Recent Steps Towards Little GAAP

As of recently, Little GAAP has not been established, but there has been several major steps in this direction.  The first major step to Little GAAP has been FRF for SMEs. FRF for SMEs, or otherwise known as “No GAAP”, is a third option for private companies (Merklin, 2014). One negative attribute about this framework is that falls under the other comprehensive bases of accounting instead of being a part of GAAP (Merklin, 2014). FRF for SMEs is a simplified reporting that focuses on clearly what a business assets, liabilities, and cash flow (Merklin, 2014).  FRF for SMEs is primarily principles-based with a focus on historical cost as its measurement basis (Merklin, 2014). This framework incorporates alternative accounting methods so business owners have the flexibility to choose which accounting methods are most suitable to their company’s facts and circumstances (Merklin, 2014). FRF for SMEs was intended to be a stable policy so there will be no need for continuously updating or amending this framework  (Merklin, 2014).

The second major step occurred while AICPA was releasing the FRF for SMEs, Private Company Council, PCC, issued three exposure drafts which would reduce the burden of financial reporting for private companies in regards to certain accounting transactions (Roth, 2013). Since PCC does not have authority to issue GAAP, their recommendations are sent to FASB in order to be rejected, further researched and reviewed, or approve the recommendation and issue a revision to GAAP (Roth, 2013). The three recommendations that PCC presented to FASB in August 2013 were simplified standards for accounting for identifiable intangible assets in a business combination, accounting for goodwill, and accounting for certain receive variable, pay-fixed interest rate swaps (Roth, 2013). The new principle for accounting Goodwill subsequent to business combination will also private companies to elect a straight-line basis for amortizing goodwill in addition to applying a simplified impairment model (Bannon, 2014). As for accounting for certain interest rate swaps, this will allow private companies to qualify certain interest rate swaps for hedge accounting more easily (Bannon, 2014). These recommendations will simplify reporting for private businesses that own real estate outside of the operating business (Newby, 2014). Recently, FASB voted to issue PCC’s initiatives for public exposure (Merklin, 2014). These initiatives are expected to be effective beginning after December 15, 2014 (Bannon, 2014).  The PCC will be under the process of finalizing other recommendations to FASB and plans to expect to submit these recommendations in the near future (Newby, 2014).

Another possible route towards Little GAAP is that SEC to implement International Financial Reporting Standards (IRFS) in the United States (Merklin, 2014).  IFRS has specific standards for small to medium sized companies, IFRS for SMEs. The likelihood of IRFS coming to the United States is very slim. The possibility of IRFS coming to the U.S. is very slim because this discussion has been going on for several years with no effort on merging U.S. GAAP and IRFS.  IFRS will not merge to U.S. GAAP because it would cause more confusion and complex for the company’s owners and financial reporters.

In the future, I expect that Little GAAP will be established in addition to having several options for private companies to implement if this type of improvement continues The only thing that I can predict that would prevent this advancement is FASB no longer on board with simplifying reporting standards for private companies.  Another thing that could possibly diminish the advancement of Little GAAP is that the public and financial reports will start losing interest similar to what happen to the IFRS merging with U.S. GAAP debate. My hope for the future is that Little GAAP will be shortly established in order to lift off the burden of financial reporting for private companies.

References

Bannon, M. (2014, February 6). Welcome Little GAAP. Retrieved from Fahrenheit Group: http://thefahrenheitgroup.com/finance-news/welcome-little-gaap/

Merklin, J. E. (2014). Big GAAP vs. Little GAAP vs. No GAAP. Retrieved from Bober Markey Fedorovich: http://www.bobermarkey.com/client_advisor/frf_for_smes_0713

Newby, J. (2014, June 24). No “BIG GAAP” “LITTLE GAAP” on the Horizon for Privately Held Companies. Retrieved from Redpath and Company: http://redpathcpas.com/2014/06/24/no-big-gaap-little-gaap-on-the-horizon-for-privately-held-companies/

Roth, E. A. (2013, October 25). Trends & dEvelopments – October 2013 – Auditing Standards – Is ‘Little GAAP’ Finally Here? Retrieved from EisnerAmper: http://www.eisneramper.com/Trends_and_Developments/GAAP-Financial-Accounting-1013.aspx

