Introduction to Technical Accounting: Navigating US GAAP and its Complexities
If you’re reading this, you may have recently heard the buzzwords of “technical accounting” or “US GAAP.” Maybe it has been from a recent investor, lender, CFO, or other interested party in your company’s financial information. And you are probably wondering why you should even care.
This step-by-step guide walks you through a basic understanding of Technical Accounting and US GAAP, as well as the overall process of hiring a technical accounting specialist.
What is Technical Accounting?
What many people may not realize is that there’s a separate set of accounting rules that certain businesses are required to follow. This separate accounting framework is called the Generally Accepted Accounting Principles in the United States, or “US GAAP,” and businesses are required to show their financial statements in compliance with US GAAP when they are reviewed by lenders, investors, and other financial statement users.
The US GAAP accounting framework comes with hundreds of pages and paragraphs of guidance that provide specific rules for how a company should account for a certain transaction. This guidance reads like a 20th century legal textbook and has the ability to put most people to sleep in a matter of minutes.
When most people refer to “technical accounting,” they are referring to the skill or practice of being able to research this complex US GAAP guidance, interpret it for their specific accounting situation, apply that guidance to their accounting transaction, and document their evaluation so that others can understand and review their thought process.
Do I Need US GAAP and Technical Accounting?
Not everyone needs technical accounting help. In fact, many businesses go their entire existence without ever needing to worry about US GAAP or the technical accounting and financial reporting that comes with it.
If you are a smaller business with little to no external equity investment or debt/loans, then US GAAP accounting likely doesn’t apply to you. Even for startups or businesses with some basic loans or lines of credit, most early-stage lenders and investors still don’t require US GAAP reporting. At this point, you may not need to update your books to US GAAP and the technical accounting that comes with it. However, the need to transition to US GAAP could be coming soon…
Now let’s talk about when do YOU need technical accounting?
Consider when your business has been growing significantly, and you take on major debt/equity funding in the range of millions or tens of millions of dollars. This type of investment tends to come from larger, more sophisticated investors and lenders that generally require financial statements under US GAAP. They may even require financial statements to be audited or reviewed by an external CPA firm to verify compliance with the accounting standards.
At this point, your accounting needs have just gotten WAY more complicated. Previously, you could manage everything with a basic bookkeeper or CPA. However, you now face the challenge of accounting for both routine activities (e.g., revenue recognition, leases, or stock-based compensation) and unique transactions (e.g., acquisitions or debt/equity funding) in a very specific manner and under complex accounting guidance. You’re likely unfamiliar with these accounting standards, and don’t have the time and/or resources to figure it out.
For more details on what Technical Accounting and US GAAP is, and whether they apply to you, see our article here.
What Technical Accounting Topics Apply to My Company?
Once you realize that financial reporting under US GAAP may be applicable to you, the next step of the process is understanding where to start. The most common and impactful areas of technical accounting under US GAAP include the following:
Complex Debt/Equity
Stock Compensation
How Can I Determine High-Risk Technical Accounting Areas For My Company?
To help you know where to start with scoping your high-risk areas for US GAAP and technical accounting, a great place to start is in reviewing certain key information about your company. Some of the most helpful information to obtain and review includes the following:
Recent Financial Statements. Key statements like a Balance Sheet, P&L, Cash Flow Statement, and Statement of Equity, as well as related footnote disclosures on the company’s existing accounting policies and specific transactions. However, if your company has never been audited or reviewed before, the most relevant internal financial statements are a good alternative.
Detailed Balance Sheet / P&L / Trial Balance. Understanding the detail behind financial statements is important as well. Any significant transactions that show up in the account details should be considered for whether they require specific attention.
Inquiries with Leadership. While financial statements are helpful for the balances that show up in normal accounting, they don’t paint the full picture. Sitting down with your leadership team and making a list of any major activities or transactions that have occurred over the past few years is especially helpful.
Key Documents. Key agreements or contracts contain all of the details of specific transactions. The type of key documents varies by each accounting topic. Check out our separate articles on each type of major technical accounting topic, including the above list of potential topics in this article, for more detail on those areas, as well as, a list of relevant key documents.
For more details on the most common Technical Accounting topics, and how you can scope for you company, see our article here.
