OUR THOUGHTS ON:

AICPA Proposes a Financial Reporting Framework for Privately Owned Small and Medium-Size Entities

Audit

By Donald Applegarth

Financial-reporting standards aimed at privately owned small and medium-size entities (SMEs) in the form of a proposed framework by the American Institute of Certified Public Accountants (AICPA) was recently released. The framework for SMEs not required to report their financials according to generally accepted accounting principles is designed for owner-managers of closely held companies and will assist more than 20 million privately owned SMEs in the United States, according to the AICPA. Currently, only public companies are required to use GAAP in financial reporting, although some private companies have also chosen to comply with it.

The guidance is designed to be simpler, easier to understand, and cheaper to prepare than public-company financial statements. There’s no cash-flow statement required, for example, and 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.

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

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 AICPA would have no authority to actually require the use of the framework for SMEs. The comment period on the proposed framework ends on January 28. Although the AICPA believes this proposed framework will become widely accepted particularly by banks, it is uncertain as to whether the proposed framework will take hold and how quickly it might become acceptable reporting within the banking system. Banks may want private companies to continue to report under U.S. GAAP, which have been the tried-and-true accounting standards for decades. Whereas some may view U.S. GAAP to be too complex and costly to comply with, many banks are savvy enough to understand the information currently being reported under U.S. GAAP. Banks may also want to consider the energy around the FAF’s newly formed Private Company Council and its approach to making U.S. GAAP more useful to users of private company financial statements.

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