How do you spell relief?

On Monday, June 10, 2013, new accounting rules were proposed for private, for-profit, small and medium-size businesses by the American Institute of Certified Public Accountants (AICPA).  Millions of small businesses will now be able to use a simplified and streamlined method for measuring and presenting their financial results.  The new framework uses only historical cost as a basis for valuing assets and liabilities, not current market value. It doesn’t include more-complex accounting for areas that smaller, simpler companies are unlikely to get into, such as off-balance-sheet entities, derivatives or hedging.  Many private companies have long complained that GAAP (generally accepted accounting principles) reporting is overly burdensome, complicated and too costly.

Public companies are required by the Securities Exchange Commission to report financials using GAAP.  If a private company expects to go public in the near-term, it may want to avoid this non-GAAP accounting option.  While the proposed measure will provide relief to many privately held companies, many larger ones may still be required to prepare GAAP statements if their lenders, financiers or regulators require it.  Not to be forgotten, a fellow trade group called the Financial Accounting Standards Board (FASB) has been looking to loosen the rules on how private companies account for intangible assets like goodwill which is created when one company buys another for more than the value of its hard assets.  Coincidentally on Monday, the FASB endorsed the council’s first three proposals to modify GAAP for private companies and agreed to issue them for public comment.

In my initial blog post titled ‘Beware goodwill’ (https://christinemederaccountingadvisory.wordpress.com/2013/06/09/beware-goodwill-2/) I show how public companies such as Hewlett Packard keep two sets of books, one GAAP and one non-GAAP.  The distinction between the two methods in HP’s case is evident as the near $20 billion goodwill write-off is included as required in its GAAP results which reflect a 2012 fiscal year loss of $6.41 per share.  The non-GAAP results for the same period exclude the write-off and thus reflected a profit of $4.05.  The concern I have moving forward is that the new rules don’t accurately represent the current financial state, activity and history of a firm.  If you are an investor, banker or a supplier to a private company or even a Fortune 20 company such as HP, would you prefer to be bamboozled by non-GAAP reporting reflecting results absent the goodwill write-off as if it never happened or would you prefer to know of the mismanagement and excessive premium that was paid to acquire the businesses which resulted in the write-down?  Transparency is the buzzword of the day and the new measure which allows for valuing assets and liabilities at historical cost and not current market is not advisable for companies with asset heavy and appreciating balance sheets.

A check of industry professionals suggests that companies with less than $100 million in annual revenue should consider the new framework which will not comply with GAAP standards.  If you’re a small to medium-size private company and the thought of preparing financial statements gives you a headache and you’re not sure whether this new simplified approach is right for you, please email me, Christine Meder, at mederchristine1526@gmail.com to schedule a free 30-minute consultation.

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About Christine Meder
Leveraging my insights and professional experience of 25 years in the accounting profession, I and my firm Christine Meder's Accounting Advisory Services provide our high net worth clients expert advice on their business activities and investments. In addition to performing traditional accounting functions in a confidential manner, I pride myself in giving clients a competitive edge whether it be in running their businesses or managing their investment portfolio. My studies leading up to completion of the EMBA program at the University of Nevada, Reno this August provide me with latest skills and techniques utilized across a broad spectrum of business functions. This breadth of education is complemented with experience as an accountant in the construction, mining, real estate and technology fields during my career. If you are looking for a trusted adviser or consultant in addition to someone you can rely on to properly keep your books, please contact me.

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