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Should Small Businesses Worry About GAAP, New Private Company Proposals?

2 minutes Read

Keeping detailed, organized financial records is very important for your small business, as we’ve written previously. But you may wonder whether—as your business grows—you’ll need to start following what’s known as GAAP or whether you’ll need to submit GAAP statements to get a loan.

Or perhaps you’ve heard rumblings of new private company proposals under consideration by the Financial Accounting Standards Board (otherwise known as FASB), which has indicated it plans to adopt what’s known as the Private Company Decision-Making Framework with a few minor exceptions by the end of this year.

The new rules are the first step in a very long effort to standardize the way private companies create financial statements and alleviate what’s been recognized as too costly and erroneous for private companies, both large and small, to comply with GAAP.

“Private companies’ struggles with implementing standards that too often are irrelevant, costly and driven by public company issues have reached an unacceptably burdensome level,” reports the American Institute of Certified Public Accountants.

What is GAAP? 

Created in the early 1970s, GAAP is the standardized accounting system for publicly traded companies. The principles essentially enable investors to compare different companies and industries using a standard method of producing accounting statements.

Governed by FASB, only publicly traded companies are required to comply with GAAP because they were created with investors in mind. There are no separate private company standards and the new efforts are aimed to augment existing principles rather than creating separate standards for private companies.

Who has to comply with GAAP?

Only publicly traded companies are required to comply with GAAP. Private companies are not required to comply with GAAP, and this will not change once the new guidance is issued.

What’s the issue for private companies and small businesses?

Some private companies follow GAAP because they plan to go public in the future; others are asked to produce GAAP statements for banking, real estate, or purchase or acquisition needs because it is the easiest way to compare companies. And they find it costly and arduous to do so.

GAAP principles were structured to help investors, who find it helpful to see the fair value of assets and liabilities, for instance, because that may impact their investment decisions. However, private companies typically use financial statements differently—to see the ability to generate earnings or track cash flow to repay a loan, for example— and management has access to additional information not included in the financial statements required under GAAP principles.

Many private firms that do not need access to public financing have managed and run their business with financial statements produced according to tax regulations. Other private companies produce statements in a format that managers can use to make decisions on an ongoing basis.

Bottom Line for Small Businesses using GAAP

If you own a private company and are producing GAAP compliant statements, it may be worthwhile to look at the new framework to see if it would reduce your compliance costs and time. But remember, private companies are not required to adopt GAAP, and are not required to adopt this new framework.

If you aren’t producing GAAP compliance statements, don’t plan to go public or buy or acquire a company, it’s not necessary to change what you are doing as there is no mandatory requirement to produce GAAP statements.

Learn more about the framework on FASB’s site.

Photo credit: g0d4ather/shutterstock.com

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