Back in March I wrote
about the possible changes on the horizon regarding revenue recognition in
the construction industry. These
proposed changes would alter how we report on construction
company operations and consequently would require a significant retraining of all those who
prepare and use those statements.
There has been an effort put forth by the American
Institute of Certified Public Accountants (AICPA) wherein they have created a
model for financial reporting for small and medium-sized businesses. This model, published in a report entitled “Financial
Reporting Framework for Small and Medium Sized Entities" (abbreviated as FRF for
SME), provides a pathway enabling qualifying entities to report via a non-GAAP "Other Comprehensive Basis of Accounting" (OCBOA). By choosing this pathway, any burdensome changes
in generally accepted accounting principles (GAAP) would not necessarily affect
a company reporting under this FRF –SME.
This would enable a more cost effective and clearer methodology under which to
report the results of operations and avoid any unnecessary complexities brought
forth by an ever changing GAAP model while providing a clear, concise, relevant and
useful report. The costs saved would of
course be primarily outside professional fees, but also internal cost savings
as interim internal financial statements would also be reported under the FRF –
SME model to outside users. Beyond the
cost savings, any confusion created in the market by some of the proposed
changes in GAAP would be avoided.
The National Association of State Boards of Accountancy
(NASBA) and the AICPA have now joined together in support of this new framework. On July 15, 2013, the two organizations
issued a joint statement indicating that NASBA will assist in the development
of a decision making tool for businesses to help them decide if this reporting
framework is right for them. I suspect
many businesses in the market we serve here in Southern California would be
good candidates as they are privately owned and operated.
One of the greatest challenges facing those interested
in adopting this reporting methodology is acceptance by the market – the users
of these financial statements. Many
creditors require financial statements to be presented in accordance with GAAP. These very same users might very well find
the FRF – SME model more useful, concise and relevant to their needs vs. GAAP
as it is proposed to change. Some of the proposed
changes to GAAP, besides the revenue recognition change discussed in my March
posting, include accounting for leases.
The simple summary here is that essentially all leases will be
capitalized. Rent expense will be a
thing of the past and the reader will see amortization of the right to lease
assets along with interest expense in its place. Banks, bond companies and others who use
financial statements need to gain an understanding of the changes in GAAP
coming down the road. They need to
assess how those changes will affect the reporting for the businesses they work with and whether those
changes to the reporting are useful to them as creditors and users of those statements. Given recent developments with the AICPA and
now NASBA, it appears there are viable options to consider.
If
the banks and bond companies could begin re-writing their credit documents
such that the financial reporting/records requirement reads “financial statements
to be provided in accordance with current accounting pronouncements” versus “…maintain
its books and records in accordance with GAAP” then this FRF – SME framework could
be an attractive option. The markets
need to take notice of these proposed changes to GAAP now so that any
unintended consequences can be avoided and small to medium-sized businesses
will not be burdened with the reporting requirements that are generally meant
for much larger businesses. This will
help everyone involved including the users of the statements and the business
owners.
