Limited liability entities have become increasingly popular in the United States in recent years. This type of business organization offers several advantages, including limited personal liability for the members. In this blog post, we will discuss ASC 272: Limited Liability Entities. This Topic addresses the reporting guidance applicable to limited liability entities organized in the U.S. that prepare financial statements in accordance with U.S. GAAP.
What is GAAP?
GAAP is a common set of accounting principles, standards, and procedures. Public companies in the United States must follow GAAP when they compile their financial statements. To that end, the Financial Accounting Standards Board (FASB) maintains GAAP. Moreover, the board issues new rules as necessary to ensure that GAAP remains up-to-date.
Where Can I Research GAAP?
FASB provides free online access to the Accounting Standards Codification, which is the only authoritative source for US GAAP. FASB and the AICPA also provide access to other authoritative literature that supplements the GAAP Hierarchy.
To access the Accounting Standards Codification, visit asc.fasb.org. Anyone can access the codes using a basic account. For more advanced features you can set up a professional account. To that end, if you work at a company subject to GAAP rules, your company likely has a professional account.
What Are Limited Liability Entities?
As the name implies, limited liability entities offer their members some protection from personal liability. That is, the member’s personal assets are typically not at risk if the business fails or incurs debt.
There are several types of limited liability entities, including:
-Limited Liability Partnerships (LLP)
-Limited Liability Companies (LLC)
A limited liability company generally has the following characteristics:
-It is an unincorporated association of two or more persons.
-Its members have limited personal liability for the obligations or debts of the entity.
-It is classified as a partnership for federal income tax purposes.
-The most common type of limited liability entity is the LLC. This type of
What is ASC 272?
ASC 272 is the section of GAAP that addresses financial reporting for limited liability entities. This guidance applies to all limited liability entities, regardless of whether they are corporations, LLPs, or LLCs. ASC 272 provides guidance on how to prepare and present financial statements for these types of businesses.
Under ASC 272, entities are required to provide certain disclosures in order to give users of the financial statements a clear understanding of the company’s financial position, performance, and cash flows.
Why Does It Matter?
The presentation and disclosure of financial statements can have a major impact on the decisions made by users of those statements. For example, if a company or individual is considering investing in another company, the investor will want to know on an ongoing basis how the company is performing.
ASC 272 follows the framework set by ASC 205 and requires companies to provide certain disclosures in order to give users of the financial statements a clear understanding of the company’s financial position, performance, and cash flows.
ASC 272 requires companies to disclose:
-The nature of their business and any material changes thereto
-Their basis of accounting (e.g., GAAP or another accounting framework)
-Their form of organization (e.g., corporation, LLP, LLC)
-The nature and extent of their members’ liability for the debts and other obligations of the company
ASC 272 also requires companies to disclose significant events that have occurred since the end of the fiscal year but before the financial statements are issued.
In short, ASC 272 requires limited liability entities to disclose key information in their financial statements such as the nature of their business, form of organization, and members’ liability. This information is important for investors and other users of the financial statements in order to make informed decisions about the company.
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