Pub. 3 2013-2014 Issue 6

16 O V E R A C E N T U R Y : B U I L D I N G B E T T E R B A N K S - H E L P I N G C O L O R A D A N S R E A L I Z E D R E A M S ture Private Company Council (PCC) and FASB simplification projects. In general, entities meeting the definition of a public business entity will not be considered, at least initially, when FASB and PCC discuss U.S. GAAP financial accounting and reporting alternatives. In January 2014, FASB issued ASU 2014-02, Intangibles – Goodwill and Other (Topic 350), and 2014-03, Derivatives and Hedging (Topic 850): Accounting for Certain Receive-Variable, Pay-Fixed Interest Rate Swaps – Simplified Hedge Account - ing Approach. Both updates were issued upon consensus of the PCC and only apply to private companies. FASB defined a private company in ASU 2014-02 and added this definition to the Master Glossary. FASB defines a private company as a company other than a public business entity, not-for-profit (NFP) entity or employee benefit plan (EBP). The next step is to understand FASB’s definition of a public business entity. Before moving on, note a couple of items. First, current accounting standards include multiple definitions of “nonpublic entity” and “public entity,” as do regulators such as the SEC, PCAOB and industry-specific regulators. All these definitions remain intact. “Public busi - ness entity” applies to U.S. GAAP accounting standards, and the definition became effective upon its addition to the Master Glossary in December 2013. It applies to the alternatives for pri- vate companies, beginning with ASU 2014-02 in January 2014. Secondly, the definitions of public business entity and private company cannot be applied carte blanche. For example, FASB determined financial institutions are ineligible to apply ASU 2014-03 on interest rate swaps even if the financial institution meets the definition of a private company. Similarly, FASB will decide on a standard-by-standard basis which NFPs and EBPs should be permitted to apply financial accounting and reporting alternatives within U.S. GAAP. Criteria As for the definition of a public business entity, if any of the criteria below are met, an entity is a public business entity for purposes of U.S. GAAP. In general, public business entities are those entities that access the public capital markets by issuing securities that are publicly traded. This premise follows FASB’s historical funda- mental concept that in order to be defined as a nonpublic entity in U.S. GAAP, the entity must not have securities that trade in a public market either on a stock exchange or in an OTC market. Criterion (e) is intended to capture securities not on an exchange or an OTC market. Implications General The financial accounting and reporting alternatives include simplification in the fundamental areas of recognition, measure - ment, disclosure, display (or presentation), effective date and transition method. Traditionally, nonpublic companies have been afforded a longer transition date, and this tradition presum- ably would carry over to private companies. The benefits of sim - plified recognition, measurement and disclosure requirements will vary by company and industry. These benefits, however, will be questionable if two sets of books must be maintained. Consider criterion (a) above, for example. If an entity is classified as a public business entity solely because its financial statements or financial information is included in another entity’s filing with the SEC, the entity is classified as a public business entity only for that purpose. The private company is permit- Criteria Classification Definition of U.S. GAAP “Public Business Entity” (a) SEC Requirement The entity is required by the U.S. Se- curities and Exchange Commission (SEC) to file or furnish financial state- ments or does file or furnish finan- cial statements (including voluntary filers) with the SEC (including other entities with financial statements or financial information required to be or included in a filing). (b) Securities The entity is required by the Exchange Securities Exchange Act of 1934, Act of 1934 as amended, or rules or regulations Requirement promulgated under the act, to file or furnish financial statements with a regulatory agency other than the SEC. (c) Foreign or The entity is required to file or Domestic furnish financial statements Regulatory with a foreign or domestic Agency regulatory agency in preparation Requirement for the sale of or for purposes of is- suing securities that are not subject to contractual restriction on transfer. (d) Over-the- The entity has issued or is a Counter conduit bond obligor for securities (OTC) Market traded, listed or quoted on an Requirement exchange or an OTC market. (e) Legal, Contractual The entity has one or more or Regulatory securities that are not subject to Requirement contractual restrictions on transfer, i.e., the securities are not subject to management preapprov- al on resale, and is required by law, contract or regulation to prepare U.S. GAAP financial statements, including footnotes, and make them publicly available on a periodic ba- sis, e.g., interim or annual periods. An entity must meet both of these conditions to meet this criterion.  Considering Private Company  continued from page 15