The ongoing bickering over FRF for SMEs — which went Defcon 4 the other day with a strongly worded press release from NASBA — has just gone nuclear.
I come from a single parent household so I don't know what it's like to live in a home with parents who are on the brink of divorce but I imagine that it is very similar to watching this unfold.
You know there is a palpable disharmony in the house but you have to live there. And really, you don't have a favorite parent, you just want them to get along. Your dad doesn't like the way your mom folds socks but when he folds his own socks, your mom hates the way he puts them in the drawer and next thing you know doors are slamming and you're thinking you can't wait to turn 18 and move to California far, far away from these miserable people.
But now we just have to figure out if NASBA is going to pack up a suitcase and let the AICPA keep the house.
Late last night, Barry Melancon sent out an email to state society CEOs, specifically addressing the NASBA press release and it contains many of the same talking points the AICPA gave us yesterday. Except, unlike a generic statement from some AICPA media dude, this is Barry. You know, your buddy Barry. And he wants to make sure state society CEOs know that the AICPA is here for them, man, no matter what happens between them and NASBA. Always.
Dear State Society CEOs,
As you may have seen earlier today, NASBA has issued a press release indicating its support of GAAP for private companies and its opposition to the AICPA’s recently released FRF for SMEs. (“click here”) This announcement was not a surprise, as NASBA had previously raised objections to our efforts to offer this alternative, non-GAAP option to the small business community. However, since you may be asked by your state boards of accountancy as well as members about the recent press release, I want to share with you some key points that may be relevant to conversations you may have on this matter.
- FRF for SMEs is essentially a next generation type of Other Comprehensive Basis of Accounting (OCBOA). OCBOAs are a long established alternative to GAAP. Companies have used various OCBOAs for over 40 years without any objections raised by NASBA or other parties. The AICPA’s recently released OCBOA for small and medium sized enterprises – Main Street businesses – is in line with this long tradition of alternative accounting options available to private businesses. Its purpose is clearly identified to ensure that it is not confused with GAAP, as even the Financial Accounting Foundation has noted.
- As the trade association for state boards of accountancy, NASBA does not issue authoritative guidance on state policy. The use of the FRF for SMEs is a decision to be made between private companies and users of their financial statements. Owners of private companies, working with users of their financial statements, will decide what reporting framework best answers their needs. Any binding limitation on CPAs reporting on a form of OCBOA would have to be subject to a rule by a state board of accountancy and no board has ever taken action to prohibit CPAs from utilizing OCBOAs (including the FRF for SMEs). It is not clear why any board of accountancy would want to interfere in the decision-making process between owners of private companies and users of their financial statements.
OH SNAP, he really called NASBA out there, didn't he? And was it really necessary to point out that NASBA is just some random, helpless trade association? That's low, you know, coming from a fellow trade association and all. Can't we keep this civil? FOR THE KIDS?
Barry would also like to clarify a few of NASBA's concerns with FRF for SMEs, naturally in the most condescending way possible, as if to say if NASBA would just get it, everything would be awesome and everyone can just be happy.
In addition, NASBA points out, in its email, three principal concerns it has with the FRF for SMEs. Below are responses that may put these concerns in context:
- “ [The FRF for SMEs] represents non-authoritative guidance and therefore will be very difficult to regulate or enforce.” The FRF for SMEs designation as non-authoritative is no different than other OCBOAs that have been issued and are also non-authoritative (e.g. modified cash, tax basis). CPAs remain regulated by boards of accountancy for the work that they do and will be expected to comply with the high expectations of their regulators and their clients.
- “The scope, ‘small and medium size entities,’ is undefined. As such, any private company, regardless of size or financial backing, could potentially adopt the FRF.” The private market can determine which basis of accounting is appropriate. They do not need a regulatory trade group making that decision. For many small and medium-sized enterprises, GAAP (including modifications for private companies) will be appropriate, but for others, the FRF for SMEs and other OCBOAs will be more appropriately suited. The AICPA believes that decision is best resolved between businesses and those that use their financial statements, without interference from outside parties.
- “It allows the use of GAAP financial statement titles, yet does not require disclosure of differences with GAAP, which will cause confusion and invite fraud and abuse.” The FRF for SMEs framework does not use the term balance sheet nor income statement in the framework. In fact, the framework uses titles that are not typically considered GAAP. Additionally, the framework requires disclosures that very clearly state that it is not GAAP and therefore will not be confused by a user – whether that user is a private business or a potential lender. Also, because any report (audit, review, or compilation) on the framework by a CPA will also state in the report that the FRF for SMEs is not GAAP, it is difficult to understand what NASBA means when it says this will “cause confusion and invite fraud and abuse.”
Alright, listen, we know this feels a little hostile but everything is going to be okay, they're going to work it out. And by "work it out," we mean everyone can keep sending passive-aggressive press releases out or just accept that this is what it is and there's nothing to do to stop it.
We will continue to have a dialogue with NASBA and state boards of accountancy about this important new framework for small and medium-sized enterprises. We believe it is an important new initiative and one that will prove to be very beneficial to the marketplace. We hope that NASBA will ultimately come to share our perspective on this matter. In addition, I’d like you to know that we have, throughout this process, also been in conversation with the FAF as they move forward with their modifications to GAAP for private companies. When the AICPA announced, in May 2012, its plans to develop a non-GAAP financial reporting framework for small, owner-managed, for-profit entities, the FAF called the project “important and complementary” to its own efforts to modify GAAP for private companies. FAF and FASB did not review or comment on the technical aspects of the FRF for SMEs, but they and the AICPA have the same objective of recognizing private companies’ unique circumstances. We strongly support the FAF’s work on their project to modify GAAP where appropriate for private companies. Together, we can meet the needs of private businesses looking for solutions to their reporting needs.
It's difficult to know at this point if FRF for SMEs will go the way of Betamax and LaserDiscs (if you don't know what either of those are, my point is made) but it seems to me the AICPA is really serious about getting all the support they can for this framework which, to them, is a superior alternative to the Wild West of OCBOA. I mean if you can't trust the AICPA, who can you trust?
Your move, NASBA.