The call for differential accounting - separate sets of generally accepted accounting principles for public and private companies - has been heard for roughly three decades. Now, at last, something is happening - but just as the United States has decided to go in one direction, the rest of the world may go in another.The underlying problem is that GAAP is designed for public companies, which tend to be large enough to deal with the complexity of the standards.
But smaller, private companies often need to meet the same standards to satisfy either state statutes or interested parties, such as lenders and investors. Trouble is, GAAP for the larger concerns can crush the smaller companies under a burden of accountancy that many feel serves little or no purpose.
While everyone acknowledges a problem, no one claims to have an ideal solution.
Recently, a joint effort between the Financial Accounting Standards Board and the American Institute of CPAs has led to a more workable and less radical solution. The two organizations will work with various sectors of the profession to produce standards that include special accommodations for private companies.
Toward that goal, in December, Judith H. O'Dell was named chair of FASB's new Private Company Financial Reporting Committee.
It will be comprised of the chair and four representatives from the community of people who use financial information, four from the corporate sector, and four from large and small audit firms. The committee will provide recommendations to FASB, and the standard-setter said that it would listen.
O'Dell previously served both at FASB and the AICPA. For five years, she was a trustee of the Financial Accounting Foundation, which oversees both FASB and the Governmental Accounting Standards Board. She also chaired the FAF Audit Committee, and was a member of its finance and executive committees.
She said that the committee is likely to first turn its attention to FASB projects that are still in the works, then look at the existing standards that are considered the most troublesome to private companies.
"I recognize that there are a lot of strong feelings on this process, pro and con," O'Dell said. "There are concerns about whether we need two sets of accounting standards, what students are going to learn, and so forth. I don't know where this is going to go, but I'm optimistic. Whatever we do is going to evolve."
DEVELOPMENTS ABROAD
Meanwhile, the London-based International Accounting Standards Board has just proposed a standard that would apply to non-public companies that issue financial reports. Interest abroad has been much stronger than in the U.S., because millions of non-U.S. limited liability companies - 5 million in Europe alone - are required to report under national or international standards. In the U.S., relatively few small non-public companies are required to do so.
The IASB effort has been led by Paul Pacter, the body's director of standards for small and midsized entities. "We believe that the international standard for SMEs will be suitable for all companies that do not have public accountability," he said. "After all, full international financial reporting statements are now required for all micro-companies in about 25 countries, including 22 of 28 European countries."
The IASB has issued an exposure draft of a proposed standard for SMEs. Comments are due by August 31. A final standard may be possible by the end of June 2008.
When the International Federation of Accountants polled its members about the appropriateness of international standards for SMEs, the concept was generally accepted. Most of the federation's approximately 160 members were glad that the IASB intended to keep things simple. Some, however, were concerned that the standard might depend on an "umbilical cord" to the "Big Book" of existing international standards, cross-referencing the simple with the complex, and thus, to some extent, defeating the purpose of the project.
The technical manager of IFAC's small and medium practices committee, Paul Thompson, reported concerns in South America, Africa, some parts of Asia, and even Europe, where accountants would like to see even simpler standards that would be appropriate to the world's most common companies - micro-entities with fewer than 10 employees.
The United Nations Conference on Trade and Development has begun exploring the possibility of a third tier of standards to meet those needs.
Paul Sharman, president and chief executive officer of the Institute of Management Accountants, suggested a solution that dispenses with the conflicts of a dichotomy.
"We just need to simplify the whole darn thing," he said. "The same rules should apply to big companies and small companies, just in less intense fashion. Just simplify it, make it principles-based, move the emphasis back onto the folks who work inside corporations, give them some latitude and let the professionals get back to work."
