8.1 Definition of a PBE and a Private Company
The first step in determining whether an entity can apply the accounting alternatives is to ensure that the entity is not a PBE. An entity that meets the definition of a PBE cannot apply any of the private-company accounting alternatives.
In December 2013, the FASB issued ASU 2013-12 to incorporate the definition of a PBE into the ASC
master glossary and clarify which entities qualify for private-company financial accounting and reporting
alternatives. The ASU was issued, in part, because the previous guidance in U.S. GAAP contained several
definitions of “nonpublic entity” and “public entity,” which resulted in diversity in practice.
The ASC master glossary defines a PBE as follows:
A public business entity is a business entity meeting any one of the criteria below. Neither a not-for-profit entity
nor an employee benefit plan is a business entity.
- 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 (including voluntary filers), with the SEC (including other entities whose financial statements or financial information are required to be or are included in a filing).
- It is required by the Securities Exchange Act of 1934 (the Act), as amended, or rules or regulations promulgated under the Act, to file or furnish financial statements with a regulatory agency other than the SEC.
- 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.
- 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.
- 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) and make them publicly available on a periodic basis (for example, interim or annual periods).
An entity must
meet both of these conditions to meet this criterion.
An entity may meet the definition of a public business entity solely because its financial statements or financial
information is included in another entity’s filing with the SEC. In that case, the entity is only a public business
entity for purposes of financial statements that are filed or furnished with the SEC.
The definition of a PBE excludes not-for-profit entities within the scope of ASC
958 and employee benefit plans within the scope of ASC 960 through ASC 965 on plan accounting. It
does not affect any existing ASC requirements.
The ASC master glossary defines a private company as “[a]n entity other than a
public business entity, a not-for-profit entity, or an employee benefit plan within the scope of
Topics 960 through 965 on plan accounting.”
8.1.1 Entities That File or Furnish Financial Statements With or to a Regulator, and Entities That Have Publicly Traded Securities
The FASB determined in ASU 2013-12 that financial statement users of entities that issue publicly
traded securities generally have less access to management than users of private-company financial
information, and they are typically a broader group with more diverse needs. The Board therefore
concluded that entities should be considered PBEs if they (1) file or furnish financial statements with or
to the SEC or another regulatory agency or (2) issue or trade securities. Further, an entity is considered
a PBE if its financial statements or financial information, such as the following, is required to be or is
included in a registrant’s SEC filing:
- Financial statements of significant acquired or to be acquired businesses under SEC Regulation S-X, Rule 3-05.
- Financial statements of significant equity method investees under SEC Regulation S-X, Rule 3-09.
- Summarized financial information of equity method investees under SEC Regulation S-X, Rule 4-08(g).
To ensure that the definition of a PBE encompassed entities that prepare U.S.
GAAP financial statements in other jurisdictions, the FASB included both foreign and domestic
regulators in it. However, the Board indicated that if an entity is considered a PBE only
because its financial information is included in the financial information of another entity
that furnishes or files financial statements to or with the SEC, the entity is considered a PBE
only for the financial statements filed with the SEC; the entity can apply the private-company
accounting alternatives in its stand-alone financial statements.
Similarly, the FASB concluded that private companies that are consolidated
subsidiaries of PBEs are not considered PBEs for stand-alone reporting purposes and are
therefore able to apply private-company accounting alternatives in their stand-alone financial
statements. This is because the information they provide may be useful to the users of the
stand-alone financial statements.
The FASB also decided that a private company that controls a public subsidiary should not be
considered a PBE. According to ASU 2013-12, “the financial reporting requirements of a public subsidiary
should not preclude a privately held entity from applying financial accounting and reporting alternatives
for private companies in its own financial statements.”
8.1.2 Conduit Bond Obligors
Conduit bond obligors indirectly access the public debt markets. In ASU 2013-12, the FASB noted that
users of such entities’ financial statements may have less access to management and related financial
information than most other private-company financial statement users do and that these entities have
a broad base of financial statement users; therefore, their users’ information needs may be similar to
those of the financial statements of public companies. Consequently, the FASB concluded that conduit
bond obligors should be considered PBEs for financial accounting and reporting purposes.
8.1.3 Employee Benefit Plans
The FASB concluded in ASU 2013-12 that the needs of the financial statement users of employee benefit plans are more focused than those of the financial statement users of public or private companies.
Further, the accounting guidance applied by employee benefit plans is often tailored to the plans. Accordingly, the Board excluded employee benefit plans from the definition of a PBE. Instead, the FASB decided to consider, “on a standard-by-standard basis, whether all, none, or some employee benefit plans should be permitted to apply financial accounting and reporting alternatives under U.S. GAAP, using factors such as user needs and resources.”
8.1.4 Not-for-Profit Entities
The ASC master glossary defines a not-for-profit entity as:
An entity that possesses the following characteristics, in varying degrees, that distinguish it from a business entity:
- Contributions of significant amounts of resources from resource providers who do not expect commensurate or proportionate pecuniary return
- Operating purposes other than to provide goods or services at a profit
- Absence of ownership interests like those of business entities.
Entities that clearly fall outside this definition include the following:
- All investor-owned entities
- Entities that provide dividends, lower costs, or other economic benefits directly and proportionately to their owners, members, or participants, such as mutual insurance entities, credit unions, farm and rural electric cooperatives, and employee benefit plans.
The amendments in ASU 2019-06 apply to all not-for-profit entities as defined in
the ASC master glossary, including those that are conduit bond obligors. Paragraph BC14 of ASU
2019-06 notes that “[t]he Board chose not to distinguish between public not-for-profit entities
and nonpublic not-for-profit entities because the informational needs of users of financial
statements of both not-for-profit entity types are the same.”