Multiple definitions of “public entity” and “nonpublic entity” exist in the Financial Accounting Standards Board Accounting Standards Codification, and the in consistency in the accounting literature has resulted in some confusion for financial statement preparers.
In December 2013, the Financial Accounting Standards Board (FASB) issued a definition of the term “public business entity” (PBE). Adding and defining the term was deemed necessary to enable the FASB to determine clearly which entities would qualify for private company accounting alternatives within U.S. generally accepted accounting principles (U.S. GAAP) going forward.
This new definition was added to the FASB Accounting Standards Codification (ASC) Master Glossary through the issuance of Accounting Standards Update (ASU) 2013-12, Definition of a Public Business Entity. Since the definition will be used in future ASU amendments to the FASB ASC, no effective date is included in this new guidance.
The Private Company Council, together with the FASB, develops alternative recognition, measurement, disclosure, presentation, effective date and transition guidance within U.S. GAAP for private companies. The PBE definition will be used by the Private Company Council and FASB to determine which entities will be eligible to use the alternative accounting guidance.
The Private Company Council and FASB will decide what kinds of entities are eligible for any alternatives within U.S. GAAP when determining the scope of each alternative. So, the definition of a PBE is a starting point for determining which entities generally would qualify for private company accounting alternatives. But the council and FASB retain flexibility in ultimately deciding which entities can use each particular accounting alternative.
The definition of a PBE excludes not-for-profit entities within the scope of FASB ASC 958, Not-for-Profit Entities. It also excludes employee benefit plans within the scope of FASB ASC 960, Plan Accounting – Defined Benefit Pension Plans, through FASB ASC 965, Plan Accounting – Health and Welfare Benefit Plans.
So, excluding not-for-profit entities and employee benefit plans, a PBE is an entity meeting any one of the criteria below:
1. It is required by the U.S. Securities and Exchange Commission (SEC) to file or furnish financial statements, or does file or furnish financial statements, with the SEC – including an entity that files voluntarily. This criterion includes other entities for which financial statements or financial information are required to be, or are, included in a filing.
2. It is required by the Securities Exchange Act of 1934, as amended, or rules or regulations promulgated under the act, to file or furnish financial statements with a regulatory agency other than the SEC.
3. It is required to file or furnish financial statements with a foreign or domestic regulatory agency in preparation for the sale of, or for purposes of issuing, securities that are not subject to contractual restrictions on transfer.
4. It has issued, or is a conduit bond obligor for, securities that are traded, listed or quoted on an exchange or an over-the-counter market.
5. It has one or more securities that are not subject to contractual restrictions on transfer, and it is required by law, contract or regulation to prepare U.S. GAAP financial statements – including notes to the financial statements – and make them publicly available on a periodic basis, for example, interim or annual periods. An entity must meet both of these conditions to satisfy this criterion.
This new PBE definition should be considered carefully by financial statement preparers. Under the definition, more reporting entities will be considered PBEs when compared with reporting entities that are considered public entities using existing accounting technical literature requirements. Entities that fit the definition of a PBE generally will not be eligible to use the private company accounting alternatives issued by the Private Company Council and FASB.
Criterion No. 1 of the definition of a PBE scopes in entities that may otherwise not meet the definition of a PBE but are considered PBEs because their financial statements are to be included in another entity’s SEC filing.
Examples of these kinds of entities are private company equity method investees of an SEC reporting entity and private companies acquired by an SEC reporting entity. In these cases, those entities’ financial statements included in the SEC filing must be prepared using the same accounting principles as the SEC reporting entity. However, those entities may prepare their standalone financial statements – those not included in the SEC filing – using the private company accounting alternatives issued by the Private Company Council.
Related to the preparation of standalone financial statements: Because there would be the need to have the financial statements prepared for the SEC filing without using Private Company Council alternatives and then to use the alternatives for the standalone financial statements, using this approach by private companies likely will be rare.
If statements have to be prepared without using the Private Company Council’s alternatives, the incremental time, effort and cost associated with having another set of statements prepared using the alternatives most likely would be prohibitive.