The American Institute of CPAs appears to be making progress on a Financial Reporting Framework for Small and Medium-sized Entities that it has been developing in the wake of the Financial Accounting Foundation’s decision to set up a Private Company Council, and plans to expose the framework by the end of the month.
The AICPA had fought to set up a separate standards board for privately held companies that would not be under the control of the Financial Accounting Standards Board. After a yearlong letter-writing campaign that it organized among CPAs to push for a separate board, the AICPA eventually agreed to support a modified version of the FAF’s original proposal (see New Private Company Standards Council Established and AICPA Says It Supports FAF’s New Private Company Council). The FAF decided that the new Private Company Council would be able to vote on and recommend changes in standards for private companies, but FASB would still have the final word on any changes.
However, in announcing its support last May, the AICPA also said it would develop an “other comprehensive basis of accounting,” or OCBOA, financial reporting framework to meet the needs of some privately held small and medium-sized entities, as well as the users of the financial statements of these entities. “The SME OCBOA framework will be a less complicated and a less costly alternative system of accounting to U.S. GAAP for SMEs that do not need U.S. GAAP financial statements,” the AICPA said.
The OCBOA project is something that Judy O’Dell, who chaired the Private Company Financial Reporting Committee—which the new Private Company Council is replacing—said she believed the AICPA should develop.
“I think if the AICPA were to pull together a project where they gave better guidance on OCBOA financial statements, which are what many very small companies report on, they would do the private company world a great service,” she told Accounting Today last November (see Private Company Committee Plans for Final Meetings). “A lot of private companies report on a tax or cash basis. They don’t use GAAP financial statements, and there is not a lot of guidance for how to do those. One of the ideas would be for the AICPA to provide better guidance on the preparation of those statements so that they could be better utilized by the very, very tiny private companies that don’t need to prepare GAAP financial statements.”
The AICPA appears to be making good on its promises. On Monday, it sent members of the AICPA Council a Frequently Asked Questions document providing background information on the Financial Reporting Framework for Small and Medium-sized Entities it has been developing. The topic is expected to come up for discussion when the AICPA holds its Fall Meeting of Council in Amelia Island, Fla., next week.
The FRF for SMEs is “a self-contained special purpose framework intended for use by privately held small- to medium-sized entities (SMEs) in preparing their financial statements,” according to the document. “The FRF for SMEs draws upon a blend of traditional methods of accounting with some accrual income tax methods. The framework is being developed by a working group of CPA professionals and AICPA staff who have years of experience serving smaller- to medium-sized private entities. The FRF for SMEs will be exposed for public comment to solicit broad stakeholder input in October of 2012. The AICPA expects to issue the final framework in the first half of 2013.”
The framework is intended for “smaller- to medium-sized, owner-managed, for-profit entities that need reliable financial statements where internal or external users have direct access to the owner-manager and GAAP financial statements are not required.”
The AICPA is defining “owner-managed entities” as closely held companies where the people who own a controlling ownership interest in the entity are substantially the same set of people who run the company, in contrast with public companies where the ownership and the management are clearly separated. “Owner-managed businesses represent the majority of all businesses in the United States,” said the AICPA. “Often, owner-managed entities do not have a qualified CPA on staff. Rather, the owner-managers or bookkeepers maintain the entities’ books and records.”
However, the AICPA has admitted that it does not have the authority to impose its standards on such businesses in the same way that FASB and the Securities and Exchange Commission can impose their standards on public companies.
“The AICPA has no authority to require the use of the FRF for SMEs for any entity,” it said. “Therefore, the FRF for SMEs will have no effective date and an owner-manager can decide to use the FRF for SMEs once it is released. An owner-manager should make that decision in conjunction with those who may use the entity’s financial statements.”
The AICPA noted that the FRF for SMEs is a type of special purpose framework that is being developed by the AICPA’s FRF for SMEs task force and AICPA staff and will be exposed to public comment and professional scrutiny. “The FRF for SMEs will not be approved, disapproved or otherwise acted upon by any senior technical committee of the AICPA or the Financial Accounting Standards Board (FASB) and will have no official or authoritative status,” said the AICPA.
