What Is a Public Business Entity (PBE)?

A Public Business Entity (PBE) is a classification under U.S. Generally Accepted Accounting Principles (GAAP), as defined by the Financial Accounting Standards Board (FASB). This designation acts as a dividing line, determining which set of accounting standards a company must follow. For business owners, investors, and accountants, understanding if an entity meets the PBE definition dictates the complexity and scope of disclosures required in its financial statements, ultimately impacting the cost and effort involved in maintaining compliance.

The Core Definition of a Public Business Entity

The Financial Accounting Standards Board (FASB) defines a Public Business Entity to identify companies whose financial information is accessed by a broad group of users, such as public investors, who have limited direct access to management. An entity meets the definition if it satisfies any one of several specific criteria.

A foundational element is an entity’s relationship with the U.S. Securities and Exchange Commission (SEC). If a business is required to file or furnish financial statements with the SEC, it is considered a PBE. This includes companies filing reports like Form 10-K, as well as entities whose financial information must be included within another company’s SEC filing. The definition also extends to entities required to file financial statements with other regulatory agencies under the Securities Exchange Act of 1934.

An entity can also be classified as a PBE if it has issued securities that can be transferred without contractual restrictions and is also required by law, contract, or regulation to prepare U.S. GAAP financial statements that are made publicly available on a periodic basis.

Securities Traded on an Exchange or Over-the-Counter

An entity is also classified as a PBE if it has issued securities that are traded, listed, or quoted on a public exchange or an over-the-counter (OTC) market. Securities are financial instruments that hold monetary value and can be traded; they primarily include equity like stock and debt like bonds. An exchange is a formal, regulated marketplace, such as the New York Stock Exchange (NYSE), where securities are bought and sold. The over-the-counter market is a decentralized market where securities not listed on a major exchange are traded.

The key factor is that the securities are available for public trading, which creates a broad base of financial statement users who rely on the entity’s reported information to make investment decisions.

Conduit Bond Obligors

PBE status can also involve conduit bonds. A conduit bond is a type of municipal security issued by a government agency on behalf of a private, third-party entity, which is often a for-profit business. The government body acts as the “conduit,” allowing the private entity to access tax-exempt financing, but the obligation to repay the bondholders rests entirely with the private company, known as the conduit bond obligor.

If these conduit bonds are traded on a public exchange or OTC market, the obligor is classified as a PBE. The reasoning is that these companies are indirectly accessing public debt markets. Investors rely on the financial health of the private obligor, so they require transparent financial data to assess the risk of their investment.

Other Entities Classified as PBEs

An entity’s PBE status can also be determined by its relationship with other companies. If a parent company qualifies as a PBE, any subsidiary included in its consolidated financial statements is also considered a PBE for those reports. This ensures all components of the public-facing financial statements are prepared using the same accounting standards.

However, if that same subsidiary prepares its own separate financial statements that are not filed with the SEC, it may not be considered a PBE for those specific reports. This allows the subsidiary to use simplified private-company accounting alternatives in its standalone statements.

Employee Benefit Plans

Employee benefit plans, such as pensions or 401(k)s, are generally excluded from the definition of a business entity and are not automatically PBEs. However, they can be required to follow PBE accounting standards if they must file their financial statements with the SEC. For example, if a company offers its own stock as an investment option within its 401(k) plan, the plan may be required to file an annual report with the SEC, and an employee benefit plan that files this form is treated as a PBE.

Not-for-Profit Entities

Not-for-profit (NFP) entities are excluded from the definition of a “business entity” and are generally not considered PBEs, as they follow a separate set of accounting standards. An NFP can, however, be subjected to PBE-level reporting requirements if it becomes a conduit bond obligor for securities that are traded on a public exchange or OTC market. If an NFP, such as a hospital or university, uses publicly traded conduit bonds to finance a facility, it must follow the more stringent PBE accounting rules to protect public investors.

The Primary Consequence of PBE Status

The classification of an entity as a Public Business Entity determines the set of accounting rules the entity must follow. PBEs are required to adhere to the full and comprehensive standards of U.S. GAAP. They are explicitly prohibited from using a set of simplified accounting and disclosure rules developed for private companies.

To address concerns that full U.S. GAAP was unnecessarily complex for private companies, the Financial Accounting Standards Board (FASB) established the Private Company Council (PCC). The PCC is an advisory body that develops “PCC accounting alternatives,” which are practical modifications to U.S. GAAP on certain complex topics. These alternatives are designed to reduce the cost and complexity of financial reporting.

The most significant result of being classified as a PBE is the inability to elect these accounting alternatives. For instance, while a private company might be able to amortize goodwill over a 10-year period, a PBE must test goodwill for impairment annually, a more complex and costly process.

How to Assess PBE Status

To determine if an entity is a Public Business Entity, its activities must be reviewed against the criteria set by the FASB. An entity is a PBE if it meets any of the following conditions:

• Is required to file or furnish financial statements with the U.S. Securities and Exchange Commission (SEC) or another regulatory agency under the Securities Exchange Act of 1934.
• Has issued equity or debt securities that are traded, listed, or quoted on a public exchange or an over-the-counter (OTC) market.
• Is an obligor for any conduit debt securities that are traded on an exchange or OTC market.
• Is a subsidiary whose financial statements are consolidated into the public filings of a parent company that is a PBE.
• Has issued securities not subject to contractual transfer restrictions AND is required by law, contract, or regulation to prepare and publicly release U.S. GAAP financial statements periodically.