It’s CRITICAL to understand that the above potential technical accounting topics can be the most common and impactful, but they are not an all-inclusive list and each company can inherently have varied complexities. To mitigate this risk, we highly recommend that you reach out to a technical accounting expert who can help you better understand the scope of your technical accounting needs to assist in scoping high-risk areas.
How Do I Hire a Technical Accounting Expert?
Similar to how you outsource specialized and complex areas to attorneys and legal firms for legal matters, it is often best to bring in a technical accounting expert for your US GAAP accounting needs.
When you first reach out to a technical accounting specialist, the process generally begins with a 15-to-30-minute introductory call with you and your team. At the end of the call, the specialist will generally confirm next steps (information requests for you and timing of a proposal from them).
After the introductory call, a technical accounting specialist will generally send you a shortlist of information requests that will help them do their scoping effectively.
What Happens Through the Proposal Process?
In preparing a quote, the specialist reviews all the information you provided. This is not a detailed review (which will be part of the project), but more to get a sense of the volume and complexity of the related information. They may reach out with a few follow-up questions to gain a better understanding of your business.
Technical accounting projects are generally priced in the form of a budget. This is an estimate of the number of hours expected based on efforts required to complete the project, with applicable hourly rates and other fees, such as administrative, applied based on the expected resources that will be involved to reach the quote amount.
Finally, the quote is delivered to you in the form of a proposal. This can range from a simple e-mail response with key terms, to a more formal multi-page proposal with detailed information on the firm and the project. Once delivered, it is time for you and your team to decide if you have any further questions or feedback, and whether you accept the terms to proceed with the engagement. If accepted, a formal contract is drafted and signed between both parties, and the project begins.
How Does Billing Typically Work?
Most firms invoice on a periodic basis; monthly is most common. At the end of each month, the amount of actual hours worked and their related rates, as well as any admin fees, are calculated by the firm and issued as an invoice to the company.
Some firms may charge an upfront advance/retainer for a certain portion of the budget, at the start of the project or upon meeting certain milestones for a larger project. If the involvement is on a recurring monthly basis, an upfront advance/retainer may be applied at the beginning of each month.
What Do Hourly Rates Look Like?
Technical accounting services are highly specialized; they require an intimate knowledge of the latest guidance, as well as how to apply that guidance properly and most efficiently. Because of this, pricing is more expensive than routine accounting services such as bookkeeping or tax return preparation.
Different types of technical accounting specialists, and their related pricing, can be considered in 3 buckets:
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This consists of the “Big 4” firms of Deloitte, KPMG, PwC, and EY, as well as other international firms (e.g. RSM, Grant Thornton, BDO). These are by far the most expensive, but bring a high level of prestige as well as a deep bench of resources in their services.
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This consists of regional or local firms, commonly considered as “boutique” firms. These firms are less costly and more agile than large firms, but have a smaller bench of resources and subject matter experts (“SME’s”).
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This consists of a single specialist, such as a freelancer or a full-time hire. This is the cheapest option; however, they can be limited in their capacity and overall knowledge and exposure to the many topics of US GAAP.
Where Does Zeroed-In Fit in All This?
At Zeroed-In, we are considered a Midsized or Boutique firm. Our Technical Accounting Consulting Services are charged based on hourly rates ranging from $200-$300, based on the role/level. For smaller scope projects, we may choose to simplify this into a single blended rate of $235, for example, for multiple levels of consulting resources. We also charge an administrative fee to assist in covering the costs of our technology stack and internal tools used.
Our projects are generally priced and billed on an hourly basis for actual hours incurred and applicable hourly rates. However, we also have fixed-fee packages available for certain projects, such as our recurring Technical Accounting Advisory services, or ASC 842 (lease) implementation projects for companies with 10 or fewer known leases. We will share with you during the proposal process whether a fixed-fee package is available for your specific company’s needs.
Reach out to us for a discovery call or check out the rest of our website for more information on our team, our services, and additional resources such as our blog and video content.
We’re here to help!
Check out this video from our Learning Hub with Co-Founder Kyle Geers discussing this article and other helpful information!
ABOUT THE AUTHOR
Kyle Geers is a licensed Certified Public Accountant in California and a seasoned professional based in LA. He has 10+ years of public accounting experience, including 7 years with global CPA firm Grant Thornton LLP. Kyle has been involved with financial statement and integrated audits of both public and private businesses, ranging from emerging start-ups to multinational corporations with complex operations. He also holds extensive advisory experience in assisting businesses with their technical accounting and financial reporting.