You’ve heard of GAAP, “cash basis,” and other financial reporting frameworks. Now comes the new FRF for SME, which is designed by a national CPA organization to specially serve small and medium sized businesses.
The American Institute of Certified Public Accountants (AICPA) issued the Financial Reporting Framework for Small-and Medium-Sized Entities (FRF for SMEs) to help the small business community with its financial reporting needs. This new framework for financial statement reporting includes a solid understanding of what the users of private company financial statements require to evaluate the company’s results. This method will allow the owners to provide efficient, meaningful results without needless complexity or cost. The AICPA required the original drafts of the framework to undergo public comment and professional scrutiny. Then they incorporated this significant feedback from CPAs, bankers, and other relevant stakeholders. This framework has not been approved, disapproved, or otherwise acted upon by any technical committee of the AICPA or the Financial Accounting Standards Board (FASB).
All financial statements are prepared in accordance with a financial reporting framework. Examples of financial reporting frameworks are generally accepted accounting principles (GAAP)and special purpose frameworks (examples are income tax basis, cash basis, modified cash basis, regulatory basis, and now the FRF for SMEs). A SME (small and medium sized entity) is not defined by the AICPA; however, the AICPA believes that the characteristics of a typical entity that may utilize the FRF for SME’s are as follows:
The entity does not have regulatory reporting requirements that essentially require it to use GAAP based financial statements.
A majority of the owners and management of the entity have no intention of going public.
The entity is for profit.
The entity may be owner-managed, which is a closely held company in which the people who own a controlling interest in the entity are substantially the same set of people who run the company.
The entity does not engage in overly complicated transactions.
The entity does not operate in an industry in which the entity is involved in transactions that require highly-specialized accounting guidance, such as financial institutions and governmental entities.
Key users of the entity’s financial statements have direct access to the entity’s management.
Users of the entity’s financial statements may have greater interest in cash flows, liquidity, statement of financial position strength, and interest coverage.
The entity’s financial statements support applications for bank financing but the banker does not base a lending decision solely on the financial statements but also on available collateral or their evaluation mechanisms not directly related to the financial statements.
Management and owners of the entity rely on a set of financial statements to confirm their assessment of performance, of cash flows, and of what they own and what they owe.
There are several advantages to using the FRF for SME’s for financial statement reporting. The new framework has simplified the accounting rules and reduced from approximately 17,000 pages of GAAP to 206 pages. Under the new framework, the financial statements will be prepared using historical cost as the primary measurement basis with no complex and time consuming fair value measurement calculation. The framework does not require the complicated accounting for derivatives, hedging activities, stock compensation, or impairment analysis on an oil and gas lease. The footnotes to the financial statements include only the relevant information they need while recognizing that those users can obtain additional information from management if they desire. The primary goal of the framework assists the owners of the small and medium sized entities in focusing on the assets, liabilities, and cash flows to run their company successfully.
The owners of the companies will need to consult with their lenders and other key external stakeholders about the use of the FRF for SME’s framework for their financial statements.
Anyone interested in making the transition from his or her current financial statement presentation to the framework for small and medium sized entities is encouraged to contact their Certified Public Accountant.
Meredith Morgan Tipton, CPA, is senior audit manager at SprolesWoodard LLC, based in Midland. With experience in complex U.S. GAAP accounting issues as well as OCBOA accounting, Tipton has worked with clients in a variety of industries, including manufacturing, distribution, oil and gas, employee benefit plans, retail, service and technology. SprolesWoodard can be found at sproles.com.