Title: What Small Businesses Need to Know about Personal Financial Statements
Abstract: ABSTRACT Bankers are probably more frequent users of personal financial statements than any other group. Consequently, their personal opinions regarding the content and the adequacy of disclosure in personal financial statements are certainly important to preparers of these statements. This study gathers bankers' attitudes regarding valuation techniques, disclosure requirements, and reporting format as specified by Statement of Position (SOP) 82-1, and Financial Reporting for Personal Financial The findings are based upon a survey of senior bank loan officers in the state of Louisiana. The results of the survey indicate that respondents generally approve of GAAP for personal financial statements. However, a majority of the respondents would prefer some in the reporting requirements. They believe that a changes in worth statement should be mandatory for personal financial statements. They also believe that personal financial statements should be presented on a comparative basis. Many would support excluding assets of a personal nature since these assets are not normally liquidated. A majority of the bankers expressed a preference for the traditional or noncurrent classification for assets and liabilities in the statement of financial condition. Bankers are generally satisfied with CPAs' compliance with the disclosure requirements of SOP 82-1. However, two areas of disclosure that are considered deficient are summarized financial for material investments and details provided for contingent liabilities. INTRODUCTION Small businesses are frequently required to submit personal financial statements (PFS) when applying for bank loans. Since bankers use PFS in making loan decisions, their opinions regarding the content and the adequacy of disclosure in personal financial statements are certainly of interest to small business managers. This study presents the results of a survey of bankers' attitudes regarding the content of PFS. Since bankers are frequent users of PFS, their experience with these statements enables them to evaluate and recommend improvements in disclosure and valuation techniques. BACKGROUND The primary objective of personal financial statements is to provide accrual-basis financial for an individual, a husband and wife, or a family regarding its financial condition (Kinsman & Samuelson, 1987). According to generally accepted accounting principles (GAAP), personal financial statements should be prepared on a current basis rather than on an basis. This requirement was established in 1982 when the American Institute of Certified Public Accountants (AICPA) issued Statement of Position 82-1 (SOP 82-1), Accounting and Financial Reporting for Personal Financial Statements. Prior to SOP 82-1, historical cost was the required reporting basis, and values were disclosed as supplemental information. The AICPA made a fundamental change in its reporting requirements when it concluded . . . the primary users of personal financial statements normally consider estimated value to be more relevant for their decisions than historical cost information (AICPA, 1992). In the statement of financial condition, assets should be reported at their estimated values and liabilities at their estimated amounts. In addition, estimated taxes must be disclosed on the difference between the estimated realization value of the assets and their tax bases. Also, net worth must be reported on the statement based on the difference between total assets and total liabilities. SOP 82-1 does not prohibit supplemental presentation of historical cost information. In the statement of financial condition, assets and liabilities should be listed in order of liquidity and maturity. Neither assets nor liabilities are classified as or noncurrent since the concept of working capital is considered inappropriate for personal financial statements. …
Publication Year: 1993
Publication Date: 1993-10-01
Language: en
Type: article
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