Should it be 'big GAAP' or 'little GAAP' for private companies?

• Author: Thrower, Andy
• Position: Financial reporting - Generally Accepted Accounting Principles

The following document was written in December 2009 by Andy Thrower, a partner at Naviscent Group LLC in Greenville, S.C., to inform members of FEI's Committee on Private Companies-Standards (CPC-S) of his views on the current state of accounting standards for private companies. This represents his personal views and not the views of FEI or CPC-S. Thrower serves on CPC-S and is the former committee chair.

Before clarifying why I am harping on a conceptual framework solution for private company constituents, I want to first elaborate a little on the view expressed by many private company constituents that if we could just roll GAAP back to the way it used to be, then we could keep that base set of standards for private company financial reporting. This latter view is expressed in a number of ways by private company constituents.

For example, some--including me--have stated (not totally tongue in cheek) that if we could eliminate all Financial Accounting Standards Board standards numbered above 100, we could solve a lot of our problems. This desired rollback of recent changes to basic GAAP was stated in another way at the Small Business Advisory Committee meeting by a fellow SBAC member. It was picked up in the BNA Reporter as follows:

"I don't think two sets of standards, 'big GAAP/little GAAP,' is the answer. Instead, I'd propose additional disclosure requirements for public companies to satisfy that small group of analysts and investors that want that and leave GAAP alone. GAAP should be GAAP; if you need additional information give it in schedules, in footnotes, but don't put undue cost out to 95, 98 percent of companies in the U.S. that are going to get zero benefit out of it."

So we private company constituents have made the argument that GAAP be put back to its normative state and then GAAP will be okay for private companies. Then FASB can just add the requested additional disclosures only for public company users. That way we can also keep a single standard-setting body.

My alternative conceptual framework approach is driven by my belief that the above rollback approach cannot work. I am old enough to have been educated in the earlier GAAP; i.e., a GAAP that focused, among other things, on measuring periodic income using the matching principle by allocating past incurred historical costs to current and future reporting periods.

There was a basis for how and why accountants did this. In other words, there was a conceptual framework...