Small-Biz Reporting Framework Should Help Lenders

A new financial reporting framework for small businesses is easier for bankers as well as filers, says the AICPA.
Kathy HoffelderAugust 12, 2013

A new financial reporting framework for privately held firms should help lenders just as much as the small businesses that are using it.

The American Institute of CPAs’ (AICPA) Financial Reporting Framework for small and medium size entities (SMEs), which was issued in June, allows for parent-company-only financial statements and among other items excludes the more complicated reporting of variable interest entities (in which a company owns less than a majority of an entity). The framework is meant for SMEs that do not need to file financial statements based on U.S. generally accepted accounting principles (GAAP).

Excluding variable interest entities from the framework makes it easier for the filers as well as the bankers who need to see what exactly a company owns, said Robert Durak, director of private company financial reporting at the AICPA on a webcast last week. The framework defines a subsidiary as “more than 50%” owned by the company.

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“Bankers really requested that. They have to see that [ownership] information stand alone,” said DeAnn Auman Hill, a CPA and a member of the task force on financial reporting for SMEs.

“When I talk about the framework I often hear, ‘Will my banker accept this financial statement prepared under the framework?’” asks Durak.  And to that he says, emphatically, “yes.” The framework was built by CPA professionals, he said, who understand what bankers need to see in financial statements.

“A banker or financial statement user needs to know that the financial statements are reliable and the framework that the financial statements were prepared under is reliable,” he explains, noting that the AICPA subjected the framework to “rigorous scrutiny.”  

According to the AICPA, the framework was designed so that lenders and others can easily understand whether a business is creditworthy, how it runs, how much debt it has and how good its cash flow is. It incorporates traditional accounting principles as well as accrual income tax methods of accounting, and uses historical cost as its primary measurement basis.

And the AICPA plans to keep on working with bankers to educate them. “At the AICPA we’re engaged in a campaign to reach out to the lending community,” said Durak. The trade group plans on working with banking organizations at the state level and on having roundtables and conference sessions. It is also meeting with banking regulators like the Federal Deposit Insurance Corporation (FDIC) to explain the framework to them.

CPAs, which represent many small businesses, will also benefit from the more simplified approach to financial reporting under the framework, added Hill. “Compliance has gotten to be so huge. This is an answer to a lot of the [financial reporting] problems that are out there.”