Accounting & Reporting Standards for Privately-Held Businesses – the FASB Needs to Step Aside….

| Audit and Accounting

By Mike Alerding     In 42 years of public accounting, I have fought the “Public vs Non-Public” battle of accounting and disclosure principles to no avail.  The FASB continually and consistently has stuck to its guns that “GAAP is GAAP” like not unlike the “Right is Right” concept.  However, regardless as to what those at the FASB believe, when it comes to reporting for closely-held businesses, Right is not always GAAP and certainly GAAP is not always RIGHT.

In early June 2013, the American Institute of Certified Public Accountants (AICPA) issued new guidelines for “Small and Medium Size Entities” (SMSE’s) to help fill the gap (no pun intended) between what the FASB requires and what SMSE’s actually need for reporting to their readers and users.  It appears that the AICPA, which represents CPA’s around the country, got tired of waiting on the FASB, which theoretically represents financial statement users, to come up with standards that were effective and efficient for privately-held businesses.  The FASB’s unwavering commitment to its “GAAP is GAAP” philosophy forced the AICPA into a corner and forced the CPA’s around the country to take a stand for privately-held businesses.

The FASB’s response to these new guidelines has been predictably rigid and consistent with its “GAAP is GAAP” philosophy.  An FASB spokesperson stated the obvious referring to the new standards as being separate from GAAP and that there were “significant and substantial differences” between the new guidelines and GAAP.  Might those “significant and substantial differences” simply be that the AICPA’s guidelines may actually work and are cost-effective and the yet-to-be-determined GAAP standards for SMSE’s won’t?  We may never know since the FASB moves at glacial speed in completing projects, fearing that something it does will be considered to be outside the accepted norm or somehow controversial.

So even with the new AICPA guidelines, the privately-held businesses in the U.S. may have a set of workable, reasonable, perhaps imperfect but effective standards, for reporting their financial condition, results of operations and cash flows.  The FASB may once again attempt to stop them from gaining wide acceptance by continuing to push its “GAAP is GAAP” philosophy.  The rhetoric coming out of the FASB continues to emphasize that the answer lies in modifying its precious GAAP to accommodate the SMES’s.  History tells us that the FASB will be so conservative about the modifications that the result of its work will be watered down and consolatory rather than robust and effective.

Although it may sound like I have a negative bias toward the FASB, I respect the members of the FASB and the work the FASB has done over the last four decades.  It has handled some very difficult issues with wisdom and foresight and has been responsive to emerging needs in most cases throughout its history.  With rare exception (its fair value concepts and its accounting for NFP entities to name a couple), I believe the FASB has established reasonable and workable standards and has developed a process allowing for conflicting opinions when exposing its proposed standards to the public.

However, like many paternalistic organizations that have been successful over a long period of time, its ability to change or to stay current with emerging needs of all of its constituents, the FASB occasionally gets lost in its superiority and stubbornness and – does or doesn’t do something – that needs to be done because the vast majority of its constituents want and/or need change.  New accounting and reporting standards for SMSE’s is one of those areas where the FASB needs to step aside and let the AICPA take the lead in developing new and effective standards that work and can become standard practice for thousands of privately-held businesses out there that need relief now.

Mike is a co-founder and Senior Director at Alerding CPA Group, an Indianapolis-based public accounting firm. Visit our website: www.alerdingcpagroup.com.

This post was written by:

Michael Alerding, CPA
Senior Director

Mike has over 40 years of experience in public accounting. He is a prior columnist for The Indianapolis Business Journal and serves on multiple boards throughout Indianapolis. He currently focuses his time on litigation support, business valuations, succession planning consulting and audit and accounting engagements.
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