The AICPA’s new Financial Reporting Framework for Small and Medium-Sized Entities was big news when it was released at the Institute’s annual Practitioners’ Symposium and Tech+ Conference … and it just keeps getting bigger.

The framework is being touted as a financial-reporting alternative for small and mid-sized private companies that are not required to conform with Generally Accepted Accounting Principles (or GAAP). The AICPA’s position seems clear: Where GAAP is required, private companies would be wise to follow the advice of the new Private Company Council, the Financial Accounting Foundation, and the Financial Accounting Standards Board, who are working to expand GAAP to private companies.

If GAAP is not required, however, the new framework for SMEs might be a reasonable alternative.

“Some private businesses, typically smaller or those with less complex business models, will see the AICPA’s framework as an effective alternative to other existing financial reporting options,” said AICPA President and CEO Barry Melancon. “Larger, more sophisticated private businesses may, in the future, choose to use GAAP for private companies, and still others with unique user needs, regulation or intentions to go public might use GAAP for public companies.”

Not everyone is on board with the new framework, however.

Specifically, the National Association of State Boards of Accountancy (NASBA) is urging private companies to not adopt the new AICPA framework.

NASBA “reaffirmed its support of Generally Accepted Accounting Principles as modified by FASB to meet the financial reporting needs of private companies,” Accounting Today reported. “NASBA said it believes significant progress is being made by the Private Company Council of the FASB. ‘Consequently, private companies should not consider adopting (the framework),’ said NASBA in a press release.”

So which is it?

The answer, says Tom Hood, is “both.”

I spoke with Tom this morning, and he made the following points:

• NASBA is absolutely justified in its vigorous support of GAAP and the work of the PCC.
   
• At the same time, there is a clear need for optional standards that provide a standardized financial reporting format and guidance for the 43,000 small CPA practices that serve more than 16 million small U.S. businesses. The MACPA’s Private Company Standards Task Force concluded as much in a 2011 whitepaper. So did the International Accounting Standards Board when it released its 230-page “IFRS for SMEs” standards in 2009.

“That is how I see the framework,” Tom said. “To me, it’s guidance for practitioners who opt out of GAAP due to extreme complexities that are often irrelevant to the financials of small businesses.”

For its part, the AICPA released a statement that addresses three main concerns put forth by NASBA. Those concerns are in italics below, and the AICPA’s response follows each.

• NASBA: (The FRF for SMEs) represents non-authoritative guidance and therefore will be very difficult to regulate or enforce. AICPA: The FRF for SMEs designation, as non-authoritative, is no different than other OCBOAs that have been issued and are also non-authoritative. CPAs remain regulated by boards of accountancy for the work that they do and will be expected to comply with the high expectations of their regulators and their clients.
   
• NASBA: The scope, “small and medium size entities,” is undefined. As such, any private company, regardless of size or financial backing, could potentially adopt the FRF. AICPA: The private market can determine which basis of accounting is appropriate. They do not need a regulatory trade group making that decision. For many small and medium-sized enterprises, GAAP (including modifications for private companies) will be appropriate, but for others, the FRF for SMEs and other OCBOAs will be more appropriately suited. The AICPA believes that decision is best resolved between businesses and those that use their financial statements, without interference from outside parties.
   
• NASBA: It allows the use of GAAP financial statement titles, yet does not require disclosure of differences with GAAP, which will cause confusion and invite fraud and abuse. AICPA: The FRF for SMEs framework does not use the terms “balance sheet” or “income statement” in the framework. In fact, the framework uses titles that are not typically considered GAAP. Additionally, the framework requires disclosures that very clearly state that it is not GAAP and therefore will not be confused by a user, whether that user is a private business or a potential lender. Also, any report (audit, review, or compilation) on the framework by a CPA will also state in the report that the FRF for SMEs is not GAAP.

Melancon said discussions between the AICPA and NASBA will continue in an effort to reach some mutual understanding.

In the meantime, I cornered Melancon at the Practitioners’ Symposium and asked him what CPAs need to know about the framework. Here’s what he said.