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New OCBOA Framework for Smaller Private Companies

June 29, 2012

The American Institute of CPAs has announced its plans to formalize an optional financial reporting framework for private companies that do not need to prepare US GAAP financial statements. The AICPA does not have the authority to set US GAAP (US generally accepted accounting principles) or to require the use of any other accounting principles. But it is hoping some companies will choose to voluntarily adopt the principles that comprise its framework. Known as the financial reporting framework for small- to medium-sized entities (FRF for SMEs), the AICPA's framework will be geared toward owner-managers and others who are not bound by requirements to use GAAP financial statements but who still want the benefit of financial statements that conform with an "other comprehensive basis of accounting" (OCBOA) that has undergone public comment and professional scrutiny.

How will the changes affect you?

The AICPA's current timeline calls for the framework to be exposed for comment in late 2012 and available for use upon its release in 2013. This framework will be in addition to the process recently announced by the FASB to carve out exceptions or modifications of US GAAP for private companies. (See this previous MHM Messenger for more information on the FASB's process.) Based on the information released to date, following are a few previews of what to expect.

  • The AICPA's framework and principles will be less voluminous and presumably simpler to learn and apply than US GAAP. The OCBOA principles will draw upon a "blend of accrual income tax methods and other traditional methods of accounting." The chief architects are a working group of AICPA members and staff with years of experience serving small- to medium-sized owner-managed entities.
  • The framework and accompanying principles will be available for use by entities in every industry group, regardless of the form of legal entity, (incorporated or unincorporated). The new tools are not specifically intended for not-for-profit organizations, but NFP entities will not be precluded from using them.
  • The framework will be designed for the following purposes: (a) to help owner-managers confirm their assessments of performance, track their cash flows, and understand what they own and owe, and (b) to support applications to lenders, when the lender is a banker who does not base lending decisions solely on the financial statements. For example, the banker may also consider available collateral or other assessments unrelated to the financial statements.
  • The framework will not have an effective date by when it must be adopted because it will be optional and not required. An owner-manager can decide to use it or not, once it is released. The AICPA suggests this decision should be made together with the users or potential users of the entity's financial statements.

Additional details can be found in the AICPA's Fact Sheet and article in the Journal of Accountancy at http://www.aicpa.org/InterestAreas/FRC/AccountingFinancialReporting/PCFR/DownloadableDocuments/AICPA-OCBOA-Project-Fact-Sheet.pdf and http://www.journalofaccountancy.com/News/20125840.htm.

Open Questions

The AICPA's announcement raises many questions that will need to be addressed as the project progresses, including the following:

1. Who will decide if and when the FRF for SMEs qualifies as an applicable financial reporting framework? This question is important within the context of a project recently undertaken by the AICPA's Auditing Standards Board (ASB) to clarify and converge US standards with International Standards on Auditing. As part of that project, the ASB replaced the term "US GAAP" with the term "applicable financial reporting framework." We expect the ASB will decide when the FRF for SMEs is a qualified framework for US private companies. It is less clear whether or when a similar determination might be made for other entities, such as not-for-profit organizations or non-US private companies that are not required to use US GAAP.
2. How much detail will be enough to balance the goal of providing a lower-cost, less-voluminous alternative to US GAAP with the need for a sufficiently robust financial reporting framework? According to the ASB's literature, the framework need not specify how to account for or disclose all transactions or events, but it must embody "sufficiently broad principles that can serve as a basis for developing and applying accounting policies that are consistent with the concepts underlying the requirements of the framework." In practice, this balance may be difficult to achieve. It may require considerable judgment, and the principles may need to evolve over time.
3. Will companies be permitted to switch back and forth between the FRF for SMEs and US GAAP or other applicable financial frameworks? The answer to this question may require coordination with other professional bodies. The frameworks available today include accounting principles set by the FASB, GASB, and Federal Accounting Standards Advisory Board, as well as IFRSs issued by the IASB and OCBOA. Examples of OCBOA include a basis of accounting used for regulatory reporting purposes (such as accounting principles set by a state insurance commission), a basis of accounting used to file an income tax return for the period covered by the financial statements, and the cash basis of accounting or cash basis modified by principles having "substantial support" (such as recording depreciation on fixed assets).
4. How significantly will the US FRF for SMEs differ from IFRS for SMEs? IFRS for SMEs is a self-contained standard of 230 pages that was established by the IASB to meet the needs and capabilities of small and medium-sized entities (SMEs). A comprehensive review of the principles underlying this standard would be helpful as a way of enhancing comparability among US and non-US companies. The IASB has indicated IFRS for SMEs is available for any jurisdiction to adopt, whether or not it has adopted full IFRSs. Each jurisdiction must determine which entities should use the standard. The IASB's only restriction is that listed companies and financial institutions should not use it. The standard and implementation guidance are available at http://www.ifrs.org/IFRS+for+SMEs/IFRS+for+SMEs.htm.
5. To what extent will the FRF for SMEs alleviate the burdens associated with disclosure overload? Under today's compilation standards, financial statements that are prepared in accordance with an OCBOA should include disclosures similar to those required by GAAP, if the statements include items that are the same as, or similar to those in GAAP financial statements. If these disclosures are not provided, the accounting firm must include appropriate language in its report. Efforts to streamline the disclosure requirements could provide significant relief to small- and medium-sized entities.

For more information

MHM's Professional Standards Group will monitor progress on the US financial framework for SMEs and accompanying accounting principles. We described the need for this type of approach in our comment letter (pdf) on the FAF's proposed approach to private company standard setting.

If you have any specific questions, comments or concerns, please share them with your MHM professional.

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