The 28 million plus small and mid-sized private companies that serve as a major growth engine for our economy may soon benefit from a simpler set of accounting reporting rules.
The simplified accounting framework
The new guidance for small and medium sized entities was developed by the American Institute of Certified Public Accountants or the AICPA. The rules serve as an alternative to GAAP reporting, which companies already follow if they have plans to go public or their bank lender requires it. However, generally speaking most small businesses utilize tax accounting for their reporting process as there isn’t often a need to report on GAAP.
The simplified accounting framework
The details are still in the proposal phase, but there are some significant differences to GAAP reporting. For instance, the new framework values assets at their historical cost as opposed to current fair market value method. In addition, the proposal reduces the book-to-tax differences that are common headaches for controllers and bookkeepers. Lastly, the framework allows the small business many different options for presenting the financial statements, which is in stark contrast to GAAP reporting guidelines. Essentially, this method is more focused on cash flow and profitability disclosures as that is often a key concern of bank lenders and insurance providers.
How does this impact your small business?
As of now there is no impact since the framework is yet to be approved and adopted. However, all signs indicate that it will pass mustard with the accounting regulatory bodies. We believe this is a step forward for the industry as the framework is more tailored to the small business and users of those financial statements. It should be noted that even if it does become mainstream, it will still be optional for a small private business. This may be important for a company with future plans to go public as they will have to eventually transition to GAAP reporting.
More tax questions? Browse answers or find a small business accountant online.
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