How’s that for alphabet soup? It means the National Association of State Boards of Accountancy (NASBA) doesn’t like the American Institute of CPAs' (AICPA) new Financial Reporting Framework for Small- and Medium -Sized Entities (FRF). NASBA seems to think the FRF is some kind of professional challenge to the Financial Accounting Foundation’s (FAF) recent establishment of the Private Company Council (PCC) to recommend exceptions to Generally Accepted Accounting Principles (GAAP) for private companies. The PCC makes those recommendations to the Financial Accounting Standards Board (FASB), the entity which normally sets US GAAP, and FASB must approve, change or reject the recommendations. In fact, on the same day the FRF was issued, the FASB announced approval of the initial PCC recommendations.
According to AICPA the FRF is not intended to replace GAAP, but is offered as another comprehensive basis of accounting that is less complex than GAAP and adequate for some business entities. The rub for some critics is in that last part, i.e. they don’t think the FRF is adequate for all business entities that might be eligible for its use. Other comprehensive basis of accounting (OCBOA) is a term familiar to accountants. The term includes cash basis financials, modified cash basis of accounting, tax basis of accounting and modified GAAP based on contractual provisions. Professional literature already provides guidance to CPAs on how they should report on OCBOA based financial reports. Private companies can and do already choose to use OCBOA for their financial reports. FRF is intended be one more accounting framework that is available as one OCBOA alternative, perhaps with more substance and guidance available than exists for the existing OCBOA presentations.
NASBA issued a press release enumerating their concerns. FAF appears to have only modest concerns about FRF, earlier commenting that the FRF project was “important and complimentary” to its own efforts with the PCC. After the FRF release FAF indicated it wanted to be sure everyone understands that FRF is not GAAP. In a message to state CPA society CEOs responding to NASBA’s press release, AICPA makes several points:
- Companies have used various OCBOAs for over 40 years without any objections raised by NASBA or other parties.
- The use of the FRF for SMEs is a decision to be made between private companies and users of their financial statements. Owners of private companies, working with users of their financial statements, will decide what reporting framework best answers their needs. Any binding limitation on CPAs reporting on a form of OCBOA would have to be subject to a rule by a state board of accountancy and no board has ever taken action to prohibit CPAs from utilizing OCBOAs.
- In addition, NASBA points out three principal concerns it has with the FRF for SMEs. Below are responses that may put these concerns in context:
- “[The FRF for SMEs] represents non-authoritative guidance and therefore will be very difficult to regulate or enforce.” The FRF for SMEs designation as non-authoritative is no different than other OCBOAs that have been issued and are also non-authoritative (e.g. modified cash, tax basis). CPAs remain regulated by boards of accountancy for the work that they do and will be expected to comply with the high expectations of their regulators and their clients.
- “The scope, ‘small and medium size entities,’ is undefined. As such, any private company, regardless of size or financial backing, could potentially adopt the FRF.” The private market can determine which basis of accounting is appropriate. For many small and medium-sized enterprises, GAAP (including modifications for private companies) will be appropriate, but for others, the FRF for SMEs and other OCBOAs will be more appropriately suited. The AICPA believes that decision is best resolved between businesses and those that use their financial statements, without interference from outside parties.
- “It allows the use of GAAP financial statement titles, yet does not require disclosure of differences with GAAP, which will cause confusion and invite fraud and abuse.” The FRF for SMEs framework uses neither the term balance sheet nor income statement in the framework; in fact, the framework uses titles that are not typically considered GAAP. Additionally, the framework requires disclosures that very clearly state that it is not GAAP and therefore will not be confused by a user – whether that user is a private business or a potential lender. Also, because any report (audit, review, or compilation) on the framework by a CPA will also state in the report that the FRF for SMEs is not GAAP, it is difficult to understand what NASBA means when it says this will “cause confusion and invite fraud and abuse.”
For additional reporting you might check out this Accounting Today article.
Talking with people behind the scenes that have knowledge of the NASBA concerns reveals some major issues that are not addressed in the press release. Those are:
- The FRF development and maintenance does not have the robust procedural and constituent development used for GAAP, and the fear is that AICPA is actually pushing this as an ultimate replacement for GAAP for privately-held companies.
- There is do definition of SMEs. Evidently in other countries that allow GAAP departures for SMEs, such entities are defined.
- While current reporting standards would require a CPA to note the statements are not in accordance with GAAP, there is concern that AICPA will ultimately change those reporting standards to eliminate the requirement. Supposedly there is evidence of this intention in the FRF material.
My first reaction to the NASBA press release was that this was one of largest molehill mountains I have seen in a long time. It seems to be more of a turf battle between two professional associations than a substantive issue. NASBA says this is an attempt by AICPA to undermine the FAF’s PCC and is a result of the FAF not choosing the AICPA’s preferred method of delineating GAAP for private companies. AICPA says NASBA is opposed to the FRF just because it was AICPA instigated. Both claims have a ring of truth to these ears.
For a humorous look at the controversy, check out AICPA Knows NASBA Is Mad But It's Okay, NASBA Gets Mad Sometimes.