Small firms get new accounting rules

Small and medium firms may have new, simpler rules for reporting finances in an effort to make accounting for them easier. While most of the business media covers large, publicly traded companies, this is a big deal for entrepreneurial firms and could amount in some much needed cost savings.

Here are some of the details from the Wall Street Journal:

Millions of U.S. small businesses will be able to use simplified, streamlined methods for measuring and presenting their financial results under a new accounting framework announced Monday.

The new guidelines for “small and medium-size entities” come from the American Institute of Certified Public Accountants, the nation’s main accounting trade group.

The guidelines are designed as an alternative to generally accepted accounting principles, or GAAP, the system large companies use in the U.S.

“It is a framework that is tailored for small business—a very relevant, simplified framework,” said Bob Durak, the AICPA’s director of private company financial reporting.

The New York Times added these details and pointed out a drawback of the new rules:

Some private companies have complained that preparing GAAP statements costs too much, with a considerable portion of the cost coming from rules that provided for disclosures that might be irrelevant. The companies say that because owners and lenders generally know one another, it is easy for them to arrange to get only the information they actually need, whether or not the rules require companies to provide it.

In the United States, unlike some European countries, there are no legally required accounting standards for most companies. The Securities and Exchange Commission requires that companies that sell securities in the public markets follow GAAP, but all others can use any form of accounting that the company and its creditors find acceptable. Many smaller companies just use tax accounting, because they must file tax returns like everyone else.

To win widespread acceptance, the institute framework would need support from two groups: accountants and bank lenders.

Any company that chooses to adopt the framework would face new headaches if it ever decided to go public. Then it would have to redo its financial statements for at least two years to conform to accepted accounting principles. “The framework is not intended for companies that are looking to go public,” Mr. Durak said.

The changes being proposed for a new GAAP for private companies might prove less of a problem. Because they are presented as specific changes from the normal rules, it might be easier to reverse them if a company needed to do so to sell securities in public markets.

It’s interesting to note that the new rules are not intended for firms that may go public. So the impact to the business media seems to be small. But it will be important for trade publications and those who work with middle market firms to understand the rules.

The New York Herald outlined the big pieces of the new guidelines:

Small businesses will use the FRF for SMEs^TM to prepare financial statements that clearly and concisely report what a business owns, what it owes and its cash flow. Lenders, insurers and other financial statement users will find this new accounting framework helps them clearly understand key measures of a business and its creditworthiness, including:

• Business profitability
• Cash available
• Assets to cover expenses
• Concise disclosures

The framework’s streamlined common-sense requirements are based on traditional and proven accounting methods to ensure consistent application. Specifically, the FRF for SMEs^TM:

• Uses historical cost – steering away from complicated fair value measurements
• Offers a degree of optionality – businesses can tailor the presentation of statements to their users
• Includes targeted disclosure requirements
• Reduces book-to-tax differences
• Produces reliable financial statements that can be compiled, reviewed or audited

What will be interesting to see is if some choose to research the outcome of the new rules. For instance, I would love to see if cost savings allow these companies to expand or if they have trouble getting bank loans because they don’t have GAAP financials. While those stories are years off, any time rules are changed, it’s a good idea to pay attention.