AICPA reporting framework for SMEs expected early in 2013

The reporting framework the AICPA is developing for small and medium-size private companies, which will blend accrual income tax methods with other traditional methods of accounting, will be exposed for public comment this fall and is expected to be ready for use in 2013.

In May, the AICPA announced plans to develop a financial reporting framework for small and medium-size private entities that are not required to prepare U.S. GAAP financial statements. The framework is being designed to be less voluminous and simpler than U.S. GAAP, allowing companies to save money on preparation while still providing banks and other financial statement users the information they need.

The document will be nonauthoritative, meaning that the AICPA has no authority to require its use by any entity. It may be used by entities in every industry group, and by unincorporated and incorporated entities.

“Management and users are looking for an accounting framework that is solid in terms of the recognition, measurement, and disclosure of assets, liabilities, revenues, and expenses, but yet easy to use and cost-effective,” AICPA Vice President of Professional Standards and Services Chuck Landes, CPA, said in a telephone interview. “And that’s what this framework gives them.”

In addition to creating this “Other Comprehensive Basis of Accounting” (OCBOA) framework, the AICPA is supporting the new Private Company Council (PCC) that’s being formed by the Financial Accounting Foundation to facilitate GAAP differences for private companies.

The AICPA framework is being developed by a working group of AICPA members and staff with years of experience serving small and medium-size, owner-managed entities. The framework is drawing on a blend of accrual income tax methods and other traditional methods of accounting. Landes said many income tax methods are incorporated so that owner-managers can essentially have one set of books for preparing their financial statements to give to their banks and file their tax returns.

“It’s based on traditional accounting theory so their CPA can come in and quickly understand how this works, how to help them with their books and records,” Landes said. “But yet it’s also streamlined enough that it doesn’t have a lot of noise and clutter of information that’s not relevant and useful to users.”

Owner-managers who rely on a set of financial statements to confirm their assessments of performance, assets, and debts, as well as to understand their cash flows, will be able to use the framework. In many cases, such financial statements are used to support applications for banking finance but are not the sole basis for a banker lending decision that may also consider available collateral or other evaluation mechanisms.

“Users for SME financial statements are primarily lenders, banks that have made loans to the small business and want to understand the company’s financial position, what they own, what they owe,” Landes said. “They also want to understand their operations, how does the company make money. And they also want to understand what kind of cash flow is available from this company to make certain that they can repay any amounts that are lent to the company. This framework will provide the information they need in a more cost-effective manner by eliminating accounting requirements that are not relevant to users.”

—Ken Tysiac (ktysiac@aicpa.org) is a JofA senior editor.