New Accounting Standards Could Impact Small, Non-Public Companies
The Financial Accounting Standards Board (FASB) has recently added an accounting standard, Stateme of Financial Accounting Standards (FAS) 150. FAS 150 will wipe out the net worth of many non-public, non SEC-registered companies. FAS 150 goes into effect December 15, 2004 for non-public companies.
- Companies must follow FASB's standards in order to be in compliance with generally accepted accounting principles.
- Because this accounting change will wipe out their net worth, FAS 150 could make it nearly impossible for contractors to obtain bonding, financing, or compete for government contracts.
- FAS 150 should be amended so that it does not apply to non-public, non-SEC registered companies.
- Congress should send a message to FASB that FAS 150 is bad for non-public companies.
FAS 150 requires that non-public companies classify as liabilities any financial instrument issued in the form of shares that are "mandatorily redeemable" (i.e. buy/sell agreements or company stock held in an ESOP). A financial instrument is "mandatorily redeemable" if it requires the company to repurchase assets at a specified or determinable date upon an event that is certain to occur (such as death or termination of employment).
Construction and construction related companies are predominantly non-public, non SEC-registered businesses. The requirement of FAS 150 to recognize an immediate liability for a company's obligation to acquire all outstanding shares poses an extreme and unreasonable financial burden for these companies. For instance in a non public company that is entirely employee owned, would every employee ever leave and redeem shares in a single day or in a single year? This accounting rule assumes they would. Therefore, implementation of FAS 150 would effectively wipe out the net worth of this non-public, employee owned company.
Shares of public companies are not impacted the same way. Public companies are not as dependent on mandatory repurchase agreements. Shares of public companies are sold to the public and are not required to be purchased by the company at any time.
Construction companies are required to have mandatorily redeemable shares to qualify for bonding and to satisfy the concerns of lenders. Commercial contractors may be required to obtain surety bonds and credit to bid on projects. Sureties require companies to have binding agreements to provide for an orderly continuation of the business so that, in the case of a triggering event (such as the death of the owner or majority shareholder), the shares are retained by the company and the long-term contracts will be completed by the company without additional financial risk to the surety or lender.
The federal government and many state and local governments demand surety bonds for general contractors. Some states require a positive net worth for companies bidding on public work. Without bonding and without a positive net worth contractors cannot bid on many public contracts.
MCAA recommends that FASB exempt non-public companies from FAS 150. Prior to the issuance of FAS 150, business continuity arrangements generally did not require disclosure in financial statements of non-public entities. An alternative to recording the liability would be to require non-public entities to disclose the terms of buy/sell agreements including the events that would produce a liability. In this case, the guidance of FAS 150 would be applied by non-public entities only when a triggering event occurred.
About the Author
Marian J. Marshall was the Director of Government Affairs for the Mason Contractors Association of America.