Private Companies: Getting rid of US GAAP Reporting!

Enough is Enough. I just read another article that described the implementation of the new lease accounting standard as "Daunting". Really!? There are three themes in every article, CPE and seminar on the new accounting standards (revenue, lease, credit losses, etc.): 1) Don't underestimate time and resources needed for implementation; 2) Don't delay; and 3) Learn from the challenges of those who have implemented them already. If multi-national, multi-billion dollar companies with significant resources, dollars and consultants are struggling to implement these standards properly, what chances do the rest of us have for successful implementation. Answer. None.

I have decided to take action and below is my plan of action.

The Plan. Until there is meaningful substantial change in US GAAP, there is no need to use it. I read an article from the Journal of Accountancy titled "How to make the most of FASB’s effective date delays". I intend to. Instead of spending ridiculous amounts of time and costs trying to implement the most recent accounting standards, I will focus on a new plan. Implementing steps to rid myself of US GAAP financial reporting by replacing it with better, more transparent financial information (i.e. other financial information which is already available or easier to prepare).

Full Disclosure. Below is a recommendation and is only my opinion. If you disagree and feel I have no idea what I am talking about, continue preparing US GAAP financial statements and having them audited.

I encourage the following: 1) Users (banks, investors, etc.) - stop requesting US GAAP financial statements and get financial information that is more relevant, timely and accurate; 2) Issuers - stop issuing US GAAP financial statements and start providing better, more transparent financial information which is already available; 3) Outside Professionals - work with your clients to implement the removal of US GAAP financial statements.

Assumption. As this website indicates, US GAAP has become an overly complex burdensome waste of time and money.

The Vision. Imagine not having to prepare US GAAP financial statements or be subject to an audit of those financial statements. Some of you, particularly smaller private businesses, are already free of this burden. Yet, there are still a significant portion who are not. It is time to fix that problem.

The Challenge. Convincing Users (i.e. banks, investors, bonding companies, etc.) to stop requiring audited or reviewed (even compiled) US GAAP financial statements and replace them with better, more transparent financial information already available.

Where to Start. Have the right mindset, be professional and be prepared. The process could be as simple as asking the User to waive the requirement on up to making multiple request or several years. Or it may never happen. You may not be successful but there is no harm in asking. At the very least, see going forward below.

The Steps. Here are recommended steps:

Step 1. Internal Assessment. Are audited/reviewed US GAAP financial statements absolutely required (i.e. there is no wiggle room)? For example, is the company intending to go public in the future? Is it required by statute (i.e. by law) and there is no exception?

Step 2. Who is Requesting. Determine who is requiring audited/reviewed US GAAP financial statements. In addition, what documents, if any, detail this requirement. For example, the two most common I encounter are debt agreements and operating/partnership agreements.

Step 3. Who to Contact. Determine the person or persons you need to contact who can make this type of decision or at the very least the person who will deal directly with the decision makers. For example, at a bank, the person who handles your banking relationship or deposit accounts may not be the same person who can address this issue. If it's a LLC or partnership, who is the managing member (if an LLC) or general partner and can they make this decision alone or is a vote required.

Step 4. Most important. Take an inventory of all (or as much as possible) the financial information the company produces and when it is produced. In the appendix below, there is a list of of items as some examples. The User will want to know what can you provide instead of audited/reviewed/compiled US GAAP financial statements. In addition, make a company wide decision to be more transparent with financial information.

Step 5. Contact. Contact the person or persons from Step 3 (face to face meetings, if possible). Explain your position and the request. Discuss what information you can provide and how often. Determine their needs (i.e. listen to what they want or need). They may have requested US GAAP financial statements because it is standard operating procedure. This is a discussion not adversarial.

Focus on the benefits. There are many benefits but these are the three primary benefits: 1) Better Financial Information. By providing more transparent financial information (financial information that is used to operate a business), Users can make more informed decisions. 2) Timely. Preparing US GAAP financial statements and the audit takes 90 to 120 days or more after year end. Once a year. By providing information already available or easy to prepare financial information using available data, Users of the financial information can make timelier decisions; 3) Accuracy. Since the financial information management uses to operate a company is derived directly from the transactions of the company and not machinated through an accounting standard, Users have more reliable information on which to make decisions. As an example of number three, compare a Statement of Sources and Uses to the US GAAP Statement of Cash Flows and tell me which one provides more reliable information.

A benefit not directly related to Users is reduction in costs. There is a substantial reduction in costs (no audit/review, appraisals, third party experts, etc. as well as internal costs to prepare & maintain US GAAP financial reporting ) because the information being provided already exists from various departments/personnel or can be easily derived from current financial data.

