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, write a 2–4 page paper in which you:
- 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.