Yes, inflation isn’t slowing down.
Though it’s not the main thing I’ll be writing about today, I did want to point out this economic elephant in the room for my business owner readers, and not just speed on by and into my accounting geekery.
One thing is clear … SMB’s (Small Businesses) are feeling the pinch.
But each situation will require a different prescription, and one thing I do NOT want to do during this craziness is to provide blanket advice to cover all of my business owner friends. I will, of course, continue to offer you these weekly notes … but I can’t get as specific with your situation as I’d like to in them.
Now … for businesses of a certain growth rate (or of a particular model), the move from “cash accounting” to “accrual accounting” is an important step in the journey. I just covered that recently.
And we know about the role of the IRS in all of these matters. (Speaking of which: reminder that second quarter estimated taxes are due next week on 6/15/22.)
But there’s ANOTHER organization that you should, at the very least, be educated about as you grow. So I’m putting on my teacher hat today…
Why Should Small Businesses Care About FASB and GAAP?
“Standards are always out of date. That’s what makes them standards.” – Alan Bennett
If the last 20 years of the economy’s highs and lows, downturns and headlines taught us anything about business, it’s that complete and transparent accounting is in everyone’s best interest.
One independent organization working to keep companies’ books clear and honest is the Financial Accountant Standards Board (FASB). You’ve probably heard of FASB – but what do they do and how could they have an impact on you and your small business?
In general, if your business is small enough, not much for now. But as your business grows, you should know about the Board. Let’s take a look.
What FASB is
FASB, based in Norwalk, Connecticut, is an independent, private sector organization that establishes accounting standards for financial reporting in the U.S. It was started some 50 years ago as a successor to the Accounting Principles Board.
Today, FASB is part of a structure that also contains the Financial Accounting Foundation, the Financial Accounting Standards Advisory Council, the Governmental Accounting Standards Advisory Council and the Governmental Accounting Standards Board (that last sets rules for state and local governments). FASB also coordinates with the International Accounting Standards Board, which is responsible for standards of international financial reporting.
FASB works to improve financial reporting within the U.S. and globally while educating stakeholders on understanding accounting standards – specifically, in this country, Generally Accepted Accounting Principles (GAAP).
That’s where FASB is likely to make the most impact on your business.
FASB’s work is key to the economy. A few of the organization’s functions:
Reporting standards. In what is widely considered the major function of the Board, FASB ensures that accountants and other intermediaries who deal with financial information create accurate and factual reports for stakeholders, reports that follow clear guidelines and schedules.
Improved standards. Investors need clear information on a company’s profits and losses, and FASB updates and tweaks accounting principles (sometimes raising as many questions as they initially answer, as we’ll see).
Principles. FASB oversees new principles designed to improve accounting and reporting. One example is the recent disclosure principle, which gives a company the right to publicize its details and structure of costs incurred in the year.
Education. FASB continually educates and updates its accountants and other professionals. One recent example is an overview of the intersection of Environmental, Social and Governance (ESG) matters with financial accounting standards.
GAAP. FASB has the authority to establish and interpret GAAP in the United States for public and private companies and nonprofits. These principles allow stakeholders and investors to interpret a company’s financial position and condition through the financial statements – and allow comparisons with other companies.
Other users of GAAP include creditors, employees and regulators like state accounting boards, the American Institute of CPAs and the Securities and Exchange Commission.
FASB frequently posts updates to the codification of GAAP on various hot topics. The Board recently issued guidance on how companies need to disclosure and account for pandemic-relief money from the government, for instance. Many are now calling for FASB to finally issue guidance on cryptocurrency. Sometimes FASB guidance just ignites questions at first, as with its “going concern” standard a few years ago.
How FASB impacts Small businesses
Clearly FASB exercises pull over how companies conduct business. Though it might seem to be just another regulator sticking its nose into how your company operates, FASB can help even a small business move ahead.
The right accounting method, for instance, gives a more accurate and complete picture of your company’s income and cash flow – and that can only help you make better-informed strategic decisions about expansion or streamlining.
For large and growing companies, the FASB-developed GAAP is required, and GAAP in turn requires you to use the accrual method of accounting (where income and expenses are recognized as they occur, not as they’re collected or paid out). Remember, GAAP is recognized as the standard by stakeholders, investors and lenders.
Small businesses don’t interact with FASB. But even small companies not yet required to use GAAP can benefit from switching to accrual from cash accounting.
It all depends on your goals for your business and how you foresee your growth.
BE THE ROAR not the echo®
Janet I. Behm, EA, CTC