For small and medium-sized businesses with low credit risk, an AICPA reporting framework would be almost as effective as GAAP at producing financial statements that give lenders the confidence to make a loan, according to a study.

The AICPA has launched its Financial Reporting Framework for Small and Medium-Sized Entities (FRF for SMEs) in 2013. The framework is designed to provide private owner-managed businesses that are not required to use GAAP with an alternative that would produce relevant, streamlined and cost-effective financial statements.

In an experimental study with 157 lenders published in the July issue of Journal of Accounting and Public Policy, the researchers concluded that FRF for SMEs is a viable alternative to GAAP when credit risk is low. In low credit risk situations, lenders have also largely preferred the FRF for SMEs to the tax base of accounting.

The study was published by researchers F. Todd DeZoort of the University of Alabama, Anne Wilkins of the University of Tennessee at Chattanooga, and Scot E. Justice of Appalachian State University. In the study, lenders rated the likelihood of approving a loan under various circumstances on a scale of 0 (low) to 100 (high).

When credit risk was low, they rated the probability of loan approval at 75.29 for GAAP-based financial statements, 71.86 for FRF-based financial statements for SMEs, and 50.86 for tax-based financial statements.

Lenders also rated the interest rates they would grant in low credit risk situations as being nearly identical for GAAP-based financial statements (50.07 on the 0-100 scale) and FRF for SMEs (50,59). They said tax-based financial statements (64.40) would result in significantly higher interest rates.

“There was no significant difference in loan approval rate or interest rate between these two executives. [GAAP and the FRF for SMEs]”Wilkins, the Tennessee-Chattanooga researcher, said in a telephone interview.

A low credit risk situation in experience was defined as a business with a stable product line that has seen consistent sales over the past three years with all suppliers being paid on time. A high credit risk situation was defined as a business that has experienced declining sales over the past three years and a low but growing number of late payments to suppliers.

“If you’re high risk, lenders aren’t really looking to give you a loan anyway. [based on those parameters]”Wilkins said.

In high credit risk situations, financial statements prepared under GAAP (67.67) were considered highly preferable to those prepared under FRF for SMEs (56.46) or tax base (56.20). There were no significant differences in interest rates between executives in the high-risk scenarios.

Lenders are not as familiar with the FRF for SMEs as they are with GAAP and the tax base. On a scale of 0 to 100, they rated their knowledge of GAAP at 84.58, the tax base at 47.88 and the FRF for SMEs at 26.11.

“I anticipate that as lenders become more familiar with the framework, it will be an even stronger alternative,” Wilkins said.

Ken tysiac (Kenneth.Tysiac@aicpa-cima.com) is a JofA Managing Editor.


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