GAAP and IFRS

Reporting: One Standard Fits All?

FASB and IASB say rules for clarity of financial reporting should be no different for smaller businesses than for their larger peers.
Lisa YoonDecember 5, 2005

The fourth meeting of the Financial Accounting Standards Board’s Small Business Advisory Committee, on November 30, dealt with uncertain tax positions, changes in accounting for postretirement benefit obligations including pensions, and the joint conceptual framework project of FASB and the International Accounting Standards Board.

Of these, the last topic got the most attention from the committee members. The joint conceptual framework project involves discussions on the objectives of financial reporting and the qualitative aspects, such as faithful representation and understandability, of accounting data. At the October joint meeting of FASB and IASB, the two boards determined it unnecessary to modify the objective or qualitative characteristics of financial reporting information for different types of companies — including smaller and non-public businesses.

Several reasons contributed to that conclusion. True, most of the users of financial reporting by smaller and non-public companies — such as bankers, rating agencies, and owners — have the ability to require the financial information they want from the company, rather than merely relying on what management gives them. But these users generally have the same informational needs as parties who don’t have that ability.

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As for the six qualitative characteristics of financial reporting identified by FASB and IASB — relevance, faithful representation, understandability, comparability, materiality, and cost-benefit considerations — understandability drew special attention. Users of smaller-company reporting, the boards observed, often are less financially sophisticated and find some data or presentations too complicated. To address this gap, many smaller companies simplify their reporting and present information in a way more easily understood by their users.

However, committee members noted that it’s important to clarify what “simplifying” means. To FASB board members, it doesn’t mean dumbing down information for accountants; simplifying should be about presenting information so it’s clearer and more useful to users who make financial decisions. Ways to achieve this, asserted the board, include eliminating smoothing of costs over time, avoiding accounting jargon, and choosing the most cost-effective means of applying accounting methods.

FASB and IASB have yet to discuss the applicability of cost-benefit considerations for all sizes of companies, but board members indicated that it’s likely they will conclude that cost-benefit considerations are equally important in financial reporting for both small and large companies.