What Exactly is a Private Company, Anyway?

As it turns out, that is an excellent question. On the heels of the FASB’s recent approval of certain GAAP exceptions for private companies, the FASB is re-evaluating the definition of a public company. Comments on the proposed amendment to the glossary were due back on September 20, 2013, and the FASB has yet to make any official changes. The FASB proposed defining a public business entity (“PBE”) as any company that meets any of the following requirements:

• The company is required to provide financial statements to the SEC.
• The company is required to provide financial statements to any regulatory agency under the Securities Exchange Act of 1934.
• The company is required to provide financial statements as part of a securities-issuing process.
• The company has securities traded on an exchange or over-the-counter.
• The company has unrestricted securities and is required to provide financial information through any legal or regulatory requirement.

CFA Institute observes that there is still ambiguity concerning FASB’s official recognition of private versus public companies. If the new amendments are adopted, there would then be at least four designations for company categorization (small to medium-sized entities, emerging growth, private, and public), which each have distinct accounting and disclosure requirements. CFA Institute further notes that while the FASB considers the cost of compliance as a key difference between private and public entities, many private entities are larger and have more complex organizational structures than their public counterparts. Both issues will need to be considered if U.S. GAAP and IFRS are to converge.

Both private and public entity accounting frameworks often call for fair value measurements, though the requirements and expectations of investors, regulators, and financial sponsors may differ. Mercer Capital has been assisting clients (both private and public) with fair value measurements for over a decade. Call us. We can help.

Related Links

• FASB Exposure Draft: Proposed Accounting Standards Update (Issued August 7, 2013)
• Private Company Financial Reporting: Need for Clear Definition of Private Company (December 13, 2013)
• Comment Letter on Definition of a Public Business Entity from the CFA Institute (October 28, 2013)