Professional Accounting Blog

    Accounting For Your Prosperity

    A Simplified Accounting Reporting Method Alternative for Private Companies

    Posted by Carlo Berlingieri on Dec 17, 2013 9:43:00 AM

    Has financial reporting become too cumbersome for your private company? If so, never fear, the AICPA has come up with a possible solution. For years, there has been discussion in the accounting world on whether there should be “Big GAAP and Little GAAP" (Generally Accepted Accounting Principles) to do away with complex financial reporting rules that may not make sense for some private companies. Both the FASB and the AICPA have identified this issue and have started two different groups to come up with a solution.

    FASB created a Private Company Council to attempt to create a new set of GAAP used for private companies, but a new reporting framework has not yet been issued from the group. However, the AICPA created a new financial reporting model, and its purpose is to help small to midsized private companies comply with their financial reporting needs. Out of their project, the Financial Reporting Framework for Small to Midsize Entities was born (“FRF for SME”).

    Qualifications

    There are certain criteria that the company has to meet in order to utilize the new framework:

    • Must be a for-profit entity
    • Owner managed
    • No intentions of going public
    • Have no significant foreign operations
    • Cannot be a financial institution
    • Does not need any highly specialized accounting guidance.

    One item to remember is that using this reporting framework does not produce a GAAP financial report but rather an OCBOA report (“Other Comprehensive Basis of Accounting”). Depending on who the users of the financial statement are (lenders, valuation specialists, etc), this may not be a fit for some Companies. 

    Main Differences

    The three main areas in which “FRF for SME” differs from GAAP are as follows:

    Goodwill:

    • GAAP requires Goodwill to be evaluated on an annual basis for impairment. It is first analyzed using a qualitative analysis, which then typically turns into a complicated valuation calculation to determine if the goodwill balance still has value. Under this new framework, this analysis is not needed, and goodwill is amortized over the same period as for tax purposes, which is normally 15 years.

    Income taxes:

    • The second difference is accounting for income taxes. For GAAP, organizations are required to use the accrual method of accounting to account for amounts payable, the deferred tax income method of accounting for deferred tax assets and liabilities, and analyze uncertain tax positions. Under the FRF for SME guidance, you can choose not to implement accrual accounting and the deferred income tax method of accounting. Also, uncertain positions do not need analyzed or recorded.

    Consolidations:

    • The third main difference between the two models is with consolidations of variable interest entities (“VIE’s”). For GAAP, VIE’s need to be evaluated to determine if they should be consolidated. Also, any entity the organization has a controlling interest in has to be consolidated. Under the new framework, the organization would have to consolidate a subsidiary if 50% of the equity interest is owned. There is no concept of variable interest entities.

    Summary

    Small businesses should consider this option for their reporting needs in order to simplify their outside financial reporting, and Meaden & Moore, Ltd. can help you implement the reporting change. Initially, you’ll want to discuss changing to this format with the user of the financial statements (typically the bank) to make sure your financial statement will still comply with loan documents, valuation models, etc. If you have any questions or are interested in exploring this option, please call our offices. 

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    Topics: Accounting & Auditing

    Carlo Berlingieri

    Written by Carlo Berlingieri

    Carlo Berlingieri, with over 20 years of experience, is a Vice President in the Assurance and Employee Benefit Plan Groups.

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