The establishment of accounting standards in the United States has been a process that has evolved since long before this country was created and continues to evolve even today with the possible creation of yet another set of accounting principles.
In the days prior to the Industrial Revolution, there was not a large amount of authoritative guidance, and accounting standards generally arose out of common practices and academic writings. There was no real body of generally accepted accounting principles ( GAAP ) such as we have today. Clearly through this period, there were huge inconsistencies and a great lack of comparability in financial statements.
The country continued under this practice through the 1920 s until the stock market crash of 1929 and the Great Depression that followed. Arguably, the lack of accounting standards contributed to the overvaluation of stocks, and efforts began to emerge in order to address that issue.
The Committee on Accounting Procedures ( CAP ) was created in 1930 as the first body to set standards, and that organization issued a number of Accounting Research Bulletins. Lacking financial and other real support, the CAP was replaced in 1953 by the Accounting Principles Board ( APB ), which issued a series of APB Opinions over the years. After an exhaustive study led by a former Securities and Exchange Commissioner, the APB was replaced in 1972 by the Financial Accounting Standards Board ( FASB ), an independent body, which became the primary accounting-standards-setting authority, issuing FASB Statements on Financial Accounting Standards. In 2010, the FASB created the current Accounting Standards Codification ( ASC ), which is amended as necessary for new standards through Accounting Standards Update ( ASUs ).
The American Institute of Certified Public Accountants ( AICPA ) also played a role in establishing certain accounting standards over the years, including addressing industry-specific issues, as did other bodies such as the Securities and Exchange Commission and the relatively new Public Company Accounting Oversight Board (for public companies). The Emerging Issues Task Force of the FASB (as the name implies) has also created guidance on emerging and controversial issues that need to be addressed quickly.
Therefore, in the past century, we have come from a no-GAAP system to a system that produces an ever-increasing, complex GAAP and which, according to many, needs to be addressed, particularly as it relates to private companies.
A recent blue ribbon panel, commissioned by the AICPA, the Financial Accounting Foundation ( FAF ) (parent of the FASB), and the National Association of State Boards of Accountancy reported that the costs of complying with GAAP often outweigh the benefits and that much of GAAP lacks relevance for users of private company financial statements. Over the years, this has been referred to as big GAAP for the large company and public company sectors, and little GAAP for what is generally considered small- and medium-sized private companies.
The FAF has established a council to review modification of GAAP for private companies, and this council has already begun to study certain specific areas. This organization appears to be addressing the problem issue-by-issue and anything promulgated by this body is subject to FASB approval.
However, the AICPA has now reinserted itself in the standard-setting process through the development of a separate financial-reporting framework designed for small-to-medium-sized private entities where financial statement users are more closely involved with the organization. This latest AICPA framework, and the guidance that comes out of it, clearly does not purport to be, and is not GAAP, but is similar to other comprehensive basis of accounting ( OCBOA ), such as the cash basis or the income tax basis of accounting that has always existed. The guidance will be considerably shorter and less complicated with fewer, but still-relevant, disclosures, and more of a focus on traditional, historical cost rather than fair value. The guidance will, in concept, be more principles-based (GAAP as we know it has been considered more rules-based); more usable across the spectrum of industries; and less subject to frequent changes.
Key for any small-to-medium-sized private company is whether reporting under the eventual new framework will be acceptable to that particular company s financial institutions or other users. As indicated earlier, this framework is not GAAP, and some users may still require GAAP-basis financial statements– thus, still the need for the FAF s private company council.
The exposure draft on this framework was released November 1, 2012, and comments were requested by January 30, 2013. As currently drafted, it is a 250-page document (compared to thousands of pages in existing GAAP under the ASC) and is available for download at the AICPA website.
Thus, there are now four primary sets of standards: International Financial Reporting Standards ( IFRS ) (and there is also an IFRS for small- and medium-sized entities); existing big GAAP as set forth by FASB; little GAAP for private companies from the recently established FAF council; and a new, comprehensive OCBOA from the AICPA.
We will keep you apprised on the development of this framework and will have further details once it is finalized.