A Win for the Little Guys

In my last blog post, I discussed the Private Company Council (PCC) recently created by the Financial Accounting Foundation (FAF) and the hope that it will provide relief to private companies, many of which are small businesses, by allowing appropriate exceptions to GAAP in the preparation of their financial statements. Now there is another accounting development in progress that also promises to be beneficial for small businesses. It is the recently released AICPA exposure draft of a new Financial Reporting Framework for Small- and Medium-Sized Enterprises (FRF for SMEs). You can find a copy of the exposure draft and a host of other information about it from AICPA here.

The deadline for comments on the exposure draft is January 30, 2013. So I encourage interested members and other parties to provide their input on this proposal.

I must admit the first time I ever heard the term SMEs (pronounced Smees) used at a meeting a few years ago, I wondered if Disney was now involved in accounting. Mr. Smee was Captain Hook’s first mate in Peter Pan.

OK, enough trivia. The term actually refers to Small- and Medium-Sized Enterprises. And some standard setters – notably IASB – have already developed accounting standards to try and address the concerns and needs of this group through IFRS for SMEs. Hopefully, the new PCC will do so as well for U.S. GAAP.

In the meantime, though, there is a universe of small businesses that don’t need to issue GAAP financial statements at all. And this new framework is an attempt to provide them, and the users of their financial statements, with a less complex and less costly alternative to GAAP. 

According to the AICPA Q&A document on the new framework, there are estimated to be 20 million SMEs in the U.S. They are active in all industries and are involved in providing goods and services in a wide range of business sectors. 

This new FRF for SMEs is designed for these smaller entities that are owner-managed and need reliable financial statements where internal and external users have direct access to the owner-manager and GAAP financial statements are not required. This new framework is another form of OCBOA (Other Comprehensive Basis of Accounting). OCBOA is a term that is soon heading for the accounting term scrap heap and will be replaced with the term “special purpose framework” upon implementation of SAS 122 at the end of the year.

The AICPA believes that lenders will accept financial statements prepared under the new FRF for SMEs as lenders are often flexible in accommodating various financial frameworks for smaller entities. The FRF for SMEs will consist of traditional accounting principles and accrual income tax accounting methods which are very familiar to lenders and have served the lending community well for many years.

After the exposure period, AICPA plans to get the FRF for SMEs finalized and out for use in a short period of time. So small businesses, and the CPAs who serve them, will soon have a very positive accounting alternative available for their use in preparing financial statements. And that’s a win for the little guys.

 

Comments

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[Kathy Kapka]

Great post! These are exciting times for SMEs and the CPAs that work with them. This ED is definitely a move in the right direction.