3.2 U.S. GAAP for Public Entities
The term “public entity” generally refers to an entity that files its financial
statements with the SEC. However, there are multiple definitions of this term in
U.S. GAAP. In an attempt to reduce complexity and diversity in practice related to
this term, the FASB issued ASU 2013-12 in December 2013. The ASU added the following
definition of PBE to the ASC master glossary:
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.
At the time ASU 2013-12 was issued, this definition of a PBE did not supersede
any similar existing definitions in the Codification (e.g., “public entity” or
“publicly traded company”). It first applied to the U.S. GAAP amendments made as
part of the FASB’s private-company decision-making framework developed in
collaboration with the PCC. Since that time, the FASB, EITF, and PCC have begun
using this new PBE definition in newly issued accounting and reporting guidance that
affects public entities differently from private entities or for which the required
effective date for PBEs differs from that for entities other than PBEs.
In an IPO, a registrant must present financial statements that are consistent
with public-entity accounting principles and must comply with disclosure
requirements for public entities for all periods presented. Examples of topics for
which the accounting principles or disclosures may apply to public entities but do
not apply to nonpublic entities include EPS; segment reporting; temporary equity
classification of redeemable securities; and certain disclosures related to business
combinations, income taxes, and pensions and other postretirement benefits. For a
more detailed discussion of accounting considerations for entities preparing for an
IPO, see Chapter 5.
Connecting the Dots
Entities should consider using a GAAP checklist that
incorporates SEC requirements in assessing the completeness and accuracy of
disclosures. Using an SEC-compliant GAAP checklist well in advance of
preparing financial statements may make it easier for an entity to draft new
required disclosures and to document management’s judgments in preparing
such disclosures.