By: Russ Madray
Over the last several years, private companies, and the CPA practitioners who serve them, have expressed concern about the cost to prepare financial statements. Many users of private company financial statements have expressed similar concern over an increasing lack of relevance of a number of accounting standards. These concerns are especially prevalent among small- and medium-sized entities. In response to these concerns and to the appeals for a solution by many stakeholders, the American Institute of CPAs (AICPA) formed the FRF for SMEs Task Force to develop a financial reporting framework other than accounting principles generally accepted in the United States (US GAAP) for small- to medium-sized entities.
In June 2013, the AICPA released the Financial Reporting Framework for Small-and Medium-Sized Entities (FRF for SMEs). The FRF for SMEs is a self-contained, special purpose framework intended for use by privately-held small- to medium-sized entities (SMEs) in preparing their financial statements. The FRF for SMEs is a cost-beneficial solution for management, owners, and others who require financial statements that are prepared in a consistent and reliable manner in accordance with a framework that has undergone public comment and professional scrutiny. The accounting principles comprising the FRF for SMEs are intended to be the most appropriate for the preparation of small- and medium-sized entity financial statements based on the needs of the financial statement users and cost and benefit considerations.
Typically, the FRF for SMEs would be used by management and owners who rely on a set of financial statements to confirm their assessments of performance and of what they own and what they owe. Often, their financial statements support applications for bank financing when the banker does not base a lending decision solely on the financial statements, but also on available collateral or other evaluation mechanisms not related to the financial statements.
Key features of the FRF for SMEs include the following:
- The framework is built upon a foundation of reliable and comprehensive accounting principles.
- Historical cost is the primary measurement basis.
- Disclosures are reduced, while still providing users with the relevant information they need.
- Familiar and traditional accounting methods are employed.
- Adjustments needed to reconcile tax return income with book income are reduced.
- The framework is a principles-based framework, usable across industries by incorporated and unincorporated entities.
- The framework contains less complicated, leaner, relevant financial reporting principles for SMEs.
- Only financial statement matters that are typically encountered by SMEs are addressed in the framework.
The AICPA has no authority to require the use of the FRF for SMEs for any entity. Therefore, use of the FRF for SMEs is purely optional. Because use of the FRF for SMEs is optional, there is no effective date for its implementation. Management, who prepares an entity’s financial statements in accordance with the FRF for SMEs, may represent or assert that such financial statements have been prepared in accordance with the FRF for SMEs, a special purpose framework established by the AICPA.
The AICPA intends to review and propose amendments to the FRF for SMEs approximately every three or four years. Amendments will be primarily based on input from stakeholders and developments in accounting and financial reporting.
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J. Russell Madray, CPA, MPAcc, is president of The Madray Group, Inc, which helps businesses, accounting firms, and other organizations understand and implement technical accounting and auditing issues. The Madray Group, specializes in providing technical reviews, inspection services, and technical assistance to small- and medium-size accounting firms throughout the United States.