18
Nov
10

Are NFPs SMEs? . . . or should we follow the recommendation of a BRP?

The AICPA , Financial Accounting Foundation, and the National Association of State Boards of Accountancy, recently commissioned a blue ribbon panel of experts (BRP) to review private company reporting. There is increasing concern that the same standards which meet the needs of public companies may not be appropriate for private companies. Here are some of the complaints:
Disclosure overload – Disclosures have been growing in number, complexity, and cost to prepare. As my colleague shared in a recent post, the frustration with these disclosures is not just the cost and time to prepare, it is the lack of relevance to primary financial statement users.
Fair Value – The recent and increasing trend toward fair value threatens to put theoretical precision ahead of practical usability for private companies.
Resources– Small companies have smaller accounting teams, and fewer resources. As a result private companies are less likely to comment on proposed new standards. This leads to  a perceived, or real, lack of responsiveness from the FASB to private company concerns.
There are also a very real difference in the users of financial statements.

  • Public companies have many financial statement users: Stockholders, Institutional Investors, Banks, and Financial Analysts. Most of these users are financially savvy.
  • Private companies have few financial statement users: Bankers, Owners, and Venture Capitalists. It is worth noting that the small number of financial statement users for private companies also often have direct access to company personal. For example, the company’s banker can call up and ask questions about the accounts receivable balance. This minimizes the benefit of standard disclosures because any needed information is a phone call away.

The BRP is wrapping up their work with a formal recommendation to be made in early December. Here is a link to a good 10 minute video highlighting some of their conclusions. If you are a super accounting nerd, here is a link to the full 43 minute video.

It is worth noting that the IASB has produces a condensed version of IFRS for Small and Medium sized Entities (SMEs). This condensed version of IFRS is only 200 pages long and simplifies reporting requirements. The BRP considered utilizing SME guidance, but ultimately rejected it because US private companies are still unfamiliar with IFRS, and because the SME guidance excludes the use of LIFO for inventory valuation.

With this environment, were do not-for-profits fit? Like public companies we often have many readers of our financial statements. But unlike public companies, the majority of our financial statement readers are donors, who often lack the financial sophistication of institutional investors and industry analysts. Similar to private companies, not-for-profits have small accounting departments and limited resources to devote to financial reporting. But unlike private companies our readers seldom have “phone call” access to records and reports. Complicating things further, nonprofits have a public trust due to the fact they receive donations. As a result, it seems logical that nonprofits would have a higher reporting threshold than a private company. But what should this look like? And what about the 990? One could argue that GAAP disclosures should be lighter for not-for-profits since most organizations file a 990 which is publicly available.

What do you think? Leave a comment. 🙂 This is a topic of conversation which I believe will increase in importance over the next few years as the BRP’s recommendations take hold and the SEC finalizes its position on IFRS.

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1 Response to “Are NFPs SMEs? . . . or should we follow the recommendation of a BRP?”



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