In theory, U.S. Generally Accepted Accounting Principles (GAAP) should apply to businesses of all sizes. After all, a debit is a debit, and a credit a credit, no matter the size of the business. But, as many owners of privately held companies know, GAAP often doesn’t make sense for their situations.

Several recent developments may provide a solution. These initiatives offer a structure for providing the information needed by most users of private companies’ financial reports without requiring the level of detail mandated of public companies.

The problem with GAAP

The information that must be assembled and disclosed under GAAP tends to provide much more detail than is needed by those who review the financial statements of private companies. For example, information relating to uncertain tax positions, fair value measurements and goodwill impairment often isn’t relevant to the users of private companies’ financial statements.

The problem is that complying with these types of disclosure requirements can make preparing GAAP financial statements an arduous and expensive undertaking. And, because their statement users typically don’t find the extra details useful, following GAAP can feel like an exercise in futility for private companies.

Despite GAAP’s shortcomings, private companies that must provide financial statements to their lenders or investors can benefit from a recognized, reliable set of accounting standards. After all, using such a framework can lend credibility to the information presented.

New initiative

In May the Financial Accounting Foundation — the parent organization of the Financial Accounting Standards Board (FASB), the entity that oversees GAAP — announced the formation of the Private Company Council (PCC). The PCC will determine whether exceptions or modifications to GAAP are necessary to meet the needs of private companies that — perhaps because of a requirement by a lender or regulatory agency — have to report their financial results in GAAP.

Any PCC-proposed changes that are endorsed by a simple majority of FASB members will be available for public comment, redeliberated by the PCC and forwarded to FASB. If FASB endorses the changes, they’ll be incorporated into GAAP. If not, the FASB chair will provide a written explanation of the decision not to endorse and may suggest changes that could lead to FASB endorsement.

The PCC also will advise FASB on the appropriate treatment for private companies when it comes to items that are under active consideration on FASB’s technical agenda.

AICPA alternative

FASB isn’t the only organization addressing the financial reporting needs of private companies. Also in May, the American Institute of Certified Public Accountants (AICPA) announced it was developing a financial reporting framework called “other comprehensive basis of accounting,” or OCBOA. OCBOA statements would be less complex and expensive to prepare than those prepared under GAAP.

This framework will be geared to small to midsize companies that are privately held and in which the users of the financial reports (such as lenders or investors) have direct access to the company’s owners and managers and may base a financing decision on a range of factors, such as the availability of collateral. At the same time, information provided under OCBOA should help the executive team as it manages the business.

The OCBOA framework, which may be used by companies on a voluntary basis, is being developed by AICPA members with experience working with private companies. The organization expects to issue the OCBOA framework in the first half of 2013.

The key to success

Providing timely, accurate and relevant financial information to management, lenders and investors is one key to the success of any business. These newer options can help private companies prepare quality financial statements using recognized accounting standards that are tailored to their needs. Your CPA is ready to help advise you on developments in these financial reporting standards. •

Global standards

Executives of private companies should be aware of International Financial Reporting Standards (IFRS) for small and midsize enterprises. These standards are less complex than the IFRS used by larger companies. IFRS, which has been adopted in roughly 80 countries but not yet by the United States, may be particularly relevant to businesses that operate in multiple countries or that have obtained financing from investors in different parts of the world.

Currently the Financial Accounting Standards Board, which oversees U.S. Generally Accepted Accounting Principles, and the International Accounting Standards Board, which oversees IFRS, have been working toward “convergence” of GAAP and IFRS. In addition, the Securities and Exchange Commission (SEC) is in the process of determining whether or to what extent IFRS will become authoritative for U.S. public companies.