FASB and AICPA seek small, private company input

The Financial Accounting Standards Board and the American Institute of CPAs have announced a joint project whose aim is to seek “constituent feedback on proposed enhance­ments to the FASB’s standard-setting proce­dures that would determine whether the Board should consider differ­ences in accounting standards for private companies.”

This is the classic conundrum commonly known to those in the biz as “big GAAP little GAAP.” (Link via Jack Ciesielski’s AAO Weblog.)

What this refers to is GAAP for “big”, public companies and “little”, private companies. It’s about striking a balance between the cost of complying with accounting standards for small companies with its relative benefit to financial statement users.

In Canada, the profession has responded to the issue with something called “differ­ential reporting”, which is a set of options that non-publicly accountable entities can choose to make their financial reporting cheaper, without sacri­ficing quality.

The most common options that I see in my work have to do with accounting for subsidiaries and other significantly-influenced invest­ments, and income taxes. Ordinarily controlled entities are required to be consol­i­dated in the financial state­ments with the parent company, but under differ­ential reporting you can use easier methods such as the equity or cost method. They don’t provide the same level of disclosure or quality of infor­mation, but in smaller companies this isn’t the end of the world.

For income taxes, the taxes payable method is an option that can be used instead of the future income taxes method, allowing a company to forgo measuring their future income taxes, which are taxes that are likely to be assessed in future periods and arise from timing differ­ences between financial accounting and tax laws.

In order to use differ­ential reporting options, all the share­holders must agree to use it. As you can imagine, it is easiest and used most often in companies with owner-managers or only a handful of share­holders. It is useful because these types of share­holders are privy to infor­mation in the companies that ordinary share­holders in public companies simply aren’t, by virtue of their increased involvement in the daily operations.

2 thoughts on “FASB and AICPA seek small, private company input”

  1. Our instructor this morning — the CFL guy, I think you had him later? — mentioned politi­cians when talking about amending the accounting rules. There was a great line he attributed to Sheila Copps being really upset about “corpo­ra­tions deferring taxes.” She would collect all those deferred taxes right away.

    Heh.

    Not really on-topic, but funny anyway — did he share that with you guys?

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