The American Institute of CPAs released an exposure draft of the much-anticipated private company financial reporting framework on Nov. 1, 2012. As proposed, it is a self-contained special-purpose framework intended to be available for use in preparing financial statements for privately held smaller and medium-sized entities.
The framework proposed in the exposure draft, entitled Financial Reporting Framework for Small and Medium-Sized Entities, is a blend of traditional financial accounting methods and accrual income tax accounting methods. The guidance is less complicated and, as such, will be a less costly system of accounting and financial reporting by small and medium-sized entities when they are not required to have financial statements prepared using accounting principles generally accepted in the United States (U.S. GAAP).
The work of the AICPA in developing the framework should not be confused with the Financial Accounting Foundation establishment of the Private Company Council (PCC) to work with the Financial Accounting Standards Board (FASB). The council was established in an effort to focus on modifications that might need to be made to U.S. GAAP to take into account needs of stakeholders interested in private company financial reporting.
Unlike the work of the PCC with the FASB, the AICPA framework is a self-contained, straightforward, concise framework that can be used in the private company financial reporting arena when there is no need for financial statements to be prepared using U.S. GAAP.
The framework has been developed from the perspective of for-profit reporting entities needing to have reliable financial statements where internal or external users have direct access to management or owner-managers. And, it is developed so that it is available for use in every industry group and by both incorporated and unincorporated entities.
While the framework was not developed with the intent of having the guidance used by not-for-profit entities, nothing precludes those entities from using it.
Here are some of the key features in the framework that should be helpful in addressing stakeholder concerns:
- The guidance is built upon a foundation of reliable and comprehensive accounting principles.
- Historical cost is the primary measurement basis.
- Disclosures are reduced so that users are provided with information they need and unnecessary clutter is removed from disclosures.
- Familiar and traditional accounting methods are used.
- Fewer adjustments are needed to reconcile tax return information with financial reporting information when compared to circumstances in which financial statements are prepared using U.S. GAAP as the applicable financial reporting framework.
- The guidance is principles-based so it is usable across industries by both incorporated and unincorporated entities.
- The framework contains less complicated, leaner and more relevant financial reporting principles for small and medium-sized entities.
- The framework includes only financial statement issues that typically are encountered in the financial reporting of small and medium-sized entities.
The framework is intended to be stable and not have frequent changes. The initial plan is to assess the need for any modifications, based on stakeholder input, within three to four years after the framework is issued.
Financial statement preparers will find that, throughout the exposure draft, the measurement focus generally relates to historical cost versus fair value. They will notice that policy choices are available that could be helpful in having financial statements developed and prepared in a manner to enhance relevance to users of the financial statements.
Additionally, many of the concerns associated with private company financial reporting have been addressed. Some of the areas of particular interest to most stakeholders are discussed in these materials. However, all interested stakeholders are encouraged to read through the entirety of the framework in order to provide robust feedback in advance of the framework being finalized for use.
In addition to the framework itself, the AICPA plan is to have a companion document published simultaneously with the Financial Reporting Framework for Small and Medium-Sized Entities. That implementation guidance will include application examples, illustrative financial statements, a disclosure checklist and similar tools that should be helpful to financial statement preparers in complying with guidelines in the framework.
The finalized framework will be available for use immediately upon release by the AICPA. The expectation is that the final guidance will be issued at some point toward the end of the second quarter in 2013.