A news release today announced that the FAF Board of Trustees has approved a Private Company Council (PCC) that will have two principal responsibilities.  First, they will determine whether exceptions or modifications to GAAP are necessary to meet private company financial statement users.  Second, the PCC will serve as the primary advisory body to the FASB on private company issues.

The structure of the PCC is generally in line with the proposal made by the FAF some months ago (see blog posts here and here), but there are some key changes based on feedback from constituents (besides the shorter and easier to remember name change!).  Perhaps the biggest change is that the FASB role will be one of endorsement (rather than ratification) of the PCC’s recommedations.  Also, a FASB member will not serve on the council, although there will be a Board member appointed as a liaison to the body.  In addition, the body will meet more frequently than what was originally proposed.

Of course, the vote in support of the PCC comes in spite of the literally thousands of letters sent to the FAF from the AICPA members who believe that a separate standard-setting body is needed to effectively address private company concerns – one that is not dependent on FASB ratification.  However, the EITF has functioned effectively for many years without accusations that it is unduly influenced by the Board, even though the Board must ratify all EITF decisions.  A major activity of the PCC that is not a change from the original proposal is that it will set its own agenda (something the EITF does not have authority to do).  I believe this is significant component of the plan and a major reason why I don’t believe the body will merely be a puppet organization to the FASB.

The burning questions that I have related to the PCC is, what criteria will be established to justify exceptions or modifications to GAAP?  Relatedly, how do the needs of private company financial statement users differ from those of public company financial statement users?  The Blue Ribbon Panel Report relied heavily on one study that suggested the needs between the two groups differ.  However, the study suffered from several weaknesses, and the case has never been clearly made to me why they would differ.

I’m sure we haven’t heard the last of this issue.  It will be interesting to observe reactions to the announcement.