December 16, 2022
The Private Company Council (PCC) met on Friday, December 16, 2022. Below is a summary of topics addressed by the PCC at the meeting:
- Summary of December 15, 2022 Meeting with the AICPA Private Companies Practice Section, Technical Issues Committee (TIC): PCC members reported on the issues discussed with the TIC during their annual PCC-TIC Liaison meeting. PCC members shared observations on a variety of topics including the implementation of Topic 842, Leases, and common control arrangements, stock compensation disclosures, accounting for software costs, joint venture formations, and taxes paid by pass-through entities. PCC members thanked the TIC for the insightful dialogue.
- Leases (Topic 842): Common Control Arrangements: The PCC discussed the post-implementation review activities related to Topic 842, Leases, including the proposed Accounting Standards Update to improve accounting guidance for arrangements between entities under common control. PCC members were supportive of the proposed practical expedient that would allow nonpublic entities to use written terms and conditions of an arrangement between entities under common control to determine whether a lease exists. Some members discussed the degree of formality required in documenting agreed upon terms and conditions, with those members observing that entities have latitude to use reasonable judgment when deciding how the terms and conditions of the arrangement are conveyed in writing. Under the proposed Update, leasehold improvements associated with arrangements between entities under common control would be amortized by the lessee over the economic life of the leasehold improvements as long as the lessee controls the use of the leased asset. PCC members discussed the judgment required under current GAAP to determine the owner of improvements made by a lessee to the leased asset in a common control lease for purposes of determining whether the lessee capitalizes those improvements as leasehold improvements. Those PCC members acknowledged that the issue with that determination is not unique to common control arrangements or the adoption of Topic 842 (that is, that same determination also was being made under Topic 840, Leases).
- Accounting for Government Grants, Invitation to Comment: The PCC reviewed a summary of the feedback received in response to the Invitation to Comment—Accounting for Government Grants by Business Entities: Potential Incorporation of IAS 20, Accounting for Government Grants and Disclosure of Government Assistance, into Generally Accepted Accounting Principles. Overall, PCC members were supportive of a project that would result in the development of accounting guidance for recognition, measurement, and presentation of government grants with IAS 20 as a starting point. Given the pervasiveness of government grants, some PCC members noted that IAS 20 permits different recognition, measurement, and presentation based on the type of grant, which could result in a workable solution to account for various types of grants. Some PCC members stated that there are challenges with certain aspects of IAS 20, such as applying the reasonable assurance threshold for recognition. PCC members discussed how additional examples could be helpful when accounting for various types of government grants. PCC members who are users emphasized the need for conservatism and consistency in the accounting, in addition to understanding the predictability and risk related to future cash flows.
- Revenue—Implementation Issues: The PCC discussed the post-implementation review activities completed to date for Topic 606, Revenue from Contracts with Customers. PCC members were generally supportive of the revenue standard. PCC members also observed some ongoing implementation challenges for private companies in the following areas: insufficient familiarity with Topic 606, especially by smaller companies/firms; disclosures about opening contract balances; and principal versus agent determination in service transactions.
- Scope Application of Profits Interests Awards: Compensation—Stock Compensation (Topic 718): The PCC reviewed the Board’s recent decision to add a project to its technical agenda that would add illustrative examples to the Codification to demonstrate how an entity would apply the scope guidance in Subtopic 718-10, Compensation—Stock Compensation—Overall, to determine whether a profits interest or similar award should be accounted for by applying Topic 718. A proposed Update is expected to be issued in the first quarter of 2023 with a 60-day comment period. PCC members expressed support for the project and related Board decisions on the illustrative examples and transition. Some PCC members suggested that the FASB increase communication about the project with smaller entities who may not be aware of the proposed guidance.
- Accounting for and Disclosure of Software Costs: The PCC reviewed and discussed recent outreach and the alternatives being explored by the staff for future consideration by the Board. Many PCC members supported the initial development cost model. One PCC member supported a model that would expense all software development costs, while other PCC members acknowledged the lack of a conceptual basis in that model. PCC members discussed the challenges with distinguishing between maintenance and enhancements, tracking software development activities, and determining a useful life for software with continued enhancements under a capitalization model. PCC members who are users supported increased transparency about software costs and highlighted that their focus is to predict future cash flows.
- Accounting for and Disclosure of Crypto Assets: The PCC reviewed the Board’s recent decisions on scope, measurement, presentation, and disclosure. One PCC member commented on the Board’s decision to exclude a disclosure about the nature and purpose of crypto asset holdings. In contrast, another PCC member observed that users of private company financial statements have access to management that allows them the opportunity to ask questions about the nature and purpose of crypto asset holdings.
- Other Business: The FASB chair congratulated PCC members on the 10-year anniversary of the PCC and the PCC chair thanked outgoing PCC members, Zubin Avari and Yan Zhang.
PCC Meeting Recaps are provided for those interested in following the activities of the PCC. Official positions of the PCC and the FASB are reached only after extensive due process & deliberations. More details on the PCC’s input on the FASB’s projects can be found within the meeting minutes, which will be published on the PCC website in the coming weeks.