AICPA Exposure Draft on Financial Reporting Framework for Smaller Private Entities
Author: Waylon Wood
On November 1, 2012, the American Institute of Certified Public Accountants (AICPA) released an exposure draft of a financial reporting framework for privately owned, for-profit, small to medium-sized enterprises. This framework is designed to be less complicated and less costly than U.S. generally accepted accounting principles (GAAP) and draws upon a blend of traditional methods of accounting and accrual income tax accounting. The project is the AICPA’s response to input from stakeholders that the marketplace needs a simpler, more cost-efficient accounting framework for small and medium-sized privately owned businesses that still provides reliable and relevant information for lenders, shareholders and other users of the entities’ financial statements.
The Financial Accounting Foundation (FAF) has called the AICPA’s development of this optional framework “important and complementary” to the FAF-established Private Company Council’s (PCC) deliberations on potential modifications to GAAP for the private company environment. The key difference between the PCC and AICPA initiatives: The PCC focuses on potential modifications to GAAP, while the AICPA framework is a non-GAAP financial reporting solution. A key determinant of the AICPA solution’s success will be the willingness of financial statement users, such as lenders, investors and bonding companies, to accept the proposed framework in place of GAAP.
Here are some significant features of the AICPA framework:
- There's no definition of what constitutes a small to medium-sized entity; the AICPA says the framework is being developed for owner-managed, for-profit entities where financial statement users have direct access to the owner-manager and GAAP financial statements are not required.
- Historical cost is the primary measurement basis.
- There are reduced disclosure requirements.
- The framework is principles-based and usable across industries by incorporated and unincorporated entities.
- There are less complicated and more relevant financial reporting principles for small to medium-sized entities. For example, the framework will not be as complex as GAAP in accounting for derivatives, hedging activities or stock compensation.
The AICPA is presenting a complimentary one-hour webinar on Friday, November 16, 2012, to provide more information. The comment period for the exposure draft ends on January 30, 2013, with the final framework expected to be issued in the first half of 2013. For additional information, contact your BKD advisor.