Accounting Alternatives for Small Enterprises –December 2016

This post concerns financial reporting. A key concern for users of a company’s financial is the accounting policies the company utilizes. For larger, established enterprises it is an easy call — GAAP (Generally Accepted Accounting Principles). For non-public and smaller companies GAAP can be quite onerous and costly. Fortunately, there are some acceptable alternatives which we discuss in the following paragraphs.

The accounting profession has developed a financial reporting framework for small and medium size entities. It is designed for smaller companies, particularly owner managed companies that constitute the majority of US businesses. This voluntary system is a cost effective, simplified approach designed to address specific concerns of stakeholders. It has been embraced by many firms and is suitable for audit opinions. The framework is known as the Financial Reporting Framework for Small and Medium Sized Entities.

The framework is built on a foundation of reliable and comprehensive accounting principles, notably historical costs. It also reduces the required disclosures while still providing relevant information familiar to users. Traditional accounting methods are employed utilizing less complicated methodology such as reducing book to tax adjustments.

In our opinion, it is worth considering this methodology if certain conditions exist. It will be particularly helpful to for profit entities that do not intend to go public, especially owner managed enterprises. In addition, the entity should not be engaged in very complex transactions or foreign operations. Also, key users must have direct access to management so that their questions can be answered and their concerns addressed.

Factors the CFO should consider in adopting this approach include:

• The nature of the entity and the purpose of its financial statements
• The needs and expectations of financial statement users
• Reporting requirements concerning matters such as loan covenants, guarantees, contracts, and financing arrangements.
• The ability of the accounting system to fairly represent underlying transactions and events
• The entity’s short term and long term reporting needs. If management seeks to go public the company should use GAAP

A key concern for users of a company’s financial is the accounting policies the company utilizes. For larger, established enterprises it is an easy call — GAAP (Generally Accepted Accounting Principles). For non0-public and smaller companies GAAP can be quite onerous and costly. Fortunately, there are some acceptable alternatives which we discuss in the following paragraphs.

Capitol CFO Solutions serves clients in Washington, DC, Maryland, and Virginia. Please contact us for a free consultation.