Simplifying U.S. GAAP For Private Companies: Current Developments

Simplifying U.S. GAAP For Private Companies: Current Developments

There are two separate efforts underway to simplify GAAP for private companies, one led by the AICPA, the other by the FASB. Both provide relief and alternatives to businesses struggling with the cost and complexity of applying current US GAAP. Neither is mandatory. Is one the right fit for your business?

LEADING THE CHARGE: THE AICPA’S FINANCIAL REPORTING FRAMEWORK FOR SMALL- AND MEDIUM-SIZED ENTITIES

In June 2013, the AICPA issued the Financial Reporting Framework for Small- and Medium-Sized Entities (FRF for SMEs). The FRF for SMEs is an accounting alternative intended for small businesses that are not required to issue GAAP financial statements. The FRF for SMEs primarily uses historical cost, reduces book-to-tax differences, simplifies consolidation (no variable interest entities), and reduces disclosures. In some cases, alternative accounting methods are provided, which gives management the flexibility to choose the accounting method most suitable to the entity’s facts and circumstances.

Application of the FRF for SMEs is purely optional. As a result, it does not include an effective date, and it was effective upon release.

UNDER DEVELOPMENT: THE FASB’S PRIVATE COMPANY COUNCIL

The FASB’s Private Company Council (PCC) was formed in May, 2012. The PCC recommend exceptions to existing GAAP to better suit private companies. The PCC’s recommendations are subject to public review and comment and FASB’s endorsement. The first PCC recommendations that are in the pipeline simplify the accounting for goodwill, non-goodwill intangibles assets arising from a business combination, and interest rate swaps. A key factor is that private companies who implement PCC carve-outs will still be issuing financial statements in accordance with GAAP.

When approved, application of the PCC’s proposals is optional for private companies. Effective dates will be provided with the release of each of the final authorized standards.

COMPARING THE AICPA‘S FRF FOR SMEs TO FASB’S PRIVATE COMPANY

The critical benchmarks are implementation costs, and the buy-in of the users of your financial statements.

As a brand new alternative accounting framework, it will take time for the entire financial community to absorb the FRF for SMEs. Your adoption of the FRF for SMEs will require an analysis of the costs to modify your present financial reporting system, and the expected benefits of simplification. Other crucial considerations are the education of financial statement users, such as lenders, and their support for this framework. While what constitutes a “SME” is not defined, it’s understood that it is intended for smaller, owner-managed ‘Main Street’ businesses.

The PCC’s recommendations will evolve over time through a proven due process. Third-party acceptance and internal transition costs are not major concerns due to the PCC’s close affiliation with FASB and existing US GAAP. Private companies currently not eligible for tax or cash based financial statements are potential beneficiaries of this authoritative response to the needs of private company reporting, because PCC standards still constitute GAAP.

WHAT YOU NEED TO DO WITH THIS INFORMATION

Stay tuned; this is an evolving topic. No immediate action is required. All private companies currently reporting on US GAAP are eligible for the PCC relief. However, small, owner-managed ‘Main Street’ businesses should consider whether the FRF for SMEs will work for them when and if the user community endorses it. We would be happy to discuss this further to evaluate the appropriateness for your business, as well as discussing this topic with you and your lender when you are reviewing your financing arrangements.

For more information on the topic discussed, please contact us at [email protected].
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Author: Marc Silverman | [email protected]

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