Entrepreneurs beginning new technology companies have many issues to deal with, including developing their products and bringing them to market, raising capital, and growing their companies.
While accounting and financial reporting matters often are not priorities, lack of proper attention to them can impede the activities of young tech businesses.
To succeed, a technology-based entrepreneur needs more than an innovative product.
Often, the ramifications of poorly prepared or inaccurate financial statements are uncovered at the worst times, like during due diligence by an investor, or when a potential new customer requests to see the company’s financial statements.
To make it in this industry, companies normally are required to have an audit, review, or compilation performed on their financial statements by an independent accountant.
Before now, small and mid-size privately owned technology companies were required to prepare their financial statements in accordance with the complexities and challenges of U.S. Generally Accepted Accounting Principles, or GAAP.
Companies now may have another option, provided they have agreement and acceptance from their stakeholders.
On June 10, The American Institute of CPAs (AICPA) introduced the Financial Reporting Framework for Small and Medium-Sized Entities (FRF for SMEs) to help the small business community with its financial reporting needs.
The accounting framework is a new option for preparing streamlined, relevant financial statements for privately held, owner-managed businesses that are not required to use U.S. GAAP.
The framework offers technology start-up companies an alternative to the non-GAAP options that are currently available (cash or tax basis). It provides efficient, meaningful results without needless complexity within U.S. GAAP.
Further, as young technology companies are trying to grow and focus their resources to advance their products, preparing U.S. GAAP financial statements could be costly due to the complexities of revenue recognition, derivatives, stock-based compensation and other standards.
This new framework may allow companies to reduce the cost of their financial statement audits, reviews or compilations.
It has also been developed to provide consistent and simpler financial statements for small and medium sized entities where U.S. GAAP is not required.
Technology companies will use the FRF for SMEs to prepare financial statements that clearly and concisely report what a business owns, what it owes, and what its cash flow is, similar to U.S. GAAP.
Investors, lenders, insurers and other financial statement users will find this new accounting framework helps them clearly understand the key measures of a business and its creditworthiness.
The framework’s streamlined, common-sense requirements are based on traditional and proven accounting methods to ensure consistent application.
As such, this framework will use historical cost — steering away from complicated fair value measurements.
It will offer a degree of optionality that could allow businesses to tailor the presentation of statements to their users. FRF for SMEs includes targeted disclosure requirements and reduces book-to-tax differences.
No matter which reporting criteria is ultimately elected, all technology companies need to set the proper “tone at the top,” so all employees know the importance placed on accurate financial reporting; to be current on their internal financial reporting; to know the difference between cash flow, the pipeline, financial reporting rules and taxability; and to not let accounting considerations stand in the way of great business opportunities.
Keep in mind that if your stakeholders require U.S. GAAP financial statements, they will still need to follow Financial Accounting Standards Board guidance.
But if there is no need for U.S. GAAP financial statements, you will have the option to use the FRF for SMEs provided the ultimate financial statement users find this acceptable. Using this standard will allow for fewer complexities in financial reporting.
Michael Brooder is a CPA and partner in the Hartford office of accounting firm Marcum LLP. Marcum’s annual Tech Top 40 event honors Connecticut’s fastest growing technology companies.
