background image
or decades, the accounting pro-
fession and other interested user
groups have debated the need
for separate reporting standards for
small, closely held businesses. Histori-
cally, scant attention has been given
to standards for small companies. The
resulting void has enabled inconsis-
tencies in practice between financial
statement preparers and confusion
among financial statement users.
Accountants have routinely tried to fit the
square peg in the round hole using Gen-
erally Accepted Accounting Principles
(GAAP) to prepare financial statements
for these clients. For many non-public
companies, much of traditional GAAP
is not applicable. Further, most prac-
tice aids and disclosure checklists are
geared to GAAP reporting requirements.
More than 90 percent of businesses
are small, closely held businesses and
may not have an annual financial re-
porting requirement. For the purposes
of this discussion, small, closely held
businesses are small- to medium-sized
businesses, owner-managed, for-profit
entities where internal or external us-
ers have direct access to the owner/
manager. These may be incorporated
or unincorporated businesses where
GAAP is not necessarily required by fi-
nancial statement users. Consequent-
ly, they often turn to an Other Compre-
hensive Basis of Accounting (OCBOA)
OCBOA statements have evolved in
practice over time as small, closely held
businesses attempt to generate finan-
cial statements that are meaningful,
understandable, and relevant.

These other bases include accrual,
modified accrual, cash, modified cash,
income tax, and "hybrid" methods.
OCBOA financial statement presenta-
tion, statement titles, and meaning-
ful disclosures are largely undefined
in professional literature. Reporting
transparency is lost as a result.

The major problem with the current state
of OCBOA is the lack of specific guid-
ance. Statements on Standards for Ac-
counting and Review Services (SSARS)
19 defines OCBOA very generally as:

1) A basis stipulated by a governmental
regulatory agency;

2) The income tax basis;
3) The cash basis or modified cash basis
where the modification has substantial
support consistent with accrual basis
principles and is not illogical.

In July 2009, standards for small- to
medium-sized entities (SMEs) were
issued by the International Account-
ing Standards Board (IASB), for situ-
ations where the SME is required
to prepare GAAP statements. "In
2008, the American Institute of CPAs
(AICPA) governing Council voted to
amend AICPA rules 202 and 203 to
recognize the IASB as an accounting
standard-setting body. Thus, AICPA
members may report on financial
statements prepared in conformity
with ... IFRS for SMEs."

Recent developments in the United
States promise additional authorita-
tive literature for small closely held
entities, whether they report on the
GAAP or OCBOA basis. On May 23,
2012, the Financial Accounting Foun-
dation (FAF) announced its deci-
sion to create the Private Company
Council (PCC). This body will set dif-
ferences in U.S. GAAP, where appro-
priate, for privately held companies.
(See sidebar for more.)
Plans Underway to Develop Financial Reporting
Guidance for Small Privately Held Businesses
By Michael J. Rolleri, MBA, CPA
Mark Fitzpatrick, CPA and Fred Frank, CPA. "IFRS for SMEs: The Next Standard for U.S. Private Companies?" Journal of Accountancy, December 2009