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APA
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Accounting, Finance, SPSS
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English (U.S.)
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Topic:

Factors that Differentiate Considerations for Private and Public Companies

Essay Instructions:


In this assignment, you will compare accounting principles for private and public companies. As you may have discovered as you’ve reviewed the materials for this course, most of what is learned in accounting courses focuses on public companies, not private ones. GAAP, as you have also learned from your studies, may be followed by private companies, but it is only required to be used by publicly traded companies. FASB, of course, is designated by the SEC to establish and improve GAAP, so their focus is primarily on publicly traded companies.
FASB has also recognized the importance and potential impact of private company financial statements. According to Forbes, out of the 5.7 million firms with employees in the United States, less than 1 percent have shares listed on a U.S. exchange. Although we tend to think of private companies as small companies, the reality is quite the opposite, with private firms accounting for 86.4 percent of U.S. firms with 500 or more employees.
In recognition of the growing importance and impact of private companies, FASB has come up with a useful publication: Private Company Decision-Making Framework: A Guide for Evaluating Financial Accounting and Reporting for Private Companies.
In this guide, FASB identifies the following five Significant Differential Factors:
Number of primary users and their access to management.
Investment strategies of primary users.
Ownership and capital structure.
Accounting resources.
Learning about new financial reporting guidance.
For this assignment:
Select two of the differential factors that interest you, and briefly explain why.
In your own words, explain the factor and why it is different from a publicly traded company.
Identify the accounting risks associated with each of your chosen factors.
What would you recommend to minimize those risks?
Based on what you have learned this quarter, what components of the Balance Sheet have the most potential to be impacted by the differential factors you have chosen? Identify both positive and negative potential impacts.

Essay Sample Content Preview:

Accounting for private vs. public companies
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Factors that Differentiate Considerations for Private and Public Companies
For the differential factor, the “number of primary users and their access to management,” there are few users of the financial statements in the case of private companies. These are mostly the lenders, different creditors, and the equity investors. Private companies tend to prepare their financial statements by considering the influence of lending agreements and distributions. For the lenders and creditors, there is a focus on reported debts and notes on cash, liquidity, and cash flow linked to servicing the debt.
The users of the financial statement also have access to management when seeking additional financial information. In reporting the recognition and measurement of financial information for the private companies, it is more likely that they will access the management, and the financial statements are likely less elaborated. In other words, since the investors can get material information from the management, there are fewer detailed disclosures when compared to the financial statements prepared by public companies (FASB, 2013). There is greater flexibility for the private companies preparing their financial statements since the management can choose what to include as part of the additional information.
Another differential consideration is ownership and capital structures were the owners of the private companies where there is more emphasis on estate taxes, income taxes, restrictions on stock holdings, transferring stocks, and those who are exposed to personal liabilities. Private companies are structured in different ways than public companies, including pass-through entities such as limited liability, S-corporations, sole proprietorships, and trusts.
Accounting risks
In the number of primary users and access to management, there are risks associated with the financial statements being less detailed than that of the public companies. The private companies have more leeway to include certain additional information, but this also leaves them vulnerable to hiding material information that may affect the users’ decisions. The GAAP financial stateme...
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