting for Private Companies" (the Guide), currently in draft form. The proposed ASU seeks to clarify which entities would be excluded from using alternative accounting and reporting guidance in the Guide.
The proposal defines a public business entity and excludes those entities from the scope of the Guide. The proposal also excludes NFP entities from both the scope of the Guide and the definition of a public business entity. Accordingly, the proposal will end the public versus nonpublic distinction between NFPs when applying future accounting and reporting guidance. The proposal would not affect existing standards and the related disclosure requirements.
Eliminating an NFP's status as either public or nonpublic is especially relevant for independent (NFP) colleges and universities. For the past several years, NACUBO has urged the Board and staff to examine the public and nonpublic demarcation in U.S. GAAP. Because FASB's current definition of a public entity includes those with either public debt securities or conduit debt, higher education has expressed concern that colleges and universities are subject to a breadth of guidance intended for publicly traded companies. Further, the differentiation does little to advance accounting and reporting topics that may be most valuable to the users of college and university financial statements.
The proposal would require the Board to consider factors such as user needs and NFP resources, on a standard-by-standard basis, when determining whether all, none, or only some NFPs will be eligible to apply accounting and reporting alternatives that will be available within U.S. GAAP for private companies. The amendments in the proposal would take effect concurrently with the first Accounting Standards Update that uses the definition of a public business entity. Although the exposure draft does not address whether existing guidance will eventually be incorporated into this new evaluation, the FASB welcomes comments on that question.
A business entity meeting any one of the following criteria would be considered public:
- The U.S. Securities and Exchange Commission (SEC) requires it to file or furnish financial statements, or it files or furnishes financial statements with the SEC (including other entities whose financial statements or financial information are required to be or are included in a filing).
- The Securities Exchange Act of 1934, as amended, or rules or regulations promulgated under the Act require it to file or furnish financial statements with a regulatory agency.
- It is required to file or furnish financial statements with a regulatory agency in preparation for the sale of securities or for purposes of issuing securities.
- It has (or is a conduit bond obligor for) unrestricted securities that are traded or can be traded on an exchange or an over-the-counter market.
- Its securities are unrestricted, and it is required to provide U.S. GAAP financial statements to be made publicly available on a periodic basis pursuant to a legal or regulatory requirement.
Comments to FASB
NACUBO encourages independent institutions to submit comments on the proposed ASU by September 17, or contact NACUBO to include your thoughts in the industry comment letter. The most noteworthy questions for independent colleges and universities to weigh in on are listed below. Question 5, in particular, provides an opening to influence existing guidance—especially current requirements that are costly to comply with and do little to enhance the value of higher education financial statements.
- Question 2: Do you agree with the definition of a public business entity included in this proposed Update? Please explain why.
- Question 4: Do you agree that no public or nonpublic distinction should be made between NFPs for financial reporting purposes? Instead, the Board would consider whether all, none, or only some NFPs should be permitted to apply accounting and reporting alternatives within U.S. GAAP. Please explain why.
- Question 5: Should the Board consider whether to undertake a second phase of the project at a later stage to examine whether to amend existing U.S. GAAP with a new definition resulting from this proposed Update? In that second phase of the project, the Board would consider whether to (a) preserve the original scope of guidance in the Accounting Standards Codification or (b) change the scope of guidance in the Accounting Standards Codification to align with the new definition. Please explain why.
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