Blue-Ribbon Panel Kicks Off the Process Creating Little GAAP

On February 2009, the Financial Accounting Foundation, FAF, American Institute of Certified Public Accountants, AICPA, and the National Association of State Boards of Accountancy, NASBA, created the Blue-Ribbon Panel (Campbell, 2011).  The purpose of the Blue-Ribbon Panel was to explore the needs of private company financial statement users and make recommendation on how to improve the process for setting standards for private companies (Campbell, 2011). The Blue Ribbon Panel consisted of financial reporting constituencies, financial statement preparers, auditors, and regulators (Accounting Battle for the Ages – Big GAAP, Little GAAP, 2011).

The Blue-Ribbon Panel’s found several weaknesses in the current standard-setting process. The first weakness is that “current standard-setting process is flawed and has an insufficient understanding of the needs of users of private company financial statements and an insufficient weighing of the costs and benefits of GAAP for use in private company financial reporting” (Accounting Battle for the Ages – Big GAAP, Little GAAP, 2011).   Blue-Ribbon Panel’s believe that the current standards are lacking relevance to private companies such as variable interest entities, uncertain tax positions, fair value measurements, and goodwill impairment which I believe to be true (Accounting Battle for the Ages – Big GAAP, Little GAAP, 2011).  Besides talking within the panel, the Blue-Ribbon Panel also reached out to several preparers and users of private company financial statements. These individuals were concerned with “private company financial statements often lack relevance to users, standards have become increasingly complex, the pace of the standard-setting process has increased, costs often exceed benefits, there has been an increase in qualified opinions and the use of other comprehensive basis of accounting (OCBOA) where possible” which I also believe that these concerns need to be address (Accounting Battle for the Ages – Big GAAP, Little GAAP, 2011).

I personally believe that Blue-Ribbon Panel’s recommendations would be extremely helpful to private business if implemented. Their recommendations were that “U.S. GAAP should have exceptions and modifications for private companies and those exceptions and modifications should be determined by a separate private company accounting standards board” (Accounting Battle for the Ages – Big GAAP, Little GAAP, 2011). According to the Blue-Ribbon Panel, the private company standards-setting board would have the ultimate authority to approve the exceptions and modifications (Accounting Battle for the Ages – Big GAAP, Little GAAP, 2011).  Besides the recommendations, the Blue-Ribbon Panel’s members thought that the industry “should be allowed to dictate whether private entities chose to follow” the new private company’s standards determined by the panel or FASB GAAP (Accounting Battle for the Ages – Big GAAP, Little GAAP, 2011). I also believe that industry that the private company does business in should  have the ability to determine what standards companies must compile to since the industry would know what is useful than the standard setters.  In my opinion,  having a separate accounting standard board for private companies will make the process of monitoring FASB’s projects and giving feedback would become more efficient and effective.

The report issued by the Blue-Ribbon Panel has had a positive effect on the financial reporting for private companies. In my opinion, the most influential effect  is that the recommendations started a new phase of reviewing the “adequacy and effectiveness of the FASB’s efforts in setting standards for the private company and non-profit sectors in the United States” (Accounting Battle for the Ages – Big GAAP, Little GAAP, 2011).  To start off this new phase, the FAF established the Trustee Working Group in 2011 (Campbell, 2011). The Trustee Working Group is responsible for addressing the accounting standards for private entities in addition to non-for-profit entities (Campbell, 2011).  The AICPA President also mentioned that there has been several changes in place to make the standard setting process be more responsive to private companies by correcting the issues that the panel stated were insufficient (Accounting Battle for the Ages – Big GAAP, Little GAAP, 2011).

References

Accounting Battle for the Ages – Big GAAP, Little GAAP. (2011, April 6). Retrieved from Accounting Research Mangaer : http://tax.cchgroup.com/downloads/files/email/pfx/aasolutions-temp/CloserLook-BigLittleGAAP-Apr-2011.pdf

Campbell, B. (2011, September 20). Big GAAP VS Little GAP – Where are we at? Retrieved from CPA’s Calculating the Latest in Audit & Accounting News: http://www.hhcpa.com/blogs/audit-accounting/big-gaap-vs-little-gaap-where-are-we-at/