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 FASBâ€™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.