Nobody wants accounting to get any more arcane, least of all commercial lenders. Untangling a small-business borrower's financials is hard enough already.
A new effort to streamline financial reporting could help credit officers make decisions without studying mountains of footnote-laden documents. The Financial Reporting Framework for Small and Medium-Sized Entities, a set of standards proposed by the American Institute of Certified Public Accountants, is touted as a simpler method to assess the health of private companies, which could have the added benefit of stimulating lending.
But as always in accounting, there are complications. The new framework has exposed decades-old divisions between accounting groups, roiling a field unaccustomed to emotional debate.
Advocates of the new framework say it could help bankers land more small-business clients, who would spend less money to prepare accurate financials that are central to credit reviews. Critics say it will just trigger new accounting headaches, by introducing a shaky set of guidelines that differ from generally accepted accounting principles, or GAAP.
"Of course a banker would like to have audited financial statements, and this may make it cheaper to get them," says Mike Gullette, vice president of accounting and financial management at the American Bankers Association. "But bankers now are going to have two different frameworks to think about, and it could take years to determine if a banker will prefer one over the next."
The AICPA, which establishes professional standards and lobbies on behalf of its members, introduced the new framework last June. It is meant to provide a detailed picture of a privately held company's finances, while avoiding the more burdensome requirements of GAAP, the most commonly used set of accounting standards.
The framework isn't a replacement for GAAP, says Dan Noll, the AICPA's director of accounting standards. It's built for traditional owner-managed companies that don't want to use GAAP but find that other accounting standards "aren't quite cutting the mustard," he says.
"This framework follows very traditional accounting principles that help put together a picture of what a company's assets and liabilities are," Noll says. "On that basis, bankers would be getting a pretty clear picture of a borrower."
For many small businesses that have used it, the simplified reporting framework is welcome.
Keith Willy, a partner at Twain Financial Partners, a small St. Louis startup that manages assets for banks, says he persuaded the company's backers to accept financials prepared under the new framework last year. The move saved around $200,000 in accounting and other costs, he says.
The new guidelines don't require the firm to consolidate its equity holdings on its balance sheet, a labor-intensive process that Willy says only serves to "clutter up your financial statement at the expense of transparency."
The new framework is not an authoritative set of rules; banks can choose to accept financial statements prepared in accordance with it or stick with GAAP. But banks that go the new route could get a leg up in small-business lending by making it easier—and cheaper—for companies to apply for loans, advocates say.
Enterprise Financial Services, parent of Enterprise Bank & Trust in St. Louis, is one of the early adopters. The $3.2 billion-asset company thinks the framework can help it land small-business customers who are reluctant to undergo a full audit, says Theresa Bible, Enterprise's senior vice president of credit.
"We look at it as a competitive advantage. If we can provide an alternative to an audit and a tax return, we would have an advantage versus a company that would want a small-business owner to do a full audit," she says.
Enterprise has begun educating the accounting firms it works with about the framework, and may hold educational sessions for potential clients—sessions that could double as marketing opportunities, Bible says.
Though it is not yet widely used, the framework "is starting to gain some traction" among companies Enterprise works with, she adds. A Thomson Reuters survey last year found that 46% of CPAs were familiar with the framework.
In the accounting community, the release of the new framework rekindled an old debate about the complexity of accounting standards, and whether some rules should be relaxed to accommodate smaller, private companies.
"There is a perception that because accounting has become too complex, it is getting too expensive to ask for an audit of financial statements.," says the ABA's Gullette, who ties the debate back to the changes ushered in by the Sarbanes-Oxley Act. That bill, a response to a wave of big accounting scandals that broke in the early 2000s, increased auditors' liability for faulty financial statements, generally making it more expensive for companies to have their financials audited.
To help ease this burden, the Financial Accounting Standards Board, which oversees changes to GAAP, has been working for the past several years to develop a less rigorous alternative—so-called Little GAAP—for small, private companies, but has not yet unveiled the new rules.