What Specific Accounting Standards Are Used By Public Companies That Differ From Those Used By Private Companies?
Introduction
In the financial landscape, accounting standards are vital for ensuring transparency and consistency in financial reporting. Public companies must adhere to strict accounting standards that differ from those applicable to private companies, driven by regulation and the complexity of their financial reporting requirements.
Essential Accounting Standards for Public Companies
Public companies, by selling shares to the public, are required to follow Generally Accepted Accounting Principles (GAAP) in the U.S. or International Financial Reporting Standards (IFRS) globally. These standards provide investors with reliable and comparable financial statements. In contrast, private companies have the option to follow simpler accounting frameworks like the Financial Reporting Framework for Small- and Medium-Sized Entities (FRF for SMEs) in the U.S., or specific private company reporting options under GAAP, which cater to their unique financial needs.
- Public companies must file comprehensive financial statements with the Securities and Exchange Commission (SEC).
- Public companies are subjected to rigorous auditing standards and required to deliver extensive disclosures regarding financial performance.
- Private companies can adopt less comprehensive standards with fewer disclosure obligations.
Key Differences in Accounting Standards Between Public and Private Companies
Differing accounting standards have implications for how companies recognize revenue, value certain assets, and disclose risk factors. Both public and private companies must address revenue recognition, but public companies follow stricter guidelines of ASC 606 in the U.S., while private companies may adopt more flexible approaches under Topic 606 or avoid detailed disclosures altogether.
- Public companies must adhere to ASC 606 for revenue recognition, including extensive disclosures.
- Private companies can utilize GAAP alternatives that allow for simpler revenue recognition methods based on specific criteria set by ASC 606.
- Public companies are mandated to disclose executive compensation in financial statements, a requirement that private firms can choose to disclose voluntarily.
Conclusion
Recognizing the differences in accounting standards between public and private companies is crucial for all stakeholders, including investors, auditors, and management. Public companies are held to stringent regulations to safeguard investors, while private companies benefit from greater flexibility. This framework improves financial information clarity, which is essential for informed decision-making in the investment landscape.
Expert Quote
David A. Vaudt, Former Chair of the Governmental Accounting Standards Board (GASB)
Public companies must provide comprehensive disclosures to enhance transparency for investors, reflecting the higher stakes involved in their financial reporting compared to private entities.
Addressing the Financial Reporting Needs of Diverse Entities, Journal of Accountancy, 2020
Relevant Links
FAQ: Private Company Financial Reporting
https://www.aicpa.org/interestareas/frc/accountingfinancialreporting/pcfr/faqprivatecompanyfinancialreporting.htmlGovernmental Accounting – Key Differences -7210 - DGS
https://www.dgs.ca.gov/Resources/SAM/TOC/7200/7210Definition of a public business entity
https://viewpoint.pwc.com/dt/us/en/fasb_financial_accou/asus_fulltext/2013/asu_201312definition/asu_201312definition_US/asu_201312definition_US.htmlWhat Are Generally Accepted Accounting Principles (GAAP)?
https://www.accounting.com/resources/gaap/Financial Reporting Manual - SEC.gov
https://www.sec.gov/corpfin/cf-manual/topic-6YouTube Videos
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