Big GAAP vs. Little GAAP has been a hot topic in recent years. (Okay, “hot” topic may be a stretch…) The question of the hour is: Why should a privately held company with close relationships to owners, bankers, insurers and other financial statement users need to comply with the same complex rules and extensive disclosure requirements that a publicly traded company is held to?
Small- and medium-sized entities (SMEs) pervade the business world and form the backbone of the U.S. economy. There are an estimated 20 million SMEs in the United States across every industry and offering more goods and services than the mind can comprehend. They’re owner-managed entities – companies in which the people who own a controlling ownership interest in the entity are substantially the same set of people who run the company. Owner-managed businesses represent the majority of all businesses in the United States.
All financial statements are prepared in accordance with a financial reporting framework (FRF), which is a set of criteria used to determine measurement, recognition, presentation and disclosure of all material items appearing in the financial statements.
The FRF for SMEs™ accounting framework delivers financial statements that provide useful, relevant information to owners and stakeholders of private companies in a consistent, simplified, cost-effective way. The framework is a new accounting option for preparing streamlined, relevant financial statements for privately held owner-managed businesses that are not required to use GAAP. This framework will give small-business owners and users of their financial statements, such as banks and insurers, robust yet relevant financial information to make informed business or credit decisions. It also allows options, so financial statements can be tailored to users’ needs.
The document provides efficient, meaningful financial statements without needless complexity or cost. It uses historical cost as its measurement basis and steers away from complicated fair value measurements. It does not require complicated accounting for derivatives, hedging activities or stock compensation. Also, there is no concept of comprehensive income in the framework. The disclosure requirements are targeted, providing users of financial statements with the relevant information they need while recognizing that those users can obtain additional information from management if they desire.
This framework is intended for owner-managers who rely on a set of financial statements to confirm their assessments of performance and of what they own and what they owe, and to understand their cash flows. Often, their financial statements support applications for bank financing, when the banker does not base a lending decision solely on the financial statements, but also on available collateral or other evaluation mechanisms not related to the financial statements.
The advantage over other special purpose frameworks such as cash basis, modified cash basis, tax basis or regulatory basis that lack definitive requirements, is that it has undergone public exposure and professional scrutiny and contains explicit and comprehensive accounting principles. These features result in a reliable and consistently applied financial framework that could appeal to lenders.
If you consider yourself an owner-manager, and would like to learn more about the FRF for SMEs accounting framework, contact Rea & Associates. Our team of Ohio accounting professionals will help you decode and understand your company’s financial statements, and show you how you can begin following the FRF for SMEs accounting framework.