One half of the United States economic output is driven by nonpublic entities. And there are more than 22 million private businesses in the U.S. compared with approximately 17,000 public companies. So many nonpublic entities often ask, “Why do I have to meet the same US generally accepted accounting principles as say a giant like General Motors Corporation?” A smaller private business may just need a bank loan for a machine. GM needs to justify billions of dollars in stock market investments. From these such questions came concerns about whether it was appropriate for US Generally Accepted Accounting Principles (“GAAP”) to apply equitably to “big” companies and “little” companies. Discussions of whether there was a need for a Big GAAP and Little GAAP arose. In other words, a system that would require “big” companies to meet one set of financial reporting standards with “little” companies following different accounting rules.

This concept of differential accounting was debated and ultimately rejected for several years. But recently we’ve seen the issuance of new accounting and auditing standards that only apply to publicly traded registrants, but not to so called private “non-issuers.” The postponement of FIN 48 is an example of the FASB and other standard setters in the US being sensitive of private company reporting. The standard setters in the United States are taking into consideration more of the user needs with respect to private entities, because those user needs may be different than a public company may be. Private entities are more interested in (and their creditors and lenders are more interested in) solvency, leverage, and short-term cash flow, versus valuation that many of the public company shareholder needs, or investor needs, are.

The AICPA, along with the Financial Accounting Foundation, recently established a panel to consider whether US private companies would be better served by a separate set of accounting standards. The panel will provide recommendations on the future of standard setting for private companies, including whether separate, stand-alone accounting standards for private companies are needed. Panel members will represent a cross-section of financial reporting constituencies, including lenders, investors, owners as well as preparers, auditors and regulators. The Private Company Financial Reporting Committee, a joint committee of the AICPA and FASB, believe the time is right to develop a separate US standard for private companies.

Many countries outside the United States already have differential accounting standards between private entities and publicly accountable entities. In May 2008 , the AICPA’s governing council decided to recognize the IASB (“International Accounting Standards Board) as an international accounting standard setter. As a result, financial statement issuers in the US have the option to use the IASB’s International Financial Reporting Standard for Small and Medium Entities (IFRS for SMEs) as an alternative to US GAAP. IFRS for SMEs was developed for private companies and their financial statement users. It is a simplification of the full International Financial Reporting Standards designed for public company reporting. If you look at US GAAP codification recently issued, it is 17,000 pages. IFRS for SMEs is 230 pages. It is principles based versus rules based.

Many lenders are asking smaller businesses NOT to use GAAP, but to use other bases of accounting instead. This request is done with the intent and goal of having the financial reporting meet the user needs. Some users might accept cash-basis of accounting or some may accept a tax return. Others may recognize that IFRS for SMEs is a good set of standards and provides them with their user needs. It could be a lot simpler for companies to apply. So we may see private entities move towards IFRS well in advance of the SEC requiring public entities to do so. In addition, we will look to the future to determine if the US standard setters can agree on and establish a separate set of reporting standards for privately held “non-issuers.”

As a privately owned company, you may have experienced the frustrations with adopting some of the new U. S. accounting and auditing standards. Having discussions with your lender on the specifics of their financial reporting needs may lead to conversations about utilizing a different or modified reporting standard. We at Apple Growth Partners are happy to assist by lending our expertise to ensure time spent on financial reporting is in line with the user's expectations.

We will continue to watch and report on actions of U.S. standard setters, as well as the trends in accounting standards requested by lenders to private businesses. Our leading edge knowledgebase and expertise in this area is rooted in our mission to provide private businesses with sound growth strategies.