By Jason Bramwell
The National Association of State Boards of Accountancy (NASBA) and the American Institute of CPAs (AICPA) have put aside their differences regarding the non-US Generally Accepted Accounting Principles (GAAP) financial reporting framework that the AICPA introduced last month and have teamed on a decision-making tool that will help small businesses decide whether the framework is right for them.
According to a joint statement released by both organizations on July 15, the NASBA will provide input to the AICPA on the development of the decision-making tool for businesses interested in using the AICPA's Financial Reporting Framework for Small- and Medium-Sized Entities (FRF for SMEs).
"The AICPA and NASBA are committed to engaging in an effort to ensure that the FRF for SMEs, as a nonauthoritative framework, is not confused with GAAP and that entities that utilize GAAP or a non-GAAP solution do so in a suitable and transparent manner", the joint statement says.
Additionally, illustrative financial statements and disclosures will be developed to distinguish FRF for SMEs–based financial statements from US GAAP–prepared statements.
"CPAs who report on financial statements prepared in accordance with GAAP or a special-purpose framework, such as the FRF for SMEs, will be held to the highest standards of professional practice by US Boards of Accountancy", according to the joint statement.
The NASBA has been outspoken against the FRF for SMEs since it was first proposed by the AICPA in January. The FRF for SMEs provides a new accounting option for preparing streamlined, relevant financial statements for privately held, owner-managed businesses that are not required to use US GAAP, according to the AICPA.
The AICPA states that the framework complements the recent efforts made by the Financial Accounting Standards Board (FASB) and the Private Company Council (PCC) to modify US GAAP for private companies.
AICPA President and CEO Barry Melancon, CPA, CGMA, emphasized on June 10 that the FRF for SMEs is not US GAAP and it is not intended to become US GAAP. He stated it is another comprehensive basis of accounting with a framework around it for enhanced financial reporting.
The purpose of the FRF for SMEs is to help small businesses prepare financial statements that clearly and concisely report what a business owns, what it owes, and its cash flow, according to the AICPA. The framework, which draws on a blend of traditional accounting principals and accrual income tax methods of accounting, includes the following key approaches:
- Uses historical cost – steering away from complicated fair value measurements.
- Offers a degree of optionality – businesses can tailor the presentation of statements to their users.
- Includes targeted disclosure requirements.
- Reduces book-to-tax differences.
- Produces reliable financial statements that can be compiled, reviewed, or audited.
On June 13, less than a week after the AICPA introduced the financial reporting framework, the NASBA recommended to privately held businesses that they not use the FRF for SMEs because it goes against the efforts made by the FASB and the PCC to modify US GAAP.
The NASBA contended the AICPA created the FRF for SMEs as a special-purpose framework, or an other comprehensive basis of accounting, without appropriate due process, against an agreement made by the US Securities and Exchange Commission and the AICPA forty years ago to vest all standards-setting authority with the FASB, and without substantial support from stakeholders, including accounting regulators.
In the joint statement, the AICPA and the NASBA stated they have a shared belief that current US GAAP may not always meet the needs of small, private businesses and the users of their financial statements.
"The PCC, which was established as a result of the Blue-Ribbon Panel on Standard Setting for Private Companies created by NASBA, the AICPA, and the Financial Accounting Foundation (FAF), is currently developing an authoritative GAAP solution for private companies that we strongly support", the joint statement reads. "The PCC has made excellent progress to date, and both NASBA and the AICPA are committed to the PCC's eventual success in developing a GAAP-based financial reporting model for all private companies.
"As the PCC works to fulfill its mission to modify GAAP for private companies, the AICPA has developed the FRF for SMEs to provide private, owner-managed, Main Street businesses a non-GAAP accounting framework that is simple to apply and cost beneficial", the joint statement continues. "We believe that preparers and users of private company financial statements should responsibly assess the accounting approach to meet their current and future needs depending on individual company facts and circumstances."
In a recent Thomson Reuters survey of more than 200 accounting firms, 46 percent of CPAs say they are familiar with the FRF for SMEs. Additionally, 56 percent of respondents say they expect one or more of their clients to consider using the FRF for SMEs, 10 percent report they do not expect their clients to use the framework, and 34 percent were unsure.