Accounting for Private Versus Public Companies
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 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.
