Over the past few years, generally accepted accounting principles have become increasingly more complex. Even today, several difficult accounting announcements are being made with more coming later down the road.
Big organizations can manage this burden, as they typically have large and sophisticated accounting departments. Smaller companies, on the other hand, are unlikely to be in a position to manage this level of complexity.
If your small or medium-sized business has trouble producing reliable financial statements, don’t worry, there is hope! The AICPA recognized the need for simplification of accounting principles for smaller companies, resulting in an optional and widely accepted framework.
Now, you’re probably thinking, can MY company use this optional framework?!
Sure, you can head over to the AICPA’s website and read the 130 pages of cumbersome details, or you can read on as we discuss this optional framework in a quick and easy to understand way.
The Complexity in Accounting (And What’s on the Horizon)
Generally accepted accounting principles (GAAP) have evolved as a result of many crises over the years.
From its inception through 1986, the Financial Accounting Standards Board (FASB) issued 91 pronouncements. Since that time, the FASB has issued more than 251 more, with many of them being extremely complicated. These include accounting for derivatives, business combinations, stock-based compensation, variable interest entities, and fair value measurements.
As of today, there are two significant pronouncements pending adoption.
- Revenue Recognition (2019) – Completely new view on how revenue is recognized.
- Leases (2021) – Will require substantially all leases to be recorded on the company’s financial statements.
Does Your Small Business Struggle with Accounting? This Solution Was Made for You
Many small and mid-sized businesses struggle with their accounting. Some focus most of their resources on growth, and therefore have smaller or sometimes no accounting departments at all. When smaller companies do have a person responsible for accounting, they are likely focused on day-to-day transactions rather than learning the changes to GAAP. However, just like every other company, they still need reliable, timely, and accurate financial reporting to manage and grow their business.
Sound familiar? If so, this optional framework will likely be for you.
The AICPA recognized the need for simplification of accounting principles for small and medium-sized entities. The result of their project was:
- A framework that enables America’s small business community to provide tailored financial reporting.
- A framework with streamlined, common-sense requirements based on traditional and proven accounting methods.
- A framework to provide robust, meaningful financial reports to business owners, lenders, insurers, and others without needless complexity.
Can My Company Use This Framework?
Here’s a quick overview of certain characteristics of typical entities that may utilize this optional framework.
- The company does not have regulatory reporting requirements that require it to use GAAP-based financial statements.
- A majority of the owners and management of the entity have no intention of going public.
- The entity is for-profit.
- Closely-held and managed business.
- Owners and management rely on a set of financial statements.
- The company does not operate in an environment that relies on highly specialized accounting guidance.
- Entity’s transactions are not overly complex.
- Key users of the business’s financial statements have direct access to the business’s management.
- Users of the financial statements may have a greater interest in cash flows, liquidity, financial position strength, and interest coverage.
- Banking relationships do not base lending decisions solely on financial statements.
If this sounds like you, you’re in luck! You should be able to take advantage of the simplification of this framework.
In a nutshell, this framework will enable your accounting function to run lean, generally result in lower professional service fees, and allow your small business to generate more useful financial information for all of its stakeholders.
Regarding the next steps, you should first evaluate whether this solution is right for your business. We can help. Our Director of Assurance Services, David Long, knows the ins and outs of these cumbersome principles and would love to walk you through the fine details to help you understand if this option is right for you.
As accounting continues to get more complex, we are right here, ready to break it down for you in a simple way. If you’d like to talk with us further about this important topic, please reach out to us today!
We are here to make the complex simple.