BC11. Under all of the definitions of nonpublic entity and public entity in the Accounting Standards Codification, entities that file financial statements with a regulatory agency in preparation for the sale of securities or for the purpose of issuing securities are defined as public companies. The users of financial statements of entities that issue securities that trade in a public market generally lack or have less direct access to management to obtain material financial information, and it is common for there to be a large number of financial statement users that have broader, more diverse needs and that use financial information for different reasons from typical users of private company financial statements. The differential factors between public companies and private companies described in the Guide were developed primarily on the basis of entities that access the public capital markets by issuing securities that are publicly traded. Therefore, when assessing those entities and their relationship to the differential factors, the Board concluded that those entities should be considered public business entities. Some respondents to the proposed Update requested that the Board clarify in criterion (c) which regulatory agencies were intended to be included. In its redeliberations, the Board stated that a regulatory agency would include both foreign regulators and domestic regulators in order to include entities that prepare U.S. GAAP financial statements that may be used in other jurisdictions.
BC12. The SEC requires certain financial statements to be filed or furnished in order to regulate the capital markets for securities and to protect investors in public capital markets. For similar reasons as indicated in paragraph BC11, the Board concluded that an entity that is required by the SEC to file or furnish financial statements or does file or furnish financial statements with the SEC should be considered a public business entity (for example, broker-dealers or voluntary filers). This also includes an entity's financial statements or financial information that is required to be or is included in a filing with the SEC (for example, Regulation S-X, Rule 3-09, Separate Financial Statements of Subsidiaries Not Consolidated and 50 Percent or Less Owned Persons, or Regulation S-X, Rule 3-05, Financial Statements of Businesses Acquired or to Be Acquired, and Regulation S-X, Rule 4-08(g), Summarized Financial Information). The Board decided that in those situations, those financial statements must be prepared using the same accounting principles as a public business entity.
BC13. Respondents to the proposed Update asked for clarity regarding concerns about criterion (a) of the definition of public business entity, specifically, some raised concerns about the portion that indicates that “other entities whose financial statements or financial information are required to be or are included in a filing,” would be considered a public business entity if that information is submitted in a filing by an entity that files or furnishes financial statements with the SEC. Those respondents indicated that it was unclear whether entities would be permitted to apply accounting alternatives for private companies in their standalone financial statements (that is, financial statements or financial information that is not required to be included in an SEC filing). In response, the Board determined whether an entity that does not otherwise meet any of the criteria of a public business entity could be permitted to apply financial accounting and reporting alternatives within U.S. GAAP for private companies in its standalone financial statements that are not included in a SEC filing. An entity may meet the definition of 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 filed with or furnished to the SEC.
BC14. Each definition of the terms nonpublic entity and public entity in the Accounting Standards Codification includes a criterion that in order to be defined as a nonpublic entity, an entity must not have securities that trade in a public market either on a stock exchange or in an over-the-counter market (OTC). Of all the conditions referenced in the definitions of nonpublic entity over time, the notion of “publicly traded” has been a main factor for making the distinction.
BC15. The Board discussed and considered alternatives that would clarify what is considered to be a public market for securities as it relates to entities that have debt or equity securities. Part of the considerations included (a) whether the public availability of U.S. GAAP financial statements should be used as a criterion to determine which business entities should be considered public and (b) what is a public market as it relates to business entities that have securities that are able to be resold in a secondary market.
BC16. The Board decided that, consistent with the existing definitions of nonpublic entity and public entity in the Accounting Standards Codification, entities that have securities that are traded, listed, or quoted on an exchange or an OTC market should be considered public. A few respondents to the proposed Update requested clarification about what constitutes an OTC market. The Board stated that an OTC market includes an interdealer quotation or trading system for securities that are not listed on an exchange (for example, OTC Markets Group Inc., including the OTC Pink Markets, or the OTC Bulletin Board).
BC17. The Board also added an additional criterion to the definition of public business entity and decided that if any of a business entity's securities are not subject to contractual restrictions on transfer, and that by law, contract, or regulation must prepare U.S. GAAP financial statements (including footnotes)1 and make them publicly available (including financial statements that are made available publicly upon request or posted to an entity's website for public access) on a periodic basis, that entity should be considered public. The Board added this criterion because of the evolution of the markets, which have changed considerably over time since the existing definitions of nonpublic entity and public entity were first established and criterion (e) is intended to capture securities other than those on an exchange or an OTC market. The existing definitions of nonpublic entity and public entity in U.S. GAAP focus only on securities that trade on a stock exchange or an over-the-counter market. Some respondents to the proposed Update requested clarification about whether an entity would be required to meet all of the conditions included in criterion (e) to be considered a public business entity. The Board decided to clarify in the final Update that an entity must meet all conditions in criterion (e) to be considered a public business entity.
BC18. Some Board members expressed concern that if the public availability of U.S. GAAP financial statements was used in the definition, entities could be required to reassess their status on an interim or annual basis to determine whether they meet this criterion to be defined as a public business entity. Some Board members who support defining an entity as public on the basis of whether it has U.S. GAAP financial statements that are made publicly available noted that including reference to a legal, contractual, or regulatory requirement to make financial statements publicly available on a periodic basis results in entities not needing to reassess whether they meet the definition of public business entity on a regular basis. Some respondents to the proposed Update suggested that the Board clarify what is meant by periodic basis. The Board stated some examples of what is intended by a periodic basis (for example, an interim or annual basis).
BC19. Another Board member was concerned that limiting the definition of public business entity to entities that had securities that trade in a public market and make their U.S. GAAP financial statements publicly available is too restrictive, because entities that have access to the public markets have similar transactions in securities and should not be treated differently on the basis of whether or not their U.S. GAAP financial statements are made publicly available. Many entities provide information to investors that is based on U.S. GAAP rather than a complete set of U.S. GAAP financial statements. Investors are made aware of the risks in the stocks on the basis of corporate and financial disclosure that is made available. Those entities have users that have similar information needs as investors and analysts of public company debt and equity investors. Those entities have availed themselves of the benefits provided by issuing securities in the public market and, therefore, should be required to apply the same requirements as public companies.
BC20. The Board decided that the definition of public business entity should include only securities that are not subject to contractual restrictions on transfer (that is, the securities are not subject to management preapproval on resale) 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.
BC21. Criterion (e) in the proposed Update referred to unrestricted securities. Some stakeholders commented that the term unrestricted should be clarified in the final Update. As a result of the feedback received from stakeholders, the Board decided to remove the term unrestricted and replace it with securities that are “not subject to contractual restrictions on transfer.”
1Reports of Condition and Income (call reports) that are required by federal financial institution regulators are not considered U.S. GAAP financial statements for purposes of this Update because they, at a minimum, do not require compliance with all of the footnote requirements under U.S. GAAP.