You will compare accounting principles for private and public companies. As you may have discovered as you’ve reviewed the materials for this course, most of what is learned in accounting courses focuses on public companies, not private ones. GAAP, as you have also learned from your studies, may be followed by private companies, but it is only required to be used by publicly traded companies. FASB, of course, is designated by the SEC to establish and improve GAAP, so their focus is primarily on publicly traded companies.
FASB has also recognized the importance and potential impact of private company financial statements. According to Forbes, out of the 5.7 million firms with employees in the United States, less than 1 percent have shares listed on a U.S. exchange. Although we tend to think of private companies as small companies, the reality is quite the opposite, with private firms accounting for 86.4 percent of U.S. firms with 500 or more employees.
In recognition of the growing importance and impact of private companies, FASB has come up with a useful publication – Private Company Decision-Making Framework, A Guide for Evaluating Financial Accounting and Reporting for Private Companies. You can access this document by clicking here.
In this guide, FASB identifies the following five Significant Differential Factors:
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- Number of primary users and their access to management
- Investment strategies of primary users
- Ownership and capital structure
- Accounting resources
- Learning about new financial reporting guidance
For Assignment 2, write a 2-to-4 page paper in which you:
• Select two of the Differential Factors that interest you, and briefly explain why.
• In your own words, explain the Factor and why it is different from a publicly traded company.
• Identify the accounting risks associated with each of your chosen Factors. What would you recommend to minimize those risks?
• Based on what you have learned this quarter, what components of the Balance Sheet have the most potential to be impacted by the Differential Factors you have chosen? Identify both positive and negative potential impacts.
1- Horoughly selected two of the Differential Factors that interest you and thoroughly explained why.
2- Thoroughly explained the Factor and why it is different from the publicly traded company, in your own words.
3- Thoroughly identified the accounting risks associated with each of your chosen Factors. Provided thorough recommendation to minimize the risks.
4- Thoroughly explained what components of the Balance Sheet have the most potential to be impacted by the Differential Factors you chose. Thoroughly identified positive and negative potential impacts
5- Error free or almost error free grammar, spelling, punctuation, and formatting.
6 In-text citations and references are error free or almost error free and consistently formatted correctly.
Selected Differential Factors and their Importance:
For this assignment, I have chosen the following two Differential Factors from the FASB’s Private Company Decision-Making Framework:
- Ownership and Capital Structure: This factor interests me because private companies often have a different ownership and capital structure compared to publicly traded companies. Private companies are typically owned by a few individuals or families, whereas publicly traded companies have a wide range of shareholders. The capital structure of private companies may be less complex, with fewer financing options compared to publicly traded companies that can raise capital through various means such as issuing stocks or bonds.
- Accounting Resources: This factor intrigues me because private companies may have limited accounting resources compared to publicly traded companies. Private companies may not have the same level of expertise or financial resources to maintain complex accounting systems, hire specialized accounting personnel, or invest in advanced accounting software. This can have an impact on the financial reporting practices and quality of financial statements of private companies.
Explanation of Differential Factors and their Differences:
Ownership and Capital Structure: In a privately held company, ownership is typically concentrated in the hands of a few individuals or families, often referred to as “owners.” These owners have more control over the company’s decision-making process, including financial reporting practices. On the other hand, publicly traded companies have a large number of shareholders, and decision-making is often more dispersed, with shareholders having limited control over day-to-day operations. This can result in differences in financial reporting practices, as private companies may have more flexibility in choosing accounting methods and reporting practices to meet the needs of their owners.
Accounting Resources: Private companies may have limited accounting resources compared to publicly traded companies. Private companies may not have the same level of expertise, personnel, or financial resources to dedicate to their accounting function. This can result in differences in the quality and accuracy of financial statements, as well as the timeliness of financial reporting. Publicly traded companies, on the other hand, are subject to more regulatory scrutiny and may have more robust accounting resources to ensure compliance with GAAP and other reporting requirements.
Accounting Risks and Recommendations for Minimizing Risks:
Ownership and Capital Structure: One accounting risk associated with ownership and capital structure in private companies is the potential for bias in financial reporting practices, as owners may have a vested interest in presenting financial information in a certain way to meet their objectives. To minimize this risk, it is important for private companies to establish strong internal controls and maintain transparency in their financial reporting practices. This can include regular reviews by independent auditors, proper segregation of duties, and adherence to GAAP and other reporting standards.
Accounting Resources: One accounting risk associated with limited accounting resources in private companies is the potential for errors or omissions in financial statements due to lack of expertise or resources.…GET A COMPREHENSIVE ANSWER HERE
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