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Private construction and real estate companies face several financial reporting choices in 2013.

Private Companies Face Financial Reporting Choices in 2013

  • 11/21/2013

Private Companies Face Financial Reporting Choices in 2013

This has been a year of dramatic change in financial reporting alternatives for privately-held contractors and real estate companies. At the beginning of the year, the “big GAAP/little GAAP” debate was still raging. The Financial Accounting Foundation (FAF) disregarded the recommendation of the American Institute of Certified Public Accountants’ (AICPA) Blue Ribbon Panel and created the Private Company Council (PCC) under the purview of the Financial Accounting Standards Board (FASB) rather than as an independent standard setting organization. Despite the controversy over its positioning, the PCC got to work right away. And so did the AICPA. The outcome is a variety of reporting options.

PCC proposals

The PCC has been very active during 2013. With the FASB, it jointly developed a “private company decision-making framework” outlining the criteria to be used to determine when it is appropriate to adjust financial reporting requirements for private companies following U.S. Generally Accepted Accounting Principles (GAAP). The PCC has also proposed changes to GAAP for private companies in areas such as intangible assets in business combinations, goodwill, variable interest entity consolidation, and interest rate swaps. These suggestions have been sent to the FASB for endorsement. Other projects under consideration include share-based compensation, uncertain tax positions, and development-stage reporting. While the new alternatives proposed by the PCC have yet to be endorsed and are not approved for use under GAAP, private companies should be aware that these proposals may provide more reporting choices in the near future.

The AICPA responds

Not to be outdone following its “defeat” at the hands of the FAF, the AICPA introduced the Financial Reporting Framework for Small- and Medium-Sized Entities (FRF for SMEs) in June 2013, as an alternative reporting framework for the small business community. FRF for SMEs is not GAAP, but rather an “other comprehensive basis of accounting” with its roots in accrual and historical cost. The AICPA believes the FRF for SMEs will enable small businesses “to prepare financial statements that clearly and concisely report what a business owns, what it owes, and its cash flow.” While percentage-of-completion revenue recognition for contractors would still be appropriate under this framework, impairment and other fair value measurements that have impacted construction and real estate companies over the past few years would be eliminated. The FRF for SMEs is not for everybody, and those companies that have a GAAP reporting requirement, operate in an industry involving transactions with highly-specialized accounting guidance, or are considering going public should not use the FRF for SMEs. Though FRF for SMEs is available, companies are hesitant to use it, because it won’t immediately be accepted by the credit granting community. Also, GAAP appears to be headed towards some of the same concepts via the PCC, so some feel it would be unnecessary to embrace the change to FRF for SMEs at this time.

How we help

With more alternatives in financial reporting than ever before, contractors and real estate companies should carefully consider which framework works best for them. The needs of the financial statement users, both current and prospective, must be balanced with the ease of reporting and cost of compliance. Consult your accountants, bankers, and sureties as you consider this decision to make sure you weigh all the implications of this decision. Learn more about the PCC, and explore the AICPA resources available for companies, CPAs, and other users.

CliftonLarsonAllen can assist owners and leaders of contractors and real estate companies as they assess their reporting choices. CLA representatives can explore the impact these different reporting alternatives will have on a company’s financial statements and assist management in communicating that impact to its stakeholders, bankers, and sureties.

Jack Rybicki, Principal, Construction and Real Estate or 813-384-2701