United States

Q&A on the new public business entity definition

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The Financial Accounting Standards Board (FASB) recently issued Accounting Standards Update (ASU) 2013-12, Definition of a Public Business Entity: An Addition to the Master Glossary, which provides a definition of a public business entity that will be used by the FASB to specify the scope of future accounting and reporting guidance. This definition also will be used as a starting point for determining which entities will be permitted to take advantage of the private-company accounting alternatives developed by the Private Company Council (PCC) once those alternatives are included within U.S. generally accepted accounting principles (GAAP)

Paragraph 2 of the ASU indicates that a public business entity is a business entity (which excludes a not-for-profit entity within the scope of FASB Accounting Standards Codification (ASC) 958 or an employee benefit plan within the scope of ASC 960 through 965 on plan accounting) meeting any one of the following criteria:

  1. 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).
  2. 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.
  3. 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.
  4. 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.
  5. 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. 

The definition of public business entity differs from some of the existing definitions of public entity in the ASC. The ASU specifies that:

  • An entity that is required by the SEC to file or furnish financial statements with the SEC, or does file or furnish financial statements with the SEC, is considered a public business entity. Some of the existing definitions of public entity in the Accounting Standards Codification do not include this criterion to define public entity.
  • A consolidated subsidiary of a public company is not considered a public business entity for purposes of its standalone financial statements other than those included in an SEC filing by its parent or by other registrants or those that are issuers and are required to file or furnish financial statements with the SEC. Some of the existing definitions of public entity in the Accounting Standards Codification consider a consolidated subsidiary of a public company to be public.
  • A business entity that has securities that are not subject to contractual restrictions on transfer and that is by law, contract, or regulation required to prepare U.S. GAAP financial statements (including footnotes) and make them publicly available on a periodic basis is considered a public business entity. The existing definitions of public entity in the Accounting Standards Codification do not include this criterion and do not consider an entity to be public unless it meets one of the other criteria included in the definition (for example, if it has debt or equity securities that trade either on a stock exchange or an over-the-counter market).

As indicated earlier, the new definition of a public business entity will be used by the FASB to specify the scope of future accounting and reporting guidance. In other words, the new definition does not affect the definitions of other related pre-existing terms in the ASC (for example, public entity and publicly traded company) or the situations in which those definitions are used. The FASB may consider whether to replace a pre-existing term with the term public business entity as part of a separate project.

There is no actual effective date for this ASU. However, the term public business entity has been used in two recently issued ASUs that provide accounting alternatives for private companies related to a simplified hedge accounting approach for certain interest rate swaps and the subsequent accounting for goodwill.

The determination of whether an entity meets any of the criteria to be considered a public business entity can be difficult.  The following are questions and answers (Q&As) focused on issues frequently encountered in making this determination.

Criterion (a): 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).

  • Is a private company that is a consolidated subsidiary of a public company considered a public business entity for purposes of its own standalone financial statements?
    If a company meets the definition of public business entity only because its financial statements or financial information has to be included in another company’s SEC filing (for example, because it passes the significant subsidiary test under Regulation S-X, Rule 3-09, Separate Financial Statements of Subsidiaries Not Consolidated and 50 Percent or Less Owned Persons), then it is a public business entity only for that purpose. In other words, it would not be considered a public business entity for purposes of its standalone financial statements that are not filed with or furnished to the SEC.

    However, if for purposes of consolidation a private subsidiary has to prepare and provide financial information to their public company parent that follows public company U.S. GAAP, an election by the private subsidiary to apply private-company accounting alternatives when preparing standalone financial statements may not result in significant benefits.
  • Is a private company that controls a public subsidiary considered a public business entity?
    No. A private company that controls and consolidates a public company in its financial statements should not be considered a public business entity. For purposes of both its standalone and consolidated financial statements it is permitted to apply private-company accounting alternatives within U.S. GAAP.

