New framework suggests new standards for small business financial reporting
But it doesn’t address all issues associated with what has become known as ‘little GAAP’
In June, the American Institute of Certified Public Accountants issued a new non-authoritative option for small business reporting. Called the “Financial Reporting Framework for Small and Medium-Sized Entities,” the framework is designed for companies that are not required to prepare financial statements in accordance with U.S. generally accepted accounting principles.
The framework – known as “FRF for SME,” for short – came about as a result of the frustrations the AICPA witnessed as the Financial Accounting Foundation continued to focus on public companies and not consider that differences exist for financial reporting for private companies.
Nine years after the AICPA Private Company Financial Reporting Task Force called for fundamental change to the standard-setting process for private companies, the AICPA released a new FRF for SME. It is 206 pages long with 31 chapters of material covering a wide range of accounting subjects, starting with financial statement concepts and ending with foreign currency translation.
So what are the key differences between the FRF for SME and current U.S. GAAP?
Most of the changes center on what most small and medium-size companies (note: FRF for SME does not define what an SME is) do not need in order to prepare financial statements in accordance with GAAP. These differences using FRF for SME do not require companies to recognize the following: variable interest entities; deferred taxes; impairment of long-term assets; other comprehensive income; and consolidation of subsidiaries, among others.
The AICPA has a lot of work to do to convince the users of financial statements, banks, creditors and other users that this is the real thing for small business. So how will it address the issue that these “financial statements present fairly in all material respects,” and so forth?
A first step
In the June 2013 issue of the National Association of State Boards of Accountancy report, Ken Bishop, president and CEO, titled his president’s memo, “Watch out for Falling Rocks.” In it, he raised concerns of the warning signs in the accounting regulators’ path.
Chief among them was the confusion the new non-authoritative framework would cause regulators. The new framework is a mix of accounting under the tax basis, other comprehensive basis of accounting (OCBOA), GAAP and the Canadian Financial Reporting Framework.
After the memo appeared, the AICPA, with input from NASBA, began developing a decision-making tool to help companies decide whether the use of the framework is suitable for them to use or not.
In January 2011, a panel on standards-setting for private companies had recommended creation of a separate standard-setting body, independent of the Financial Accounting Standards Board, to set private company standards. Later that year, the Financial Accounting Foundation said it would establish a new Private Company Council, but it would not be independent of FASB, and its decisions would be subject to the approval of the board. This new body was specifically given the task of improving the standards-setting process for U.S. GAAP for private companies.
On the same day that the AICPA issued the framework in June, the FASB voted to endorse three Private Company Council proposals to address concerns about the relevance of certain standards for private companies that prepare GAAP-basis financial statements.
These proposals would modify the treatment for private companies for goodwill, certain types of interest rate swaps and accounting for assets acquired in business combinations. While this effort is a step in the right direction, it does not address all of the issues associated with what has become known as “little GAAP.”
I would encourage the Private Company Council to get a move on and bring to the table more proposals for private companies that would simplify their accounting, including a review of all relevant areas where a simpler approach to accounting for private companies would be more appropriate.
A good start would be to review “Financial Reporting for Private Companies: The Canadian Experiment.”
Frederick G. Briggs Jr. is a certified public accountant with a practice in Manchester.