Private Company Accounting Standards Released

The American Institute of Certified Public Accountants (AICPA) recently released the anticipated Financial Reporting Framework ( FRF”) for Small- and Medium-Sized Entities ( SMEs ). This framework represents another chapter in the evolution of accounting standards in the United States.

This FRF for SMEs is not considered generally accepted accounting principles ( GAAP ), nor is it authoritative. Rather, according to the AICPA, it is an excellent, new accounting option for preparing streamlined, relevant financial statements for privately-held, owner-managed businesses that are not required to use GAAP. The FRF offers consistently measured, relevant financial information to assist users in assessing an entity s performance. In effect, it is another comprehensive basis of accounting–much like the income tax basis and cash basis–designed to provide a cost-beneficial solution for owner-managers and others who need financial statements prepared in a consistent and reliable manner, in accordance with a framework that has undergone public comment and professional scrutiny.

Compared to the thousands of pages in the GAAP Accounting Standards Codification ( ASC ), the FRF is only slightly more than 200 pages. The following summarizes answers to many frequently asked questions about the FRF for SMEs and its applications. More details may be found on the AICPA website.

While there is no standard definition of an SME, the term is widely recognized and encompasses an estimated 20 million U.S. businesses, which are vital to the economy and active in all industries. The AICPA purposely did not quantify size criteria for SMEs with respect to application of the FRF. The following list, which is not all-inclusive, highlights some SME characteristics:

  • The entities have no regulatory reporting requirements for GAAP-based financial statements.
  • The entities may be owner-managed or closely-held, where controlling ownership interest and management are essentially the same.
  • Users of the financial statements have direct access to management.
  • Creditors, and particularly banks, do not base credit or lending decisions solely on financial statements, but consider collateral or other evaluation mechanisms.
  • The entities are for-profit with no intention of going public, are not in an industry with highly specialized accounting guidance, and do not engage in overly complicated financial transactions.

The FRF is composed of familiar, traditional accounting and accrual accounting principles, but includes only pertinent financial reporting topics most meaningful to SMEs and their financial statement users. Considered more principles-based than GAAP, the FRF uses historical cost as the measurement basis and steers away from complicated fair-value measurements. Further, there is no industry-specific guidance included. The AICPA expects the FRF will be stable with proposed amendments every three to four years, based on input from stakeholders, as well as relevant accounting and reporting developments.

The new framework is not without some controversy, however. The National Association of State Boards of Accountancy ( NASBA ) has pushed back against the AICPA and is advising private companies not to use the FRF. NASBA supports a separate initiative by the Private Company Council of the Financial Accounting Standards Board ( FASB ) which is modifying GAAP to meet the needs of private companies.

Also, an important consideration is whether lenders and financial institutions will accept financial statements prepared under the FRF for SMEs. Owner-managers will need to consult their lenders and other key external stakeholders. Since the FRF consists of traditional accrual accounting principles and methods and focuses on consistent and reliable financial position, operations, and cash flow measurements, the AICPA believes lenders will be accepting. The lending community was involved in the development of the FRF and recognizes its relevance, simplicity, and cost effectiveness.

The AICPA believes the FRF for SMEs is a viable option for certain businesses. PYA will keep you apprised of its overall acceptance given the position of NASBA and others.

We are prepared to assist you and your stakeholders with consideration of the FRF for financial statement preparation and reporting. For more information, contact the expert listed below at PYA, (800) 270-9629.

WE ARE REQUIRED BY IRS CIRCULAR 230 TO INFORM YOU THAT THE FOLLOWING DISCUSSION WAS NOT INTENDED OR WRITTEN TO BE USED, AND IT CANNOT BE USED, NOR RELIED UPON, BY ANY TAXPAYER FOR THE PURPOSE OF AVOIDING ANY PENALTIES THAT MAY BE IMPOSED UNDER FEDERAL TAX LAW. THE ADVICE WAS WRITTEN TO SUPPORT THE PROMOTION OR MARKETING OF THE TRANSACTIONS OR MATTERS ADDRESSED IN THE DISCUSSION. EACH TAXPAYER SHOULD SEEK ADVICE BASED ON ITS PARTICULAR CIRCUMSTANCES FROM AN INDEPENDENT TAX ADVISOR.


Doug Arnold

Doug Arnold

Principal

Related Posts
Several PYA employees were acknowledged for their achievements in mid-year promotions.   PYA, a professional services firm, has announced that Matt Neilson is the latest principal to join its executive team.  In addition,...
Read More

PYA Announces Several Mid-Year Promotions

In the nonprofit world, organizations are fueled and sustained by generous contributions and grants, which are used to support the organization’s mission.  Although such funding can often be the deciding...
Read More

“Threading the Needle”—Accounting Standards Update Closes Hole in Nonprofit Grant Guidance

Certain employees of governmental and not-for-profit organizations may qualify for a program that offers student loan forgiveness with zero tax liability.   The Public Service Loan Forgiveness (PSLF) Program gives full-time...
Read More

Tax-Free Student Loan Forgiveness for Eligible Public Servants

PYA, a national professional services firm headquartered in Knoxville, has been awarded a 2018 Top Workplaces honor by the Knoxville News Sentinel. The award is a result of employee feedback...
Read More

Knoxville News Sentinel Names PYA a Winner of the Greater Knoxville Area 2018 Top Workplaces Award

The new Tax Cuts and Jobs Act (TCJA) can be confusing for many-- especially small business owners.  Although many aspects of the TCJA have been discussed, one component of the...
Read More

Government Clamps Down on “Deductible Fun” for Businesses

As businesses consider the impact of the Tax Cuts and Jobs Act (TCJA) introduced late last year, the corporate tax rate is receiving substantial attention.  However, according to a 2014...
Read More

2018 Tax Reform – The Excess Loss Limitation Likely to Squeeze Owners of Cyclical Businesses

A recent Accounting Standards Update (ASU) addresses land easements and their accounting under the new lease standards.  In January 2018, the Financial Accounting Standards Board (FASB) issued ASU 2018-01 Leases:...
Read More

Land Easements—Guidance for Implementing New Lease Accounting Standards

Many Americans have a 401(k) retirement savings plan as a benefit of employment with their employers.  They contribute a percentage of their compensation to their 401(k) each pay period with...
Read More

Taking Distributions from Your 401(k): What You Need to Know

Stakeholders seeking clarity were behind the latest Accounting Standards Update (ASU) issued by the Financial Accounting Standards Board (FASB).  In response to questions raised, the FASB released ASU 2018-03: Technical...
Read More

Measuring Fair Value: New ASU Offers Clarity

Share This Insight

If you received value from this article, please share it with your network (e.g., Facebook, Twitter, LinkedIn). Icons below for your convenience.

Stay Current

* indicates required
Monthly eNewsletters
See more newsletter and alert options.

PYA Population Health Ascend

PYA Healthcare Blog

PYA Thought Leadership Services

The Healthcare Loop