Despite the recommendations from the Blue Ribbon Panel on Standard Setting for Private Companies and the call from thousands of private companies across the country, the Financial Accounting Foundation (FAF) has decided that there should not be separate accounting standards for privately held businesses and publicly traded companies.
It was the recommendation of the Blue Ribbon Panel (and the hope of small businesses across the country) that a separate independent standard-setting board would be established and not be subject to Financial Accounting Standards Board (FASB) approval process. Alas, the FAF’s decision not to create a separate body for private company accounting standards will continue the frustration of small businesses and the third party users of their financial statements.
For years, the FASB’s focus has been on the needs of publicly traded companies, much to the chagrin of small businesses. The differences between the financial reporting needs of publicly traded companies and privately held entities and their third party users are numerous. With more and more FASB pronouncements being geared toward the interests of public company reporting, that gap continues to widen. In many cases, the financial and record-keeping burden on small business in order to comply with U.S. generally accepted accounting principles (GAAP) has become onerous.
Possible alternatives for small businesses include reporting on an Other Comprehensive Basis of Accounting (OCBOA), such as income tax basis or cash basis, or making a “GAAP Exception” in their reports. While these options have merit, they also have their drawbacks. Most loan agreements with lenders specifically state that borrowers are to provide financial statements in conformity with GAAP. The challenge can be convincing loan underwriters that OCBOA statements or statements with a GAAP Exception are just as useful and informative as those that are in compliance with GAAP, especially in cases where the GAAP rules add little or no value, but additional costs and administrative burdens on the small business owners.
Small businesses and the users of their financial statements, which include lending institutions, insurance carriers, bonding companies and financial advisors, as well as the American Institute of Certified Public Accountants (AICPA), will continue to lobby and clamor for a separate standard setting board. Until then, public companies and small business alike are still subject to the same financial reporting standards under GAAP.
For more information on our Accounting and Auditing Services, please contact Jim Suttie at 440-449-6800.