- Retain a traditional approach to lease accounting, rather than put them on the balance sheet as a liability, as the FASB is threatening to do.
- Allow entities to follow the taxes payable method when accounting for income taxes (no more deferred tax liability!).
- Not include the concept of other comprehensive income.
- Not include the concept of variable-interest entities. This exclusion would allow for groups of businesses (for example, a retail store and real estate partnership that owns the store that are both owned by the same individual or group of investors) to report their finances separately, rather than be consolidated into one set of statements. This allows management and their banker to gain a fuller understanding of the businesses financial results and position.
- Allow for depreciation to be calculated in a "rational and systematic manner" - no more book vs. tax differences!
...well, not really. What we do have is an exposure draft for the Financial Reporting Framework for Small- and Medium-Sized Entities (FRF for SMEs). To the uninitiated, GAAP (Generally Accepted Accounting Principles) is a long and arduous set of rules that are to be followed to prepare financial statements. If those rules aren't followed, I as your accountant must propose changes to the statements, and if those changes aren't made or cannot be made for some reason, our accountants' or auditors' report will state that the statements are in fact NOT GAAP. That's not usually what your bank or funding source is looking for.
This framework essentially appears to allow for simpler financial reporting for privately owned, for-profit smaller enterprises that are not required to produce financial statements in accordance with U.S. GAAP. The way I understand it, if your bank is the only entity that needs a copy of your financial statements at the end of the year, and your company's stock is not publicly traded, this probably applies to you. All of the complicated stuff, leave it to the 'big' guys. Thus, the need for not just one set of GAAP, as we have now, but both a "big GAAP" and a "little GAAP" has been debated since well before I took Accounting 101.
So what's "simpler" about it? Historical costs—rather than fair value—are emphasized in the proposed framework, which is expected to be released as a final document in the second quarter of 2013. In addition, the proposed framework will:
At first glance, there is a lot to like about this proposal. Use of the FRF for SMEs is a choice made by the management of an entity (with the bank's buy-in, of course). Therefore, the FRF for SMEs will have no effective date, and management can decide to use the FRF for SMEs once it is released. The framework is intended to stand on its own, and it doesn't appear to refer to existing GAAP. This results in a stable able framework that will not undergo frequent changes.
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