It is high time that the accounting community devote attention to suitable accounting principles for small and medium-sized enterprises as these entities have had a very difficult time attempting to follow public accounting practices. Changes in this area require' significant scrutiny and serious review to gain a depth of understanding.
In June 2013, the American Institute of Certified Public Accountants (AICPA) released its optional accounting framework for small and medium-sized enterprises--Financial Reporting Framework for Small and Medium-Sized Entities. It was developed as a brand new set of self-contained principles by a task force of certified public accounting practitioners who work at such enterprises. It has not been approved or rejected by the AICPA or the Financial Accounting Standards Board (FASB).
The Financial Accounting Foundation (FAF), parent of FASB, is currently preparing its own set of principles for small and medium-sized entities, looking first to existing [U.S.] generally accepted accounting principles (GAAP) to determine which standards might be eliminated or changed.
In the United States, there is no mandatory set of accounting standards for private, non-stock-exchange listed companies, contrary to most other countries. The recently released AICPA framework could be used by these companies as a management technique and in pursuit of bank loans when the lenders seek more detailed financial information.
Applicable to a going concern, this set of principles seeks to provide a fair presentation of the financial position and operations of the entity, stressing the qualitative characteristics of objectivity, measurability, completeness and relevance.
This framework comprises 13 chapters and a glossary, amounting to 188 pages of definitions and requirements, where the overriding emphasis seems to be on flexibility and transparency. It should also be noted that this framework is not expected to be updated or otherwise frequently changed.
Typical small and medium-sized enterprises that could utilize this framework, according to the document, would exhibit the following attributes:
1 They do not have regulatory requirements for using GAAP.
2 The for-profit entities are not going public.
3 The owners are the managers, relying on the financial statements to assess its performance and cash flows.
4 The entities are not in specialized industries requiring special accounting guidance; nor do the entities engage in overly complex business transactions.
5 The entities do not have significant foreign operations.
6 The principal users of the financial statements have direct access to management and are likely to have significant interest in cash flows, liquidity, balance sheet strength and interest coverage.
7 The financial statements tend to support bank financing.
Framework's Differences and Similarities to Public Accounting
Despite what the document asserts, it looks like a compact version of GAAP with an emphasis on what is relevant to small and medium-sized entities that also includes a number of differences reflective of International Financial Reporting Standards (IFRS). Much like IFRS, the balance sheet is referred to as "a statement of financial position," and the income statement as "a statement of operations." In contrast to IFRS, though, emphasis is clearly placed on historical cost.
Most remarkably, and contrary to both IFRS and IFRS for Small- and Medium-Sized Entities (IFRS for SMEs) as well as U.S. GAAP, this framework does not call for deferred tax recognition, which should reduce accounting costs considerably. Nevertheless, an entity does have the option of using deferred tax accounts. There are no requirements for interim reporting, segment reporting or earnings per share as is true of IFRS for SMEs.
Further, there is no mention of other comprehensive income, accumulated other comprehensive income or total comprehensive income. Interestingly, there is a separate chapter on risks and uncertainties. In this respect, risk disclosures should...