The AICPA also clarified the position of the FRF for SMEs compared to the work of the forthcoming Private Company Council, which is still being set up.
“For decades the AICPA has wanted private companies and their financial statement users to have the information that suits their unique needs and is cost beneficial to them,” said the AICPA. “The new Private Company Council and the FASB will be working toward that goal and the AICPA is committed to the new Council’s success. But that solution only helps private companies that need U.S. GAAP financial statements. The fact is, many SMEs do not need GAAP financial statements and their financial reporting needs can be better addressed by a less complicated and more relevant financial framework like the FRF for SMEs.”
In answer to the question in its FAQ document, “Is developing the FRF for SMEs a way for the AICPA to become an accounting standard setter?” the AICPA answered, “No. The FRF for SMEs is a nonauthoritative financial reporting framework that can be used voluntarily by entities that do not need GAAP financial statements. The AICPA has no authority to compel or preclude the use of the FRF for SMEs. The FAF supports the AICPA’s development of the FRF for SMEs, calling it ‘important and complementary.’”
The AICPA also explained the difference between its FRF for SMEs and the similar-sounding IFRS for SMEs, a streamlined version of International Financial Reporting Standards also aimed at small and medium-sized entities, which the International Accounting Standards Board has developed.
“The International Accounting Standards Board has been recognized by the AICPA as an international accounting-standard setting body and, as a result, the IFRS-SME may be an alternative for those SMEs needing GAAP financial statements,” said the AICPA. “While there will be some similarities between the FRF for SMEs and the IFRS-SME, the AICPA believes that the FRF for SMEs will be more understandable and more useful at this time since it is specifically written for U.S. entities. Additionally, the FRF for SMEs will reduce differences between the FRF for SMEs and the U.S. tax code. For example, LIFO inventory is not permitted by the IFRS-SME whereas it will be permitted by the FRF for SMEs.”
In case FASB and the IASB ever do manage to achieve convergence of U.S. GAAP with IFRS, which appears unlikely in the near future, the FRF for SMEs could still come in handy.
“The AICPA expects that the FRF for SMEs will be a very useful financial reporting system in the U.S. as owner-managers of SMEs, their accountants and their external stakeholders recognize its benefits,” said the AICPA. “The FRF for SMEs is a financial reporting framework for those entities that do not need GAAP. As such, the convergence of U.S. GAAP with IFRS does not directly impact the FRF for SMEs. As the U.S. financial reporting environment continues to evolve in response to global forces, such as convergence and adoption of IFRS and the emergence of the IFRS for SMEs, the FRF for SMEs will remain a relevant framework and key element in that evolving environment.”
So while we’re waiting for the Private Company Council to set up shop and start recommending changes in accounting standards for private companies, the AICPA’s FRF for SMEs may prove to be helpful for private company accountants in search of assistance with the complexities of the ever-evolving standards.
Meanwhile, the FAF is making some progress in setting up the PCC, having named a chairman and members last month (see Private Company Council Members and Chairman Appointed). FASB also proposed its own decision-making framework in July for which criteria and circumstances should be used to determine when it is appropriate to adjust U.S. GAAP for private companies (see FASB Proposes Private Company Decision Framework).
The deadline for commenting on the proposed decision-making framework is at the end of October. FASB plans to host a repeat “encore performance” of its webcast explaining its proposed framework on Thursday, Oct. 18, from 1:30 to 2:45 pm EDT on its Web site in an effort to elicit more feedback. No doubt the AICPA will also be explaining the workings of its upcoming framework when it’s exposed later this month.
So while the battle over a private company accounting standards board has apparently been settled for now, the different frameworks that FASB and the AICPA are now proposing may well cause some confusion among practitioners about which framework is which and how they should be applied. Perhaps it’s time that one organization at least dropped the use of the term “framework.” They might also want to refer to SMBs, the term for small and midsize businesses that’s commonly used in the U.S., instead of the British term “SMEs” to avoid confusion with IFRS for SMEs.