New Way to Do Accounting — Is It Right for Your Small Business?
A comprehensive new approach to accounting has been created by the American Institute of Certified Public Accountants. It is intended to help small-business owners produce financial statements that are more informative not only for their own understanding and use, but also for sharing key financial information with lenders and potential investors.
The new system, known as the Financial Reporting Framework for Small and Medium-Sized Entities [PDF], is entirely voluntary and may be used across a wide range of industries.
According to Mitchell Slepian, media relations manager for the AICPA, the new accounting framework is more cost-effective than existing ones. It’s simpler, too, and will be of value to small businesses preparing financial statements — provided that they are not required to follow generally accepted accounting principles.
“Today, many small businesses use cash and modified cash basis or tax basis accounting in preparing financial statements, both for internal use and for sharing with external parties like bankers and potential investors,” Slepian explains. “But in many cases, these bases of accounting don’t work all that well for a business’s financial reporting purposes. This is where the new [framework] can provide more comprehensive, integrated financial statements, but still allow for uncomplicated and cost-effective financial reporting.”
Is the New Framework Right for Your Business?
Start by asking your accountant whether your business must comply with generally accepted accounting principles. If not, discuss how well the new framework fits your financial reporting needs. Any competent CPA should have the tools and resources to identify your options and help you make an informed decision about whether to start using the new framework.
To learn more on your own, visit the AICPA’s framework-related webpages. The toolkit for small-business owners will help you to better understand the approach and determine whether it’s right for your business.
In offering the new framework, the AICPA aims to enable private, for-profit, owner-managed companies, and their accounting teams to produce highly relevant and practical financial statements easily and quickly.
The Financial Accounting Foundation, under which the Financial Accounting Standards Board establishes and maintains the generally accepted accounting principles, calls the new framework “a non-GAAP, special purpose framework … for smaller, owner-managed, ‘Main Street’ businesses, whose lenders or investors do not require the comprehensiveness of GAAP financial statements.”
The foundation and the AICPA advise small businesses and their accountants to carefully consider which financial reporting methodology is most appropriate for any given business.