    In reaching this conclusion, the FASB considered that if a controlling private company is not permitted to apply private-company accounting alternatives in its consolidated financial statements, its private subsidiaries would be required to provide the parent with financial information prepared in accordance with public company U.S. GAAP, which could be costly to prepare and irrelevant to financial statement users.
  • If an entity’s financial statements or financial information is included in a filing with the SEC  pursuant to any of the following SEC rules, does that entity meet the definition of a public business entity: (a) Regulation S-X, Rule 3-09, Separate Financial Statements of Subsidiaries Not Consolidated and 50 Percent or Less Owned Persons, (b) Regulation S-X, Rule 3-05, Financial Statements of Businesses Acquired or to Be Acquired, or (c) Regulation S-X, Rule 4-08(g), Summarized Financial Information of Subsidiaries Not Consolidated and 50 Percent or Less Owned Persons?
    Yes. In those situations, the financial statements must be prepared using public company U.S. GAAP. As indicated in an earlier Q&A, if a company meets the definition of public business entity only because its financial statements or financial information has to be included in another company’s SEC filing, then it is a public business entity only for that purpose. In other words, it would not be considered a public business entity for purposes of its standalone financial statements that are not filed with or furnished to the SEC.

Criterion (e): 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.

  • Does a call report filed with federal financial institution regulators result in a bank being considered a public business entity?
    No. An entity has to provide a full set of U.S. GAAP financial statements (including footnotes) to meet this criterion. Reports of Condition and Income (call reports) that are required by federal financial institution regulators are not considered U.S. GAAP financial statements for this purpose because they, at a minimum, do not require compliance with all of the footnote requirements under U.S. GAAP.
  • Do banks with over $500 million in assets that are required to file annual audited financial statements with the FDIC meet the definition of a public business entity under this criterion?
    Banks with over $500 million in assets are required to file annual audited U.S. GAAP financial statements with the FDIC and to make those financial statements available to the public upon request. Accordingly, if such a bank has one or more securities not subject to contractual restrictions on transfer, that bank would be considered a public business entity. See a later Q&A for further discussion about contractual restrictions on transfer of a security.
  • What does the concept publicly available include?
    The concept of publicly available as used in this criterion not only encompasses public filings of financial statements with regulators (for example, a 10-K filing with the SEC), but also financial statements that are made publicly available upon request or upon being posted to an entity’s website for public access.

    However, keep in mind that it is not enough for an entity to make its U.S. GAAP financial statements publicly available on a periodic basis for this criterion of the public business entity definition to be met. An entity must be required (by law, contract or regulation) to prepare and make those financial statements publicly available on a periodic basis, and must also have one or more securities not subject to contractual restrictions on transfer. See a later Q&A for further discussion about contractual restrictions on transfer of a security.
  • If a bank covenant requires an entity to provide the bank with quarterly U.S. GAAP financial statements, would those financial statements be considered publicly available?
    No. Financial statements provided to a lender or limited number of lenders are not considered publicly available.
  • If a nonpublic company, such as an LLC, places its U.S. GAAP financial statements on its website for its members and a login and password is required to access these financial statements, would those financial statements be considered publicly available? Non-members would not have access.
    No. Financial statements that can be accessed on an entity’s website only by members or shareholders would not be considered publicly available.

    However, even if financial statements posted to an entity’s website did allow for public access and, as such, were considered publicly available, the entity would still not necessarily be considered a public business entity under this criterion. An entity must be required (by law, contract or regulation) to prepare and make those financial statements publicly available on a periodic basis, and must also have one or more securities not subject to contractual restrictions on transfer. See a later Q&A for further discussion about contractual restrictions on transfer of a security.
  • What are contractual restrictions on transfer of a security?
    Contractual restrictions on transfer of a security means sale of the securities is subject to management pre-approval. These restrictions limit the ability of the holder to transfer the security. Such restrictions may be contained in buy-sell, shareholder or other agreements. We do not believe that a right of first refusal held by the entity is a restriction on transfer of the security.

    This criterion in the definition of public business entity considers only securities that are not subject to contractual restrictions on transfer because many private companies place restrictions on the sale of their securities in a secondary market and can control to whom they sell their securities. Securities that are subject to contractual restrictions on transfer generally are sold to a limited number and type of investors who often will have a greater ability to access management (characteristics consistent with a private company). Therefore, when these contractual restrictions exist, the entity would not be considered a public business entity (provided it does not meet any of the other four criteria included in the definition of a public business entity).

Accounting Standards Update No. 2013-12 is copyrighted by the Financial Accounting Foundation, 401 Merritt 7, Norwalk, CT 06856, USA, and sections are reproduced with permission.

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