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If you own and run a small, privately held business, reporting your financial performance usually means choosing between Generally Accepted Accounting Principles (GAAP) and special purpose frameworks, more commonly known as other comprehensive basis of accounting (OCBOA).

OCBOA has been an alternative to GAAP for more than 40 years, allowing smaller businesses to use a cash basis or tax basis of accounting to report financial results. In June, the American Institute of Certified Public Accountants (AICPA) introduced a new OCBOA called the “Financial Reporting Framework for Small- and Medium-Sized Entities” (FRF for SMEs). This 206-page framework is designed to be a nonauthoritative blend of traditional accounting and accrual income tax accounting.

Meanwhile, the Private Company Council (PCC), which works under the auspices of the Financial Accounting Foundation (FAF), has been issuing proposals designed to simplify accounting for private companies that report according to GAAP.

The FRF for SMEs

The goal of the FRF for SMEs is to provide a streamlined, cost-effective financial reporting solution for businesses that aren’t required to use GAAP. It’s designed to address transactions encountered by small and midsize, private, for-profit entities, and to show the business’s profitability, assets and available cash.

A company doesn’t have to meet a specific definition of a small business to use the FRF for SMEs, and use of the framework is optional. Management and other stakeholders in a company can determine whether the framework is appropriate for the entity and, if so, begin using it immediately.

The FRF for SMEs differs from GAAP in a number of ways. For instance, it uses historical cost as the primary measurement basis, rather than fair value. In addition, because many small businesses have limited resources, the framework isn’t expected to undergo frequent amending. However, it will be updated when significant developments affect financial reporting by small and midsize entities.

Words of caution: The National Association of State Boards of Accountancy (NASBA), which works with accounting regulators and practitioners, has said it supports modifying GAAP to meet the needs of private companies but doesn’t support the FRF for SMEs. Instead, NASBA advocates following GAAP standards for private companies once they are issued by FASB.

Regardless of whether you choose GAAP or an OCBOA such as the FRF for SMEs, it’s a good idea to use a CPA to help navigate the rules. OCBOA statements can be audited, reviewed or compiled by a CPA just like GAAP financial statements to provide added credibility and assurance.

The PCC

The PCC was established in 2012 to improve the process of setting accounting standards for private companies that prepare GAAP-based financial statements.

It has two broad areas of responsibility: One is determining whether and how existing nongovernmental GAAP should be modified to better meet the needs of users of private company financial statements. The other is advising the Financial Accounting Standards Board (FASB) on the appropriate treatment for private companies when it comes to new items that are under consideration.

Before being incorporated into GAAP, this and other PCC proposals are subject to a FASB endorsement process. FASB has endorsed three proposals that would:

  1. Provide relief from requirements that certain intangible assets required in a business combination, such as a merger, be separately recognized,
  2. Allow the amortization of goodwill and a simplified goodwill impairment model, and
  3. Allow two simpler approaches to accounting for certain types of interest rate swaps when a private company intends to economically convert the interest rate on its debt from variable to fixed.

As of this writing, these proposals have not been implemented by FASB. Until the proposals become official, private firms that choose GAAP must continue to follow the same reporting requirements as their public counterparts.

Options for Private Companies

For more information on ongoing developments with the FRF for SMEs and the PCC’s work, go tohttp://www.fasb.org/pcc and http://www.aicpa.org/Pages/default.aspx. And be sure to consult with your accounting professional. He or she can help you understand the financial reporting options for private companies.

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For additional information on our audit & assurance services, please contact Jeff Elwell, CPA at 302.225.0600 or click here to email Jeff.   In a brief consultation he can assess your situation and determine the best way to proceed.