Assignment 2: Accounting For Private Vs. Public Companies

Assignment 2: Accounting for Private vs. Public Companies Due Week 8

Compare accounting principles for private and public companies. Discuss the focus of GAAP and FASB on public versus private companies. Select two of the five Significant Differential Factors identified by FASB in their Private Company Decision-Making Framework. Briefly explain why these factors interest you, and in your own words, describe each factor and how it differs from a publicly traded company.

Paper For Above instruction

Accounting standards and principles are foundational to the transparent and efficient functioning of companies, whether private or public. However, the approach to accounting can vary significantly based on the company's status as private or public. Public companies are those whose shares are traded on stock exchanges, and they are subject to strict regulatory oversight and comprehensive reporting requirements primarily governed by Generally Accepted Accounting Principles (GAAP). Private companies, though they may follow GAAP, often operate with different reporting standards and less regulatory scrutiny. The Financial Accounting Standards Board (FASB) is responsible for establishing accounting standards in the United States and concentrates predominantly on public companies, which represent a minority of private firms but are heavily scrutinized due to their market presence and investor obligations.

FASB's recognition of private companies' unique needs led to the development of the Private Company Decision-Making Framework, which offers guidance tailored to the specific circumstances of private enterprises. This framework identifies five Significant Differential Factors that influence accounting practices, acknowledging the distinct circumstances and requirements of private firms compared to their public counterparts. These factors shape how private companies prepare and report financial statements and impact their decision-making processes.

Selected Differential Factors of Interest

1. Number of Primary Users and Their Access to Management

This factor concerns who primarily uses the financial statements—whether management or external users like investors, creditors, regulators, or other stakeholders—and the level of access these users have to company management. In public companies, the primary users are often external—investors and regulatory bodies—who rely on detailed disclosures and extensive financial reports to make informed decisions. Public companies must provide broad access to their management and financial data to meet regulatory requirements and investor expectations.

In contrast, private companies usually have a smaller, more familiar group of primary users—such as owners, private investors, or family members—who often have direct access to management. This close relationship influences the level of detail in financial reporting and reduces the necessity for comprehensive disclosures required of public companies. The limited external stakeholder access simplifies reporting but also necessitates different strategic considerations regarding transparency and confidentiality.

This factor interests me because it underscores how the interaction and information access between management and users fundamentally differ between private and public entities, affecting reporting complexity and governance structures.

2. Ownership and Capital Structure

This factor relates to how ownership is organized—whether dispersed among many shareholders or concentrated among few owners—and how this impacts the company's capital structure. Public companies typically have dispersed ownership with numerous shareholders and often raise capital through stock offerings on stock exchanges. Their capital structure is generally designed to support large-scale, public market operations, and they must adhere to strict issuance and reporting regulations.

Private companies, on the other hand, tend to have concentrated ownership—often among a few individuals or entities—allowing more control over the company's direction and less regulatory oversight related to capital raising. Their capital structure might involve private equity, debt, or owner investment, and they are less required to disclose detailed information about ownership stakes and financial arrangements publicly.

This differential interests me because ownership and capital structure influence strategic decision-making, financial flexibility, and regulatory obligations, shaping how private companies operate compared to their public counterparts.

Conclusion

The differences highlighted by these two factors—access to management and ownership structure—demonstrate how private companies can operate with more flexibility and confidentiality but also face distinct challenges related to stakeholder communication and capital management. Understanding these differences is crucial for stakeholders, accountants, and policymakers aiming to support the sustainable growth of private firms while maintaining fair and transparent markets for public companies.

References

  • Financial Accounting Standards Board (FASB). (2018). Private Company Decision-Making Framework. Retrieved from https://www.fasb.org
  • Forbes. (2023). Private Companies and Their Role in the U.S. Economy. Retrieved from https://www.forbes.com
  • Financial Accounting Standards Board (FASB). (2020). Improving the Effectiveness of Financial Disclosures for Private Companies. Retrieved from https://www.fasb.org
  • Chen, S., & Kim, S. (2021). Private versus Public Company Financial Reporting Practices. Journal of Accountancy, 232(5), 15-19.
  • Leuz, C., & Wysocki, P. (2016). The Economics of Disclosure and Transparency. Journal of Accounting Research, 54(2), 487-528.
  • Bushman, R., & Powell, R. (2014). The Future of Private Company Accounting Standards. Accounting Horizons, 28(2), 347-363.
  • Hail, L., & Leuz, C. (2006). International Differences in Audit Pricing: Evidence from Germany, the UK, and the US. The Accounting Review, 81(4), 855-882.
  • AICPA. (2022). Private Company Financial Reporting and the Impact of FASB's Framework. Retrieved from https://www.aicpa.org
  • Schmidt, R. H., & Wilkins, M. S. (2014). Stakeholder Perspectives on Private Company Financial Reporting. Journal of Business & Economics Research, 12(4), 245-254.
  • Johnson, L., & Scholes, K. (2020). Exploring Private Company Finance Strategies. Strategic Management Journal, 41(3), 550-567.

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