The Financial Accounting Foundation (FAF) is the parent organization for the Financial Accounting Standards Board (FASB) and the Governmental Accounting Standards Board (GASB). In recent years FASB has occupied itself with the modification of U.S. generally accepted accounting principles (GAAP), more closely aligning them with International Financial Reporting Standards (IFRS). IFRS rules are set by an “international” standards setting body based in Brussels, the aptly named International Accounting Standards Board (IASB). To be fair, the IASB has been working to harmonize their standards with U.S. GAAP as well.
The convergence of U.S. GAAP and IFRS is believed by many as a worthy pursuit leading to the development of a single set of global standards. I won’t spend a lot of time on this, but the idea is more a lofty ideal than a practical goal. IFRS proponents often use as support for their system claims that the rest of world has adopted these “international” standards, without mentioning that most countries make modifications to assuage local special interests as they adopt.
IFRS in France is not the same as IFRS in Great Briton. Rule 9 – the rule that forced banks to mark-to-market worthless investments in collateralized mortgage obligations was quickly adopted by Australia, but not France. So, banks in continental Europe were able to support sticking their collective heads in the sand on the issue for quite some time and politics entered the process. How dare accountants tell management how to account for investments that only management fully understood!
The politicization of accounting standards has been a growing problem. On occasion the FASB has backed away from proposals, or hastily withdrawn or watered down recently enacted standards, in response to threats from politicians to legislate new standards in reaction to their constituents’ consternation over unpopular new rules. Remember when U.S. companies, mostly high-tech high-flyers with powerful lobbyists, almost stopped the expensing of stock options? The tech boom fizzled and the option backdating scandals later on hopefully proved to some politicians that accounting matters are best left to accountants.
FASB and the FAF also stood their ground amid more recent complaints that differential standards for private companies are sorely needed. FIN 46 and FIN 48 had a lot to do with fueling a growing movement of dissent – a belief that GAAP simply didn’t fit for many private companies any longer. In October 2010, a Blue Ribbon Panel recommended that the FAF support a differential standards committee – a big-GAAP and little-GAAP approach. Some at the FAF did not support forming a separate committee – I guess people forget that we already have some differential standards under GAAP – the requirement to disclose the fair value of the company’s debt instruments only applies to those with more than $150 million in assets.
The IASB’s response to the needs of smaller companies is IFRS for SMEs, or IFRS for Small- to Medium-Size Entities. As with IFRS, IFRS for SMEs can differ between countries. But, the guidance is much more condensed and, as a result, supposedly easier to implement.
Bear in mind that both IFRS and IFRS for SMEs are considered generally accepted reporting frameworks – just not U.S. GAAP. The Securities and Exchange Commission has yet to support IFRS reporting for U.S. market registrants. The Big Four and their international clients would love for the U.S. to adopt IFRS since they see it an opportunity to save substantial amounts on training and systems integration.
All of this is background to my point.
The AICPA recently announced that it was getting back in the accounting standards setting business. Perhaps in response to complaints of FASB foot-dragging, or to take control of and serve a perceived unmet need, the AICPA is forming its own group to develop a Financial Reporting Framework (FRF) to serve the needs of small- to medium-size entities. In other terms, the AICPA intends to develop an Other Comprehensive Basis of Accounting (OCBOA) for SMEs. Now, most of us in the trade think of OCBOA as either tax basis or cash basis – with the understanding that there are widely accepted modifications to the cash basis and well accepted conventions that define and regulate these other comprehensive bases, reporting frameworks that have been in existence quite some time. So, we’re left wondering what exactly the AICPA is trying to accomplish?
According to the AICPA’s press release – the new OCBOA will be a “less complicated and less costly system of accounting for SMEs that do not need U.S. GAAP financial statements.” As for this new system’s content the AICPA says that,”The FRF will draw upon a blend of accrual income tax methods and other traditional methods of accounting.” I presume this means cash and GAAP.
The interesting thing about the AICPA’s announcement is that it comes on the heels of the FAF’s announcement just a few days earlier that it had begun a search for members to form the PCC or Private Company Council – a body dedicated to, when necessary in the rule setting process, develop SME GAAP.
I am not saying the FASB has not done a good job with GAAP in the past, they have. But they have caught a lot of flak for not listening to the complaints of constituents that the rule makers have been unresponsive to the needs of smaller, privately held companies by continuing to introduce ever more complex, and in some eyes, unnecessary standards.
The AICPA explains it this way, “The AICPA and the FAF are both committed to a private company financial reporting constituency; however, the objectives of these two efforts are different. The new Private Company Council will focus on modifications to U.S. GAAP for private companies where GAAP financial statements are required or necessary. Alternatively, the FRF for SMEs promises to be a straightforward, concise Framework for management and other users of small- and medium-sized private company financial statements where U.S. GAAP financial statements are not required or necessary.”
Acknowledging that it is not an authoritative standard setter, the AICPA is rightly calling its effort the development of an OCBOA. They can’t call it U.S. IFRS for SME’s or U.S. GAAP for SMEs, but it is quite obvious that they intend to set a new, generally accepted framework, a new standard.
Now, whatever form the FAF/PCC effort takes, it will be the authoritative source of U.S. GAAP for SMEs. When the PCC is formed and if the recommended differential standards it sets go far enough to satisfy the users of private company statements, where will it leave the AICPA’s standard for SMEs? Well, just one more basis of accounting for all of us to learn I guess…..
Maybe the AICPA and the FASB will work together to converge their standards someday.
Maybe a lesson will be learned by all – too many cooks in the kitchen spoil the broth. If nothing else we have quite the alphabet soup to work with.
See the FASB discussion of it efforts at:
See the AICPA press release at:
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