Private equity firms and the portfolio companies they back may eventually be allowed to follow disclosure note guidelines more in line with the needs of private-sector entities when writing their financial statements.
In a FAQ document posted to its website on Thursday, the Financial Accounting Standards Board (FASB) – the body responsible for setting US accounting standards – said sister group the Private Company Council (PCC) will evaluate disclosure requirements to determine whether alternatives are warranted for private companies.
The PCC was assembled last year to find exceptions or modifications to US GAAP for private companies, who argue US accounting standards are more geared towards the needs of large public companies.
The PCC has not formally placed disclosure note requirements on its agenda, but will regularly discuss the issue as other accounting projects are addressed in the coming months, according to a spokesperson for FASB.
GPs (and the private-sector companies they sponsor) have long criticized US accounting standards for producing financial statements bloated with disclosure notes. Often, these notes are too complex and difficult to read to be of much value to users of financial statements, critics contend.
For private equity particularly a “problem is that the Limited Partnership Agreement often says the firm will follow US GAAP. But because GAAP requires GPs to include lots of nonsensical or non-meaningful notes, LPs don’t even bother reading them,” said David Larsen, a managing director at valuation specialist Duff & Phelps. “They are paying GPs to create something they find little value in.”
In its FAQ, FASB said its primary goal in its Disclosure Framework Project launched to address these criticisms is to improve the relevancy of financial statement notes, and not necessarily the volume.
However, removing irrelevant notes may very well result in less disclosure notes in total, FASB noted in its FAQ.
FASB staff are conducting field testing to determine how disclosure note requirements can be improved. A feedback report on their findings is expected to be delivered to FASB by end of year, but may not arrive until early 2014, the spokesperson said.