16.1 Background

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16.1 Background

During the final years of development of the revenue standard, the FASB was under pressure from the AICPA and others regarding the establishment of U.S. GAAP for nonpublic entities. Specifically, some criticized the FASB for setting standards for large public companies that increase the complexity (and, therefore, the cost) associated with producing financial statements. As a result, the Financial Accounting Foundation, the FASB’s parent organization, created the Private Company Council to help the FASB determine when there should be differences in U.S. GAAP for nonpublic entities (see Deloitte’s May 25, 2012, journal entry and June 5, 2012, Heads Up for more information). Accordingly, throughout the redeliberations and final development of the revenue standard, the FASB considered the disparate needs of users of nonpublic entities’ financial statements. Ultimately, the FASB concluded that no specific recognition or measurement differences for nonpublic entities were necessary. However, the Board also concluded, largely on the basis of feedback from the nonpublic-entity community, that differences in the required disclosure package and mandatory effective date of the revenue standard would be appropriate for nonpublic entities. In addition, after the revenue standard was finalized, the FASB decided to provide recognition exceptions for franchisors that are not public business entities (“private-company franchisors”) by issuing ASU 2021-02, which allows private-company franchisors to use a practical expedient and a policy election when identifying performance obligations in their contracts with customers (i.e., franchisees) under ASC 606. See Section 5.3.5 for additional details.

At the same time the FASB was developing the revenue standard, it was working on a separate project to clarify which entities would be within the scope of the relief available to nonpublic entities under financial reporting standards. In that project, the Board decided to answer the question of which entities qualified for nonpublic-entity relief indirectly by determining, in stages, which entities would not qualify for such relief. The Board began its analysis by determining what constitutes a “public business entity” (PBE). In ASU 2013-12, and as noted in Chapter 2, the Board defined the term 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).
b. 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.
c. 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 footnotes) 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.

In defining PBEs to exclude not-for-profit entities and employee benefit plans, the Board deferred to future deliberations, on a standard-by-standard basis, its determination of which, if any, not-for-profit entities and employee benefit plans would be eligible for relief available to nonpublic entities. Accordingly, the Board subsequently determined that an entity would be eligible for such relief under the revenue standard if it does not meet the definition of any of the following:

A PBE.
A not-for-profit entity that 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.
An employee benefit plan that files or furnishes financial statements with or to the SEC.

After determining which entities could be afforded relief in application, the FASB considered the costs and benefits of making the requirements in the revenue standard applicable to nonpublic entities and decided to provide those entities with relief related to:

Disclosures.
Mandatory effective date.
Identification of performance obligations related to preopening services provided by a franchisor (refer to Section 5.3.5 for additional information).

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This publication provides comprehensive guidance; however, it does not address all possible fact patterns, and the guidance is subject to change. Consult a Deloitte & Touche LLP professional regarding your specific issues and questions.