Big GAAP vs. Little GAAP

Recent issues impacting the question of standards for large publicly traded companies versus smaller nonpublic entities.

April 19, 2010
Sponsored by AuditWatch

The debate about whether we should have two sets of Generally Accepted Accounting Principles (GAAP) seems like it has been going on forever. The issue is whether we should have one set of standards for large publicly traded companies and one set for smaller nonpublic entities. Numerous committees, individuals and groups have debated the issue for years but always ended in a stalemate; that is up until now. Two events have recently occurred that may be the tipping point for settling this age-old question.
IASB Issues IFRS for SMEs
The International Accounting Standards Board (IASB) has done what the Financial Accounting Standards Board (FASB) has been unable to do; issue GAAP requirements for smaller entities. The new International Financial Reporting Standards for Small- and Medium Sized Entities (IFRS for SMEs) was issued in July 2009 and is significantly smaller and less complex than the International Financial Reporting Standards (IFRS) or U.S. GAAP. For example, U.S. GAAP standards consist of approximately 20,000 pages. The IFRS are composed of approximately 2,500 pages of guidance and IFRS for SMEs is only about 250 pages. The IASB recognized the fact that small nonpublic companies usually don’t need as extensive of disclosures and such stringent reporting requirements as larger publicly traded companies. Small private companies reporting under the IFRS can now choose to follow the standards that make the most sense for their particular size of entity.

PCFRC Favors Separate GAAP for Private Companies
The Private Company Financial Reporting Committee (PCFRC), co-sponsored by the AICPA and the FASB, has officially made its opinion known to the Financial Accounting Foundation (FAF) and has recommended that the FAF address the issue of private company accounting in the context of the FASBs mission. The PCFRC took it one step further, stating its preference is for a separate, stand-alone set of accounting standards for private companies in the U.S.

The PCFRC letter was sent to the chair of the FAF and cited a number of recent events and trends that have increased interest in the issue including:

  • The recent issuance by the IASB of IFRS for SMEs.
  • Other countries efforts to address private company GAAP.
  • A preference for different standards for private companies noted in recent surveys of financial professionals.
  • The increase in complex accounting standards, which are expensive to implement and provide limited usefulness to users of private company financial statements.

Where Do We Go From Here?

So now that we have an influential group recommending a smaller, less complex set of GAAP standards for nonpublic companies what can we expect next?

Creating a less complex set of accounting standards for nonpublic companies seems like the right thing to do. There does, however, need to be a balance between benefits to users of financial statements with the costs of complying with the standards. Certainly the rising costs to comply with increasingly complex standards must be addressed. The PCFRC indicated that there’s currently an imbalance between the mounting burden private companies are experiencing in complying with accounting standards and the minimal benefit certain of those standards provide to the users of private company financial statements.

So how soon can we expect to hear the FASB announce that they have added a “Little GAAP” project to their agenda? Answer; probably not very soon. The FASB has a very full agenda as it is and creating or adopting a separate set of accounting standards for private companies will require a great deal of effort, but it is a significant step in the right direction.

— From the CPE & Training Solutions ezine from the Tax & Accounting business of Thomson Reuters, March 2010. To view current and past issues of the ezine, click here.