Alternatives. If they refuse to provide a complete waiver of the requirement for US GAAP reporting and audit, know your alternatives and be prepared to negotiate. Try requesting the following:

  1. Qualified opinion. This gives flexibility on implementing certain accounting standards (i.e. lease standard comes to mind)
  2. Audited OCBOA financial statements (rarely seen)
  3. Reviewed US GAAP financial statements instead of audited
  4. Compiled US GAAP financial statements instead of reviewed/audited
  5. Financial statements with special procedures on specific accounts (Rarely seen, but possible)
  6. IFRS/FRF for SMEs (Alternative reporting framework)

Finally, there are other alternatives that are more aggressive but be careful managing your business relationship. As an example, if a lending institution, change banks, acquire a new loan and move your deposit accounts. In addition, be open to alternative types of financing such as private debt.

Step 6. Deliver. Whatever is agreed to, provide it. Do not make exceptions or excuses. Make it a priority in the company like the monthly close. It becomes part of the reporting process which management is responsible for.

Going Forward. Take the following actions.

  1. Discuss up front. Inquire of prospective investors and lenders their requirements for US GAAP financial statements and audit. Most have no requirement. They "prefer" to have US GAAP financial statements and an audit. Once there is no requirement then it is just negotiating what they do want and what you can provide. If they insist, you may need to seek alternative investors and/or lenders. Then again, you may have no choice.
  2. Remove wording from documents. Make sure any document is screened to remove wording related to US GAAP reporting and/or audit. Occasionally, the people you meet with are not the ones who are preparing the documents or someone else in your company (owner, President, COO) met with someone and you are receiving the documents for review. The primary documents I deal with are debt agreements or operating agreements. Half the stuff in these documents is either boilerplate or taken from another document. Upon reviewing the documents, I search for terms (or some form of them) that state books and records are to be maintained under US GAAP, or audited financial statements under US GAAP. I remove the words and replace them with specific financials statements such as company prepared accrual basis balance sheet and income statement or just leave it as to be determined by ______ (insert entity name). And I do not replace the audit language with anything.
  3. Management philosophy. Have a management philosophy to be more transparent with financial information for Users. Users want timely, relevant an accurate financial information. Provide it and they will not need US GAAP reporting or an audit.

Appendix. The following list are examples on financial information I have produced. Everything below can be produced practically in real time at anytime, except for a few items. All or any of them are far more valuable than a US GAAP financial statement.

  1. Company prepared comparative balance sheet and income statement on the accrual basis with accompanying footnotes detailing certain assets, liabilities, equity, revenue and expenses. The footnotes (better than US GAAP) provided reflect supporting detail related to balance sheet and income statement accounts. This detail is derived from other readily available reports. As a simple example, the footnote for accounts receivable lists major customers and balances due. Should a user wish to have more detail we can provide the A/R aging from where that information was derived. We can produce these financials within 10 days of a month or quarter end and usually faster.
  2. Pro Forma (i.e. projections, forecasts, etc.).The single most valuable financial information I produce both for users and internally. All of them are cash based, provide anticipated sales, expenses, Capex, returns (IRR), equity, waterfalls, financing needs, etc. They are updated monthly, quarterly or annually.
  3. Internal valuations of assets. Schedule for the owners which outlines each asset, its value (internally calculated), debt on each asset, ownership percentage by investor and the net value associated with each owner/investor. Updated Annually or upon request.
  4. Cash Flows (i.e. statement of sources and uses). Prepared at an entity and global company level. Reconciles to the ending cash balances. If you do not have a format for a sources and uses, the format on this website is a good start. As I understand, many non-profits also have to prepare something similar and maybe their format can be used. Prepared as needed in real time.
  5. Budgets and Budget to Actuals. Company level and project level. At the project level our project managers are very involved. The budget to actuals are updated monthly for active projects and quarterly or annually for minimally active projects.
  6. Bank statements and bank reconciliations. Monthly.
  7. AP Reports (aging, vendor, terms, etc.). Real time as needed.
  8. AR reports (Cash Receipts, aging, customer detail, terms, etc.). Real time as needed.
  9. Rent rolls. Real time as needed.
  10. Tax Returns. Even the returns of owners if closely held. Annually.
  11. Personal financial statements of the owners. Prepared for lenders especially if personal guarantees are involved. Annually, 90 to 120 days after year end.
  12. Appraisals. much less expensive than audit and more specific to the asset or assets of a company or organization. As needed.
  13. General Ledgers and any other accounting ledgers. Real time as needed.
  14. Reports from Software. There are numerous reports that are available from several software packages we utilize. All can be run in real time as needed.
  15. Cash Balances and Debt Schedules. Updated weekly for all accounts.
  16. Documents. Any sale/purchase agreement, operating agreement, lease, service contracts, subcontracts, etc.

Many companies have similar financial information and may have even more extensive financial information especially in the areas of sales and inventory (we do not have inventory).

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