Alternatives to GAAP Accounting for Small & Medium Sized Businesses

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GAAP (Generally Accepted Accounting Principles) and IFRS (International Financial Reporting Standards) are considered the best way for large companies to maintain accounting records and financial reporting. These standards help ensure companies “play by the same rules” and produce financial statements that can be more easily interpreted and relied upon as complete and accurate by potential investors, bankers, regulators and the financial industry. However, these accounting standards can often be a challenge for small and medium-sized businesses (SMBs) to implement and manage. Fortunately over the past decade there has been extensive discussion and development of alternative accounting standards that are gaining acceptance around the world. Both the AICPA (American Institute of Certified Public Accountants) & IASB (International Accounting Standards Board) have developed standards for Other Comprehensive Basis of Accounting (OACBA). OACBA gives privately-owned SMBs the prospect of having a set of financial reporting standards that can be more easily adopted, and also are gaining wider acceptance by potential private investors, lenders and the finance community.

The IASB has developed IFRS for SMBs (sometimes referred to as “IFRS Light”) that is considerably more compact and succinct. Put into practice in 2009, IFRS Light has been accepted in many financial sectors around the world. These standards are made up of only 230 pages, a mere fraction of the length of US GAAP which is over 20,000 pages of standards, so it is easy to see the appeal of IFRS Light to SMBs. The AICPA has also begun developing standards for SMBs and is looking at simpler alternatives to traditional GAAP accounting.

The challenge for new accounting standards designed for SMBs is the ability of accounting professionals and the finance community at large to adapt their current methods and understanding to embrace these standards. Many countries have agreed to adopt the standards as legitimate forms of reporting, however a full-fledged change to the simpler financial reports still has its detractors. Perhaps the biggest challenge of adopting OACBA is ensuring that bankers and investors will accept the financial statements as reliable. Most lenders, credit-rating agencies and other financial statement users in the US are hesitant to accept non-GAAP or non-IFRS financials. Some of the main advantages to separate standards for SMBs include simplification of accounting for goodwill, investments, business combinations, and decreased disclosure and internal control requirements.

Most accounting firms in the US, including TGG Accounting, strive to follow US GAAP or IFRS standards. These standards are still the most widely accepted and best understood in the financial world, although they can pose significant challenges for small business. As the global accounting industry continues to evolve, there will be increased benefit in looking at simpler alternatives to the thorough, but costly, standards that are current common practice. The managerial accounting professionals at TGG Accounting can help your small or mid-sized business wade through the confusing standards and simplify financial reporting, providing meaningful information to business owners in a timely manner.

Written by:
Brian O’Connor
TGG Accounting

 

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