By Jason Bramwell
Stating that it would "significantly weaken the financial reporting of private companies", the National Association of State Boards of Accountancy (NASBA) is recommending to privately held businesses that they not use the Financial Reporting Framework for Small- and Medium-Sized Entities (FRF for SMEs) introduced by the American Institute of CPAs (AICPA) on June 10.
The FRF for SMEs provides a new accounting option for preparing streamlined, relevant financial statements for private companies that are not required to use US Generally Accepted Accounting Principles (US GAAP).
AICPA President and CEO Barry Melancon, CPA, CGMA, emphasized on June 10 that the FRF for SMEs is not US GAAP and is not intended to become US GAAP. He added that it is another comprehensive basis of accounting with a framework around it for enhanced financial reporting.
On June 13, NASBA reaffirmed its support of the efforts being made by the Financial Accounting Standards Board (FASB) and the Private Company Council (PCC) to modify US GAAP to meet the financial reporting needs of private companies.
"At a time when accountability and transparency of those in authority is scrutinized, it is troubling that a nonauthoritative proposal to significantly weaken the financial reporting of private companies and public protection is even being suggested", NASBA Chairman of the Board Gaylen Hansen, CPA, said in a written statement.
According to NASBA, the national organization for the fifty-five US Boards of Accountancy, the US Securities and Exchange Commission, and the AICPA, agreed forty years ago that the FASB would be the single, duty-authorized body to promulgate accounting standards.
The Financial Accounting Foundation (FAF), the parent organization of the FASB, formed the PCC in 2012 as a result of deliberations of the Blue-Ribbon Panel on Standard Setting for Private Companies, a group sponsored jointly by the AICPA, the FAF, and NASBA. The PCC works hand-in-hand with the FASB to determine whether and when to modify US GAAP for private companies.
NASBA contends that the AICPA created the FRF for SMEs as an other comprehensive basis of accounting (OCBOA), or special-purpose framework, without appropriate due process, against the agreement to vest all standard-setting authority with the FASB, and without substantial support from stakeholders, including accounting regulators.
When the AICPA released its proposed FRF for SMEs in January, NASBA requested the AICPA either table or withdraw the proposal in order to allow the PCC adequate opportunity to develop standards uniquely applicable to private companies that are authoritative and part of US GAAP.
NASBA believes the FRF for SMEs has three glaring deficiencies:
- It represents nonauthoritative guidance and, therefore, will be very difficult to regulate or enforce.
- The scope "small and medium-sized entities" is undefined; as such, any private company, regardless of size or financial backing, could potentially adopt the FRF for SMEs.
- It allows the use of US GAAP financial statement titles, yet does not require disclosure of differences with US GAAP, which will cause confusion and invite fraud and abuse.
"The state boards' responsibility to ensure quality service from the CPAs they license makes any potential weakening of the standards of practice a matter of great concern to board members across the country", NASBA President Ken Bishop said in a written statement. "We will continue to assist the state boards in fulfilling their public protection role by only backing standards that come from authoritative sources."
In April, the PCC and the FASB developed a private company decision-making framework that is intended to act as a guide for both organizations in determining whether and in what circumstances to provide alternative recognition, measurement, disclosure, display effective date, or transition guidance for private companies reporting under US GAAP. The public comment period on the proposed FASB and PCC decision-making framework ends June 21.
Also, on June 10, the FASB endorsed three accounting proposals from the PCC in the hopes of addressing concerns raised by stakeholders about the complexity of certain aspects of US GAAP for privately held companies.
The three accounting proposals that the FASB approved involve intangible assets acquired in business combinations, goodwill, and certain types of interest rate swaps.
AICPA Issues Response
While the AICPA said it shares with NASBA a commitment to serving the public interest, the use of an OCBOA has long played an important and vital role in fulfilling the financial information needs of small businesses throughout the country, according to an AICPA statement in response to NASBA June 13.
"Thousands of smaller enterprises – from attorneys, to doctors, to small business owners on Main Street – use OCBOA-based financial statements to run their practices and businesses", the AICPA stated. "OCBOA-based financial statements, which include the cash basis and income tax basis of accounting, are frequently used by Main Street and users of those entities' financial statements."
The AICPA said it carefully developed the FRF for SMEs by working with a group of experts from the CPA profession that followed due process, including exposure of the proposed framework for public comment.
"The AICPA promulgates robust and effective professional audit, compilation, and review standards that govern how a CPA reports on OCBOA-based financial statements", the AICPA stated. "These standards have long been recognized by state boards of accountancy. As always, the AICPA stands ready to work with other organizations and state boards to give priority to those areas where public reliance on CPA skills is most significant."
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.
NASBA's Hansen said concerned boards of accountancy will be provided information and guidance to address the use of nonauthoritative OCBOAs issued by private-sector organizations. This may include communicating to all CPAs and CPA firms that the use of the FRF for SMEs does not have the support of the boards, nor NASBA, and that they should consider the risks of using or recommending the use of the AICPA framework or any other nonauthoritative options to clients or employers.
NASBA is also developing recommended rule language prohibiting the use of nonauthoritative standards unless it is acceptable to boards of accountancy. Further, a study group has been appointed to analyze the standard-setting structure and processes for accounting, auditing, and professional ethics for services provided to private entities. The study group will include state board regulators from around the country.