Private Company Reporting is Changing

Reporting for U.S. non-public small to medium size businesses is in transition. Many of these companies are owned by one person or just a few owners. A family owned and operated company would be an example of this. The American Institute of Certified Public Accountants (AICPA) has been addressing the reporting for these companies in an attempt to improve the usefulness of reporting. They have released a framework for this. Basically this would represent a new reporting option for non-GAAP (Generally Accepted Accounting Principles) financial statements. This guidance from the AICPA is known as the Financial Reporting Framework for Small-and Medium-Sized Entities ( FRF for SMEs).

What Has Been

Typically these businesses have used what is known in the accounting profession as OCBOA (Other Comprehensive Basis of Accounting) for preparing financial statements. Essentially this means that the financial statements do not comply with GAAP. Frequently the method used is tax basis. Tax basis financial statements mean exactly what it sounds like; the statements basically agree to what is reported on income tax returns. Other methods of reporting include cash basis, modified cash-basis, and statutory basis. Statutory basis statements comply with rules of a governing body for a particular industry. There is really no need to get into a detailed discussion of how each of these works for this article.

Advantages and Disadvantages to OCBOA

Cash basis, modified cash-basis, and tax-basis financial statements are generally easier for business owners and non-financial people to understand, particular since they provide a very tangible way to tie activity like collections and disbursements directly to the statements. In addition they are generally easier for accountants to prepare.

A big disadvantage is that they don’t necessarily reflect the reality of what has occurred. For example, on a cash basis a company may have paid a number of expenses in one month for a sale that is not collected until a future month. This means that reports on a cash basis will not align revenues with associated expenses, which can be misleading.

What the New Option Means

While OCBOA has served businesses well, there has been a wide range of non-GAAP reporting methods which are not always applied consistently from company to company. Thus, the new reporting method is intended to create consistency by using documented guidance for statement preparation. This consistency will make financial statements prepared on a non-GAAP basis more consistent, useful and meaningful to users. The FRF for SMEs provides the tools necessary for understanding and implementing this. Additionally, this tool kit is free to download. Simply type FRF for SMEs as an internet search and you can get access to it.

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