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
PYA is pleased to announce the promotions of Michael Ramey, Matt Stuart, and Jeff Pate to the level of Equity Principal. PYA has announced the promotion of Senior Manager Michael...
Read More

PYA Announces Three New Equity Principals

In today’s business environment, cloud computing arrangements play a key role in the day-to-day operations of companies large and small. The Financial Accounting Standards Board’s (FASB) Accounting Standards Update (ASU)...
Read More

Clearing Up Cloud Computing Accounting

An on-demand webinar, presented by Mike Shamblin, CPA, and brought to you by PYA, helps lay the foundation for the new revenue recognition standard.  The webinar guides healthcare providers of...
Read More

PYA On-Demand Webinar Outlines the New Revenue Recognition Standard in Preparation for Implementation

In the wake of this year’s devastating hurricane season, the President signed into law the “Disaster Tax Relief and Airport and Airway Extension Act of 2017” (the Act). This law...
Read More

Individual Tax Relief for Disaster Areas

Blockchain technology, one of the biggest technology developments in years, has the potential to transform the accounting and audit (A&A) industry. The potential benefits are numerous, but so are the...
Read More

Blockchain Technology—An Audit and Accounting Awakening

The growing popularity of companies like Airbnb and Vacation Rentals By Owner (VRBO), has many Americans considering renting out their homes, or even specific rooms in their homes,  in hopes...
Read More

Tax Rules to Know When Renting Your Home

Securing fidelity bond coverage as part of your retirement plan is a step in the right direction toward safeguarding your business from mishandled funds, mismanagement, and abuse. Further, it is...
Read More

The Importance of Fidelity Bond Coverage in Your Retirement Plan

PYA was ranked highly for female percentage ownership among the 100 largest accounting firms in the U.S. by Inside Public Accounting. PYA, a national management consulting and accounting firm, has...
Read More

PYA One of the Highest Female Percentage Ownership Among Top 100 U.S. Accounting Firms

The Internal Revenue Service (IRS) recently reported the first revocation of a hospital’s tax-exempt status under the Internal Revenue Code (IRC) Section 501(r) requirements of the Affordable Care Act (ACA)....
Read More

Tax-Exempt Status Revoked: Is Your Hospital’s Tax-Exempt Status Safe?

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