Change in small business statements presents full financial picture
Certified public accountants follow a rigid set of guidelines for preparing businesses’ financial statements. When we create these statements, footnotes are mandatory, and our rules for small businesses mirror the rules that apply to large publicly held companies. Unfortunately, owners or managers of these small and medium-sized businesses sometimes complain that these financial statements include meaningless details and lose touch with the significant highlights of their businesses.
Our industry has been working on the codification of generally accepted accounting principles (GAAP), with new statements being issued on a regular basis. Because the needs of the readers of the financial statements are of utmost importance, we continue to improve the standards so that meaningful statements present a full financial picture of the company being reported on.
In recent years, we have been concerned about whether some of the more complex GAAP standards are relevant to those small and medium-sized entities, whether they are necessary, and whether the typical user of the statements can understand them. As a result, a new framework for reporting has been issued for these small and medium-sized entities.
What does this mean to the typical company? As CPAs, our goal is to simplify the standards sufficiently to make the financial statements meaningful to management, financial institutions, investors, and other readers of the financial statements. In our firm, we prepare a lot of financial statements for owners of small businesses, who then struggle to understand what they are reading. Many believe that a tax basis or modified cash basis better meets their needs. Our standard-setting body has listened to small business owners’ requests for more understandable statements and has come out with a new financial reporting framework that we hope is more meaningful.
What are some of the things to watch for under this new Financial Reporting Framework for Small- and Medium-Sized Entities (FRF for SMEs)?
The FRF for SMEs allows certain items to be reported differently — variable interest entities, amortization of goodwill, historical cost basis instead of fair value measurements, potentially fewer book-to-tax adjustments, and more limited impairment testing.
The entire framework is more clear and concise and is discussed in approximately 200 pages. The goal is to provide more meaningful financial statements with easier-to-understand guidelines for accounting principles. If you would like to read these new guidelines, take a look at the following link on the American Institute of CPAs (AICPA) webpage: http://www.aicpa.org/InterestAreas/FRC/AccountingFinancialReporting/PCFR/Pages/FRF-SMEs-MediumFirms.aspx
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As CPAs, our goal is to provide quality financial statements. We hope that these new reporting standards will allow us to make financial statements that are more meaningful and easier to understand. The AICPA is working to make these standards understandable so that they can be consistently applied. Our partnership will result in financial information that more clearly represents each company’s financial position. It allows the cash and tax basis to be used in the presentation as well as regulatory and contractual bases of accounting. It allows for standard modifications from GAAP that have been widely accepted.
Change is constant in the accounting industry. Some changes are more welcome than others. Because it does a great job of improving our ability to understand financial statements, this is one change we’re happy to see.
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