The American Institute of Certified Public Accountants (AICPA) has released the Financial Reporting Framework for Small-and Medium-Sized Entities (FRF for SMEs) to help the small business community with its financial reporting needs. The FRF for SMEs represents a new accounting option for preparing financial statements for privately-held, owner-managed businesses that are not required to use U.S. generally accepted accounting principles (GAAP) for financial reporting purposes.
The FRF for SMEs gives small business owners an alternative to the non-GAAP options that are currently available while providing meaningful results without unnecessary complexity or cost. This new framework developed by the AICPA is considered complementary to efforts by the Financial Accounting Foundation’s Private Company Council to modify GAAP for private companies, which the AICPA fully supports.
The focus of the FRF for SMEs is for small businesses to prepare financial statements that clearly and concisely report what a business owns, what it owes and its cash flows, which will allow stakeholders such as bankers, insurers, and other users to clearly understand the key measures of a business and its creditworthiness. Required disclosures will be clear and concise.
The focus of the FRF for SMEs is on traditional and proven accounting methods to ensure consistent application. Significant items of interest include the following:
- The FRF for SMEs uses historical cost and attempts to avoid complicated fair value measurements.
- The new framework offers options to businesses that can tailor the presentation of statements to their specific users.
- The FRF for SMEs includes targeted disclosure requirements.
- The framework also attempts to reduce book-to-tax differences.
- The FRF for SMEs produces reliable, internal financial statements that can be compiled, reviewed or audited by independent third parties.
Some of the most significant recognition and measurement elements of the AICPA’s FRF for SMEs that differ from current or proposed GAAP are:
- The basic financial statements include a balance sheet, income statement, statement of changes in equity, and a statement of cash flows. A statement of comprehensive income is not required.
- A choice can be made by a parent company either to consolidate its subsidiaries, or account for its subsidiaries under the equity method. In either case, all subsidiaries have to be accounted for in the same way.
- Control of a subsidiary is based entirely on ownership of more than 50%.
- In broad terms, lease accounting is similar to current GAAP and the distinction between a capital lease and an operating lease is retained. Such treatment differs from accounting for leases as proposed by the Financial Accounting Standards Board (FASB).
- Generally, the conditions for recognizing revenue are consistent with current GAAP and not according to the revenue recognition standard proposed by the FASB.
- A choice should be made to account for income taxes under either the “taxes payable” method or the “deferred” method.
The new framework was developed by a working group of experts from the CPA profession with a solid understanding of what users of private company financial statements need. This new accounting framework has also undergone public comment and professional scrutiny, and incorporates significant feedback from CPAs, bankers and other relevant stakeholders. The AICPA expects to review the framework and propose changes approximately every three or four years. The use of this framework is entirely optional. As a result, there is no effective date.
Under U.S. Treasury Department guidelines, we hereby inform you that any tax advice contained in this communication is not intended or written to be used, and cannot be used by you for the purpose of avoiding penalties that may be imposed on you by the Internal Revenue Service, or for the purpose of promoting, marketing or recommending to another party any transaction or matter addressed within this tax advice. Further, RubinBrown LLP imposes no limitation on any recipient of this tax advice on the disclosure of the tax treatment or tax strategies or tax structuring described herein.
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