Differential problems & possibilities accounting: the concept of big and little GAAP has been discussed for more than 20 years. Now, on the brink of international convergence, many argue its time has finally come.

• Author: Cheney, Glenn
• Position: Accounting

For over 20 years there has been some disgruntled rumbling in the trenches of the accounting profession. As the Financial Accounting Standards Board (FASB) issues ever-more complex and arcane standards, financial executives of nonpublic companies have been groaning under the weight of onerous accounting requirements that often just don't seem to apply for them.

The thing they groan most is, "Why?" Why, they want to know, should Mom-n-Pop's Coffee Shop have to meet the same generally accepted accounting principles (GAAP) as giant General Motors Corp.? All Mom-n-Pop want is a bank loan for a new grill, while GM needs to justify several billion dollars in stock market investments.

From such questions came the concept of Big GAAP-Little GAAP--a system that would require big companies to meet one set of standards while little companies meet another. The idea kicked around in the 1980s and died out; it was revived in the 1990s, only to fizzle again.

Here in 2004, it's back--with its now politically correct term: "differential accounting." The division isn't between big and little companies, but rather between public and nonpublic companies.

Bill Balhoff, CPA, a partner with Postlethwaite & Netterville and an accounting activist who has held positions on the American Institute of CPAs' governing council and FASB's advisory council, and whose voice has been heard at Congressional hearings, believes the time for differential accounting has come.

"Over the years, I've defended the concept of a single set of accounting rules for all companies, public and private," Balhoff says. "But over the past year, decisions at FASB, the creation of the Public Company Accounting Oversight Board (PCAOB) and the drift of the International Accounting Standards Board (IASB) have led me to the conclusion that GAAP for public companies is less than ideal for private companies, sometimes even less than tolerable."

Balhoff points out that half of America's economic output is generated by millions of nonpublic companies, yet FASB writes standards primarily for the complex finances of about 15,000 public companies, establishing the GAAP that the SEC requires for listing on U.S. stock exchanges.

The Sarbanes-Oxley Act may also worsen the situation for privately held companies. The Act mandates that public companies provide funding for FASB. Formerly, funding came from a variety of sources, including accounting firms, investment companies, trade associations and nonpublic...