In December 2013, the Financial Accounting Standards Board added a new definition to its master glossary with the issuance of Accounting Standards Update 2013-12, Definition of a Public Business Entity. The public business entity (PBE) definition will be used to determine which entities may apply the private company accounting and reporting alternatives within US generally accepted accounting principles (US GAAP) on a going-forward basis.
Together with the Financial Accounting Standards Board (FASB), the Private Company Council (PCC) develops alternatives to US GAAP for private companies to address concerns that certain accounting standards are not relevant to many users of private company financial statements and that they create unnecessary complexity and significant costs for preparers and auditors.
Definition of a PBE
A PBE is defined as an entity meeting any one of the following criteria:
- Required by the US Securities and Exchange Commission (SEC) to file or furnish financial statements, or does file or furnish financial statements (including voluntary filers), with the SEC (including other entities whose financial statements or financial information are required to be or are included in a filing)
- Required by the Securities Exchange Act of 1934 to file or furnish financial statements with a regulatory agency other than the SEC
- Required to file or furnish financial statements with a foreign or domestic regulatory agency for the sale of securities or for purposes of issuing securities that are not subject to contractual restrictions on transfer (that is, the securities are not subject to management pre-approval on resale)
- Issued, or is a conduit bond obligor for securities traded, listed or quoted on an exchange or an over-the-counter market
- Its securities are not subject to contractual restrictions on transfer and it is required by law, contract or regulation to prepare US GAAP financial statements, including footnotes, to be made publicly available on a periodic basis. Both of these conditions must be met for this criterion to apply
Entities meeting the definition of a PBE will not be eligible to elect the accounting and reporting alternatives in US GAAP issued by the PCC and FASB. Also, nonprofit entities and employee benefit plans may not elect PCC modifications unless specifically permitted on a standard-by-standard basis. In addition, private companies not eligible to apply PCC modifications will be identified, on a standard-by-standard basis, by factors such as user needs and entity resources.
The PBE definition does not affect existing definitions of public and nonpublic entity. Since the PBE definition will be used in future financial accounting and reporting guidance the ASU has no effective date.
Additional FASB clarifications affecting PBEs
An entity may meet the definition of a PBE solely because its financial statements or financial information is included in another entity’s SEC filing, e.g., equity method nonpublic investee. However, entities meeting this definition may use PCC alternatives in their stand-alone financial statements.
A private company that consolidates a public company is not considered a public business entity and can apply the financial accounting and reporting alternatives for private companies in its own financial statements.
A conduit bond obligor is responsible for paying the debt service for debt securities issued by a state or local government on its behalf and is deemed a PBE when its debt securities are publicly traded. FASB indicated that conduit bond obligors are indirectly accessing public debt markets and therefore users of its financial statements often have similar information needs as investors in public company corporate debt securities. FASB acknowledges that some private company conduit bond obligors face similar resource constraints as many other private companies and indicated a willingness to consider deferred effective dates.
Reports of Condition and Income (call reports) required by federal financial institution regulations are not considered US GAAP financial statements for purposes in criterion e) above because call reports do not require compliance with all footnote requirements under US GAAP.
As described above, even if an entity is not a PBE it may not necessarily be eligible to apply the accounting and reporting alternatives available to private companies. Financial institutions that do not otherwise meet any of the criteria of a public business entity are not considered PBEs. However, FASB could exclude these financial institutions from adopting accounting and reporting alternatives on a standard-by-standard basis if the differences affect the provision of relevant information to financial statement users.
Financial statement preparers need to carefully consider the PBE definition to determine if they are eligible to utilize the private company alternatives. In addition, private companies need to meet with their financial statement users to determine whether it’s acceptable to apply the private company alternatives in their financial statements.
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