Which accounting framework should a private company use?

Multiple options for private company financial reporting have emerged this year as standard setters, the AICPA, and other organizations have sought to reduce complexity and costs for small business owners.

A new tool developed by the AICPA provides guidelines to help privately held businesses determine which accounting framework best meets their financial reporting needs.

The AICPA in June released the new Financial Reporting Framework for Small- and Medium-Sized Entities (FRF for SMEs), for use by private, owner-managed businesses when GAAP financial statements are not required.

Meanwhile, FASB and the Private Company Council (PCC) are developing potential alternatives for private companies within GAAP. Four narrowly scoped alternatives for private companies have been proposed by FASB and are under consideration by the PCC and FASB.

The AICPA developed its decision-making tool with input from the National Association of State Boards of Accountancy. The tool, presented as a nonauthoritative aid whose use is not required, takes readers through a step-by-step process for choosing a framework.

The tool immediately advises use of GAAP financial statements for entities that:

• Face a reporting requirement that demands GAAP-based financial statements; or
• Operate in an industry that uses transactions requiring highly specialized accounting guidance that makes use of a non-GAAP framework insufficient for financial reporting.

For the remainder of privately held entities, the tool presents considerations to help decide whether GAAP, the FRF for SMEs, cash/modified cash basis, or tax basis is the most suitable accounting framework. Organizations also are advised to consult with their CPA firm and external stakeholders, where appropriate.

Before issuing the tool, the AICPA released illustrative financial statements and disclosures as an aid to implementing the FRF for SMEs that help distinguish between financial statements based on the new framework and GAAP-prepared statements. 

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