Bennett Thrasher 2013 Financial Reporting Standards and Requirements Update

The Private Company Council (PCC), established by the Financial Accounting Foundation (FAF) in May 2012, is working in conjunction with the Financial Accounting Standards Board (FASB) to determine whether and when to modify existing US Generally Accepted Accounting Principles (US GAAP) in order to simplify the process and reduce the cost of preparing private company financial statements and improve the relevance of the financial statements to users. Those efforts are now paying off.

On June 10, 2013, the FASB voted to endorse the first three alternatives within US GAAP. These alternative treatments pertain to the accounting for intangible assets acquired in a business combination, accounting for goodwill subsequent to a business combination and accounting for certain receive-variable, pay-fixed interest rate swaps.

In a separate but related project, the FASB met on June 6, 2013 to clarify and refine the definition of a public entity for financial reporting purposes. The Board decided that a business entity meeting any of the following criteria would be considered a public entity and therefore would not be eligible for the proposed alternative accounting treatments under US GAAP:

  • It is required to file or furnish financial statements with the Securities and Exchange Commission.
  • It is required to file or furnish financial statements with a regulatory agency in preparation for the sale of securities or for the purpose of issuing securities.
  • It has issued or is a conduit bond obligor for unrestricted securities that can be traded on an exchange or an over-the-counter market.
  • Its securities are unrestricted, and it is required to provide US GAAP financial statements to be made publicly available on a periodic basis pursuant to a legal or regulatory requirement.

In contrast to the efforts of the PCC and FASB to provide alternatives for private companies under US GAAP, the AICPA has released the “Financial Reporting Framework for Small- and Medium-Sized Entities” (FRF for SMEs), a special purpose accounting framework which is not based on US GAAP. This type of non-GAAP accounting framework is commonly referred to as an Other Comprehensive Basis of Accounting (OCBOA) and may only be used in situations where management is requiring either general use financial statements or external use financial statements that are not required to be prepared in accordance with US GAAP.

On June 10, 2013, the FAF issued a press release reiterating that there are significant differences in financial reporting between US GAAP and the AICPA's FRF for SMEs and that it is the responsibility of everyone with an interest in private company financial reporting to take measures to fully understand the differences between these two accounting frameworks before selecting the financial reporting methodology that is most appropriate for their circumstances. Financial statements prepared using the FRF for SMEs accounting framework should clearly state the specific differences between US GAAP and FRF for SMEs to ensure that non-GAAP financial statements are not mistaken for US GAAP. In addition, it is important for companies that may require US GAAP based financial statements in the future to understand the implications of preparing their financial statements on a basis of accounting other than US GAAP using FRF for SMEs.

For more information on the latest financial reporting standards and requirements, please contact Lindsey Sykes or call 770.396.2200.