New Accounting Rules Proposed for Small Businesses

 MICHAEL RAPOPORT for the Wall St. Journal writes:  Millions of U.S. small businesses will be able to use simplified, streamlined methods for measuring and presenting their financial results under a new accounting framework announced Monday.

The new guidelines for "small and medium-size entities" come from the American Institute of Certified Public Accountants, the nation's main accounting trade group.

The guidelines are designed as an alternative to generally accepted accounting principles, or GAAP, the system large companies use in the U.S.

"It is a framework that is tailored for small business—a very relevant, simplified framework," said Bob Durak, the AICPA's director of private company financial reporting.

Public companies in the U.S. must use GAAP, as must privately held companies if their lenders, bonding companies or regulators require it. But smaller, less-complex private companies long have complained that GAAP is overly burdensome and complicated.

The Private Company Council, a new panel created last year with the AICPA's participation, is focused on carving out potential modifications to GAAP to benefit privately held firms.

But even given those efforts, Mr. Durak said many private companies that don't have to use GAAP have been "looking for another option" that omits some of the complexities of GAAP that aren't relevant to them.

Among the ways in which the new framework would simplify GAAP: The new framework uses only historical cost as a basis for valuing assets and liabilities, not current market value. It doesn't include more-complex accounting for areas that smaller, simpler companies are unlikely to get into, such as off-balance-sheet entities, derivatives or hedging.

The new framework will be optional even for companies who might choose to adopt it. The AICPA doesn't have any authority to compel companies to do so.

Some have opposed the group's efforts, saying the AICPA should wait for the Private Company Council to develop its modifications to GAAP to benefit private companies instead of trying to develop a separate system.

In April, the council and the Financial Accounting Standards Board, the U.S. accounting rule maker under whose auspices it works, issued a proposed "decision-making framework" that would guide when it was appropriate to make such exceptions to GAAP.

"We believe efforts focused on enhancing GAAP will be more beneficial for a broader population of private company stakeholders than creating another non-GAAP framework," PricewaterhouseCoopers LLP, an accountancy firm, said in a January letter sent to the AICPA.