New Accounting Framework to Ease Burdens for Small Businesses
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This article was updated with additional reporting at 5:20 p.m. Eastern.
If the thought of organizing your business financial statements gives you a headache, announcements from two leading U.S. accounting trade groups today should offer some welcome relief.
The American Institute of Certified Public Accountants released the framework for a new financial reporting option for small and midsize businesses which aims to save some business owners time and money.
The new framework, which was created by a team of certified public accountants, is an option for only private, for-profit businesses. Any company that is publicly traded is required by the U.S. Securities and Exchange Commission to file financial documents according to Generally Accepted Accounting Principles, known as GAAP standards. This new framework is not compliant with GAAP.
Millions of businesses don’t have to comply with GAAP standards but still need financial statements for applying for loans, insurance plans and in management planning, according to AICPA.
Private-companies with $300,000 to $100 million in annual revenue ought to consider the new framework, according to Nicholas Bird, a partner and owner of Lucid Books accounting firm in Orem, Utah. Bird expects that he will be telling his clients about the new option.
“What we hear when we talk to these small businesses and the CPA’s that serve them is that they are looking for another option,” says Bob Durak, the director of private company financial reporting at AICPA. These new standards are likely to be used by owner-managed firms that don’t have an in-house accounting team, says Durak. If a company expects to go public in the near-term, it may want to avoid these non-GAAP accounting principles, he says.
The new framework for preparing financial statements uses historical costs and avoids the complicated fair-value measurements, says Durak. Also, it allows businesses to tailor their financial statements to the specific situation for which they are drawing them up, among other changes. This built-in optionality cuts out unnecessary work, Durak says.
If you think that your business might benefit from the simpler financial reporting, you should see your certified public accountant, says Durak. The AICPA will be educating CPAs about the changes and providing them with tools to understand when the new framework is beneficial.
Another benefit of the new framework is that, if it is widely adopted, it is expected to make it easier for you to compare the growth of your business with other businesses, says Bird. The benchmarks will be parallel. “It would be apples to apples instead of apples to oranges,” as with the non-GAAP accounting systems used in private companies currently, says Bird.
Also Monday, the Financial Accounting Standards Board announced that it has endorsed three alternatives to U.S. GAAP reporting standards and released them for public comment. Unlike the new framework from AICPA, which can be used immediately, the proposals to GAAP reporting practices endorsed by FASB need to be finalized and voted upon. The three proposals aim to streamline the financial statements that private companies subject to GAAP financial requirements have to adhere to, says FASB Chairman Leslie Seidman, in a statement.