Differential Factors Between Private Companies and Public Companies

Topics: International Financial Reporting Standards, Public company, Financial statements Pages: 5 (1580 words) Published: May 6, 2013
Yaqi Qiu
Professor Beckman
December 10, 2012

Differential Factors Between Private Companies and Public Companies

Generally speaking Financial Accounting Standard Board (FASB)’s primary purpose is to develop General Accepted Accounting Principles (GAAP). GAAP might not concern the whole areas of accounting criteria, FASB look up and adjust accounting standard to make sure standards have been updated to follow current situation. On July 31, 2012, FASB issued an Invitation to Comment, which reviewed key areas of the Private Company Decision-Making Framework - A Framework for Evaluating Financial Accounting and Reporting Guidance for Private Companies staff paper. This project was to gather comment from stakeholders about how they evaluate this private company decision-making framework. Therefore, FASB was able to decide carry the new concept into execution. The project provided serious of questions for respondents, in this paper we focus on the differential factors between private companies and public companies, and elaborate the necessity of adjustment.

A private company denotes a company of two or more persons, but not exceeding fifty excluding the employees and shareholder. A private company is nothing but the extension counter a partnership with limited liability. It prohibits any invitation to the public to subscribe for shares and restriction the right to transfer its shares. Private company is desirable in those cases where it is intended to take the advantage of corporate life, limited liability and the control of the business over the hands of few persons. Public companies are any company whose securities trade in a public market on either of the following: a. A stock exchange (domestic or foreign) 
b. In the over-the-counter market (including securities quoted only locally or regionally), or any company that is a conduit bond obligor for conduit debt securities that are traded in a public market (a domestic or foreign stock exchange or an over-the-counter market, including local or regional markets). (ASC.840-10-20) The main difference between them is trading security, accompany with some other differences leading the differential factors between private companies and public companies. In the project, the staff identified and focused on six differential factors of accounting guidance between private companies and public companies.

First of all, types and number of financial statement users are different in private companies and public companies. Since the size of private companies is differ from public companies, users size may vary in those companies. Financial statements of private companies have smaller number of users than public companies have. Public company equity and debt investors and analysts typically are the most common types of users of public company financial statements, while lenders and other creditors and equity investors typically are the most common users of private company financial statements.

Second is the difference of access to management. Due to private companies often have fewer financial statement users than public companies. The economic influence of those users often varies, and private companies have the direct access to management to obtain additional material financial information and analysis. In contrast, public companies often have more financial statement users, financial statements are not always enough for their users, and they often have strong desire to obtain extra information beyond financial statements. Thus public companies have indirect access to management to acquire additional material financial information and analysis.

Third is the difference of investment strategies. The major investment strategy may vary in holding period of their equity between private companies and public companies. For public companies, they prefer to hold equity ownership interests for a shorter duration than many private companies. Longer duration bonds will have a...
Continue Reading

Please join StudyMode to read the full document

You May Also Find These Documents Helpful

  • Essay about Difference between public limited company and private limited company
  • Essay on Difference Between Public Company and Private Company
  • Different Between Private Company and Public Company Essay
  • Advantages of Public Company Essay
  • Risk Factors of Abc Company Essay
  • Private Limited Company Essay
  • Whether Facebook Can Benefit from the Changing Between Private Limited Company to Public Limited Company Essay
  • Company Law Essay

Become a StudyMode Member

Sign Up - It's Free