Question

What are some of the advantages or disadvantages of a non-public company following different or simplified standards of GAAP?

Answer 1

Generally Accepted Accounting Principles (GAAPs) refers to standards issued by Financial Accounting Standard Board (FASB) for preparation and presentation of financial statements of any organisation. There are guidelines and principles in GAAPs relating to preparation and presentation and to disclose it to public of financial statements issued by FASB like Principles of Consistency, Regularity, Continuity, Materiality etc. These principles are needed to be followed by public company. However, Non-Public Company are still free to apply their predetermined standards for preparation and presentation of financial statements.

Non-Public Company are not following the GAAPs because it is not possible for private companies to report the financial performance and financial position as per the framework provided by GAAPs due to many complexities like difference in reporting of financial statements and tax return etc. Therefore, non-public companies are allowed to follow tax payable method to reflect the mirror image of tax return in financial statement. Apart from this, there is many problems for private company to implement the GAAPs principles for non-public companies to follow the principles of GAAPs.

Therefore, we can conclude that non-financial company can prepare the financial statement as per the standards fixed by them but they are not allow to deceive the interest of any party by making stringent rules and reporting standards. In that case, GAAPs rules will prevail over the general rules framed by non-financial company. Finally, the American Institute of Certified Public Accountant (AICPA) has issued guidelines and frameworks for preparation and presentation of financial status of non-public company.