PCC revamp leaves hope for fair value reforms

As the Private Company Council increases its capacity as an advisor to FASB, the industry hopes the changes will lead to better fair value disclosure rules. 

Following a three-year review, the Financial Accounting Foundation's (FAF) board of trustees has decided to reform some of the procedures for the Private Company Council (PCC), which the private funds industry hopes will lead to better disclosure rules around fair value reporting.

The PCC was created in 2012 to consider the needs of private companies in US GAAP, which is more geared towards the needs of large public companies. Questions have surfaced around what type of relationship the PCC should have with the Financial Accounting Standards Board (FASB), which sets US GAAP, and if the two bodies communicate enough to make the PCC an effective advisory board.

Following a consultation launched earlier this year, FAF, the main oversight body of both FASB and PCC, said in a report released Wednesday that the PCC will, over time, become more involved in active FASB projects. The PCC also maintains the ability to develop proposed accounting alternatives for FASB’s consideration, a tool it has used four times since inception. 

A new PCC technical group was also established, comprised of two FASB members, that should help FASB to consider private company stakeholder feedback before deciding which group would be more suitable to address the issue.

The reforms are leading private fund managers, which are both users and preparers of private company financial statements, to hope for better accounting rules tailored to their needs.

“In particular, we think many existing disclosure requirements remain ripe for scrutiny and possible simplification,” the National Venture Capital Association (NVCA) said in a consultation response.

GPs argue that financial statements have become bloated with useless disclosure notes written only to appease regulators, instead of achieving their intended purpose of providing transparency and highlighting risks. For private fund CFOs, the problem manifests most when writing disclosures about their fair value estimates, which tend to be for illiquid “Level 3” assets that are tough to price and require careful explanation.

“The PCC’s mission should continue to recognize that users of private company financial statements have quite different information needs than public company users,” the NVCA said in its letter. “What might be relevant disclosure for a public company may be less relevant for a private company but equally costly to prepare and audit.”