Definition of a public business entity: Additional guidance
FINANCIAL REPORTING INSIGHTS |
In late October 2017, the American Institute of Certified Public Accountants staff issued a technical question and answer (TQA) document that addresses questions about certain terms used in the definition of a public business entity (PBE). The answers to these questions may change an entity’s conclusion about whether it is a PBE and when and how it is required to implement certain new accounting standards. Although the TQA is non-authoritative, the guidance within it should be considered when determining whether an entity is a PBE.
FASB Accounting Standards Update (ASU) 2013-12 amended the Accounting Standards Codification (ASC) Master Glossary to define a PBE as a business entity (except for a not-for-profit entity or employee benefit plan) meeting any one of the following criteria:
- 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).
- Criterion (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.
- Criterion (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.
- Criterion (d) - 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.
- 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.
The above definition of a PBE is used to determine which entities are subject to deferred effective dates for new ASUs. The definition also is used to determine which entities are eligible for simplified accounting alternatives developed by the FASB Private Company Council, as well as simplified transition and disclosure requirements for new ASUs.
Public business entity vs. public entity
By definition, a not-for-profit organization cannot be a PBE. However, it is important to note that the effective date for certain ASUs, including ASU 2014-09 (revenue recognition) and ASU 2016-02 (lease accounting), depend on whether an entity is a public entity. ASC 606-10-65-1a and ASC 842-10-65-1a provide that 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 is subject to the same effective dates as public business entities.
Thus, a not-for-profit health system that has issued bonds through a conduit entity such as a state financing authority, although not considered a public business entity, would be considered a public entity under ASU 2014-09 and ASU 2016-02, and be subject to the earlier effective dates.
Key implications of the TQA
Use of the term “security” and types of securities included in the definition of a PBE
The TQA provides that entities should use the definition of a security in ASC 320, Investments — Debt and Equity Securities. The TQA also provides that all forms of securities – including debt and equity securities (referred to in the TQA as financing instruments), should be evaluated to determine whether they meet the definition of a security. Refer to TQA 7100.01 and 7100.2 for additional information.
Use of the terms “over-the-counter market” and “conduit bond obligor” in the definition of a PBE
The TQA clarifies that the examples of over-the-counter (OTC) markets described in ASU 2013-12 are accessible by the public to execute trades. Markets generally accessible only by certain investors (e.g., qualified institutional investors or accredited investors) are not OTC markets for purposes of the PBE definition. Similarly, securities that can only be purchased by certain investors, such as 144A securities, are not securities that can be traded by the public and are not subject to criterion (d) in the ASC glossary definition of a PBE, but are considered in the analysis of the other criteria. Refer to TQA 7100.3 and 7100.4 for additional information.
As a result, in determining whether criterion (d) is met, entities will need to consider whether securities they have issued are accessible to trading by the public. If so, the entity would be considered a PBE. These considerations also would be relevant in evaluating whether an entity would be considered a public entity when determining the effective date of ASU 2014-09 and ASU 2016-02.
Use of MSRB EMMA data in assessing status as a PBE
The TQA indicates that Municipal Securities Rulemaking Board (MSRB) Electronic Municipal Market Access (EMMA) is not an OTC market. However, because EMMA, as the official SEC-designated repository for disclosure documents related to public offerings of municipal securities, provides historical trade prices, credit ratings and other information related to those securities, such EMMA information may be relevant in assessing whether a conduit bond obligor meets either criteria (d) or (e) in the ASC glossary definition of a PBE. Refer to TQA 7100.5 for additional information.
Use of the terms “prepare,” “publicly available,” “financial statements” and “periodic basis” in the definition of a PBE
The TQA clarifies that, in order to meet criterion (e) in the ASC glossary definition of a PBE, preparing and making financial statements publicly available must be required by law, contract or regulation. Voluntarily preparing and making financial statements publicly available would not cause an entity to meet criterion (e). Similarly, a requirement to prepare financial statements on a periodic basis that does not also require the financial statements to be made publicly available would not cause an entity to meet criterion (e). The TQA also clarifies that it is inappropriate to combine separate contractual, legal and regulatory requirements to conclude that an entity is required to both (a) periodically prepare financial statements, and (b) make financial statements publicly available on a periodic basis.
The TQA offers reminders that the definition of financial statements includes full U.S. GAAP financial statements, including footnotes, and that interim or annual financial statements are examples of periodic basis (prepared on a recurring basis, in contrast to financial statements that are prepared on a one-time basis.) Refer to TQA 7100.7 for additional information.
The application of the guidance in the TQA requires careful consideration and the application of professional judgment to the facts and circumstances specific to each entity. This summary is intended solely to create awareness of the TQA and certain of its more commonly used provisions. The TQA should be read in its entirety in order to understand all of its implications and how they would apply to each situation.