Financial Reporting by Private, Small and Mid-Size Companies

Changes in the accounting standards for inventory costs, nonmonetary exchanges and earnings per share - all reflect the start of a trend. Many more narrow-scoped changes in accounting standards lie ahead on the road to convergence. The end result is expected to benefit large public companies with cross-border capital-raising transactions and listings on multiple exchanges. But the resulting changes in U.S. accounting standards, added to the normal volume of changes and the increasing complexity of U.S. accounting standards, increase the burden on private, small and mid-sized companies.

Is the company prepared for more accounting changes in 2005?

The international standards known as International Financial Reporting Standards (IFRS) took effect on January 1, 2005 for public companies in Europe. The FASB has expressed its commitment to working with the International Accounting Standards Board (IASB) to eliminate differences between U.S. GAAP and IRFS. The next sets of issues to be addressed are discussed in the section on "More Changes from International Convergence."

The burden of constantly changing and ever more complex accounting standards on private, small and mid-sized companies prompted standard-setters and regulators around the world to take action.

Highlights of steps taken in 2004 include the following:

• In June 2004, the IASB issued a discussion paper on "Preliminary Views on Accounting Standards for Small and Medium-Sized Entities." The purpose was to invite comments on the IASB's basic approach to developing international accounting standards for them.
• In September 2004, the International Federation of Accountants (IFAC) cited challenges for small and medium-sized entities and accounting firms as one of the key obstacles to be overcome in its paper on "Challenges and Successes In Implementing International Standards." The paper noted that Europe has 7,000 public companies but over one million private entities.
• The challenges cited by the IFAC include: (a) the length and complexity of the international standards, (b) the cost of compliance with IFRS versus the benefits received, (c) the perceived focus on large-entity issues, (d) the lack of sufficient small and medium-sized entity and accounting firm representation on international standard-setting bodies, and (e) the need for a reeducation process in connection with statements used for tax preparation, banking covenants, and other reporting requirements.
• U.S. regulators, standard-setters, and professional associations took steps in 2004 to respond to similar concerns. The FASB formed a small business advisory committee. The AICPA formed a Private Company Financial Reporting Task Force to study the topic of financial reporting for privately held businesses. And the SEC appointed an advisory committee to provide input on accounting standards and financial reporting requirements that apply to smaller public companies.

All these developments reflect a growing awareness of the impact of changing and more complex accounting standards. They also reflect growing concerns about the continuing relevance of U.S. GAAP.

Does existing U.S. GAAP serve the needs of the users of the company's financial statements?

Due to the combination of the high cost of compliance with the Sarbanes-Oxley Act and recent accounting standards, the focus of the U.S. advisory groups has broadened to include the grass roots question of how effectively existing U.S. GAAP serves the needs of the users of smaller and private companies' financial statements.

Although there is considerable uncertainty about the outcome of the broader issues, it does seem likely that greater input from the preparers and auditors of private, small and mid-sized companies - groups underrepresented in the past - will help to shape the future direction of standard-setting projects and regulatory initiatives.

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