Small Private Firms Getting Their Own Accounting Standards

A new AICPA framework requires fewer disclosures than GAAP: less use of fair value, for instance.
Kathy HoffelderNovember 2, 2012

Privately owned small and medium-size entities (SMEs) not required to report their financials according to generally accepted accounting principles got their own proposed batch of financial-reporting standards in the form of a proposed framework by the American Institute of Certified Public Accountants (AICPA) released yesterday.

The framework, which is designed for owner-managers of closely held companies, will assist more than 20 million privately owned SMEs in the United States that aren’t required to adhere to U.S. GAAP, according to the AICPA. Only public companies are required to use GAAP in financial reporting, although some private companies have also chosen to comply with it.

The association heard from CPAs and bankers serving SMEs “about their long overdue need for financial reporting relief,” Barry Melancon, AICPA president and chief executive officer, said in a statement. The guidance is designed to be simpler, easier to understand, and cheaper to prepare than public-company financial statements. The framework “will use historical cost as its measurement basis and depart from the increased use of fair value,” according to a fact sheet posted on the AICPA site. Further, the guidance “will not require complicated accounting for derivatives, hedging activities, or stock compensation,” according to the fact sheet.

Drive Business Strategy and Growth

Drive Business Strategy and Growth

Learn how NetSuite Financial Management allows you to quickly and easily model what-if scenarios and generate reports.

Also incorporating fewer disclosures, the framework includes an other comprehensive basis of accounting (OCBOA) method, a non-GAAP, special-purpose blend of accrual-income-tax and traditional accounting, already used by accounting professionals. “For many small companies, this will save time and costs while also producing financial statements that are more relevant to business owners and lending institutions,” said David Morgan, chairman of the AICPA’s task force on the financial-reporting framework for SMEs and managing partner at accounting advisory Lattimore, Black, Morgan & Cain, in a statement.

The new framework will also reduce the adjustments needed to reconcile tax-return income with book income.

Banks, the AICPA contends, will particularly welcome the new framework because it “will consist of traditional accounting principles and accrual-income-tax accounting methods that are very familiar to lenders and have served the lending community well for many years.”

Although the AICPA would have no authority to actually require the use of the framework for SMEs, it is widely believed that it will become an industry standard after the comment period on the measure ends on January 30.

Last May the AICPA said it planned to work on the framework after the Financial Accounting Foundation (FAF) formed its Private Company Council to determine if GAAP principles should be revised to better comply with private-company needs. The AICPA and the FAF “are both committed to the private company financial reporting constituency; however, the objectives of these two efforts are different,” according to the fact sheet. While the Private Company Council “will focus on modifications to U.S. GAAP for private companies that need or are required to have financial statements prepared in accordance with GAAP,” the AICPA said, its own guidance for small and midsize entities “is a concise, highly relevant framework for owner-managers of SMEs and their external stakeholders where U.S. GAAP financial statements are not required or necessary.”

“The fact is, many SMEs do not need GAAP financial statements and their financial reporting needs can be better addressed by a less complicated and more relevant financial framework like the FRF for SMEs,” the AICPA asserted.

Mike Loritz, a shareholder and member of the professional standards group at accounting firm Mayer Hoffman McCann, says the framework could see widespread acceptance. But he notes certain industries and defined users might be more accepting in the beginning than others. “Add the unknown regarding future potential changes to GAAP recommended by the Private Company Council, and it creates an extremely interesting time,” he says.