At Rea & Associates, we believe some elements of Generally Accepted Accounting Principles, or GAAP, create an excessive burden for closely held businesses and the accounting firms that serve them. Although GAAP principles work well for publicly-traded businesses, financial reporting requirements as a result of some of the principles take a great deal of time to prepare and result in additional accounting expenses for our clients – without providing any benefit to the businesses or those who use the financial information.
We recently submitted comments to the Financial Accounting Foundation’s Blue Ribbon Panel regarding the impact of GAAP on privately held companies. Below are some of the issues we discussed.
Users of financial statements prepared for privately held businesses – banks, bonding agents, insurance entities and donors, for example – don’t necessarily understand or care about these added requirements. Business managers and creditors use financial statements for planning purposes, while creditors or lenders want to know the actual assets, liabilities and cash flow of the business for credit or lending decisions. This is a very different use of financial information than a financial statement for a publicly traded company.
Some of the standards we consider most burdensome for closely-held businesses are standards that require very subjective judgments for measurement and reporting such as variable interest entities, accounting for uncertain tax positions and fair value measurements and the related disclosure requirements for these standards.
In our comments, we asked the panel to make such complex standards optional, and encouraged the panel to develop accounting standards that are based on the needs of end-users of financial statements in a privately held business. We also asked that the panel to include greater consideration regarding the impact new standards would have on privately held businesses. This would include consideration of the cost to implement a standard, whether in terms of internal resources or external costs, that privately held companies would experience.
Many other accounting firms with private business clients share our concerns about GAAP burdens faced by private businesses. Here’s hoping that our concerns are heard by the Financial Accounting Foundation and the Financial Accounting Standards Board.