Accounting News

Tuesday, December 4, 2012
Accounting Standards for Small Business

The American Institute of CPAs is proposing an accounting framework for small and medium sized businesses. These are companies who are not public and don't need to pay the expense to be GAAP compliant. They are calling this the Financial Reporting Framework (FRF).

They have issued a draft proposal and are soliciting comments from certified accountants, small business owners, and users of financial statements. The comment period is open until February 2013. They are hoping to release a final framework later in the spring of 2013.

The goal of the FRF is to set a standard for smaller businesses. These companies are not required to use GAAP when preparing financial statements. They don't use GAAP to reduce the cost of preparing the statements. The new standard is supposed to make it easier to prepare but still provide the information required by users of financial statements. These includes companies offering credit to businesses and those in the mergers and acquisitions markets.

The FRF has a couple of differences over GAAP. It uses historical costs over fair value where reasonable. It  uses reporting of costs when they occur and revenue when it is invoiced. The plan for the FRF is to make is easier to reconcile the tax returns with the companies financial reports.

Another goal for the framework is to help business owners better understand their cash flow. This is more difficult for owners without a financial or accounting background. Since owners are a primary user of the financial statement and cash flow is so crucial to the health of a business this seem like a great objective.

Since these business are under no regulatory requirement the FRF will be voluntary. So the first step will be to sell the FRF to accountant who will then need to sell it to their clients. It is expected to be a process that takes a few years to gain general acceptance.

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