Why Should I Care about Technical Accounting?

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 article walks you through a basic understanding of Technical Accounting and US GAAP, and whether it applies to you and your company. 

What is Technical Accounting? 

 To understand what Technical Accounting is, you should first know that there are specific accounting rules for a company and its operations. In fact, there are multiple sets of accounting rules that a company must follow for different purposes. 

For example, every year you work with your CPA to make sure that your accounting in tax returns that you file meets the tax rules set by the Internal Revenue Service (“IRS”). Get those rules wrong, and you could be receiving a nastygram from the IRS with additional amounts owed for tax penalties or interest. They may even notify you of an upcoming tax audit of your business.

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. These US GAAP financial statements typically will have differences from amounts reported to the IRS. 

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. 

As you might expect, this is not a skill that most people, and even most career accountants, care to take part in. For that reason, technical accounting has become a less common and highly specialized skill that may require an expert, similar to how you might hire a CPA or tax attorney for complex tax situations. 

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. 

Consider if you are a smaller business with the following characteristics: 

• “Bootstrapped” (funded solely by the owner) or closely-held by the owners, with little to no external equity investment

• Minimal (or no) loans/debt  

If this is the case, then the only person really using your financial information is….you! If so, then chances are you aren’t required to comply with US GAAP. You can run your business free of the need for technical accounting. 

Consider this one step further, with the following situations: 

• Startup with early-stage rounds of equity financing from a venture capital (VC) firm or an angel investor, generally in Series “Seed” or “A” rounds. 

• Small business with a loan or line of credit from a lender, such as an SBA loan or standard line of credit with your bank.  

Most early-stage lenders and investors still don’t require US GAAP reporting. Whatever cash-basis or other accounting you currently have may be enough to meet their needs for financial analysis. Again, 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 are ready to take it to the next level with major debt/equity funding. Or perhaps you are ready to sell your business to a larger business or buyer. Think of this in the context of debt or equity in millions or tens of millions of dollars. The companies with that level of capital are large businesses, lenders like large banks, or large VC or PE firms. With that type of price tag, they’re going to be VERY interested in the financial results of your business. As a result, they generally require your company to produce financial statements under US GAAP. In fact, they may even require you to now have your financial statements audited or reviewed by an external CPA firm to verify this 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. 

If this sounds like you, then have no fear, you’re in the right place. You don’t need to go through this on your own. To get a better understanding of the Technical Accounting process, when to consider a technical accounting specialist, and what the proposal process is like, check out the following article as well as our other technical accounting resources.  

Or reach out to us for a discovery call to get an overall understanding your company’s current technical accounting needs and where we can help. 

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!