Financial Reporting Framework for Small- and Medium

Financial Reporting Framework for
Small- and Medium-Sized Entities
An Introduction for [Name of Client
or Financial Statement User]
• What is the Financial Reporting Framework for
Small- and Medium-Sized Entities?
• Why was it developed?
• Who can use it?
• What does it change?
• When can it be implemented?
• How will you benefit?
What Is It?
• New special purpose framework, or other
comprehensive basis of accounting, for preparing
financial statements
• Developed by the AICPA and released June 2013.
• Provides an alternative to other frameworks:
Income tax basis
Cash basis
Why Was It Developed?
• In response to—
– Accounting complexity
– Disclosure overload
• To better meet the needs of small businesses
and their financial statement users
Needs of Small Businesses
• Relevant, streamlined reporting, more robust
than cash or income tax basis
• Flexibility in choosing accounting policies
• Simplified guidance for typical, plain vanilla
• Targeted disclosures
• Concise, plain-English standards that are easy
to follow and keep up with
Who Can Use It?
• Entities that—
– Are not required to prepare GAAP-based financial
– Have no plans to go public in the foreseeable future.
– Operate for profit.
– Are owner-managed.
– Do not operate in an industry with highly-specialized
accounting guidance, for example, no financial institutions
or governments.
– Have no overly complicated transactions or significant
foreign operations.
– Give their financial statement users direct access to
What Does It Change?
Basic features
Contents of the FRF for SMEs
Primary differences from GAAP
How your financial statements will change
Basic Features
• Historical cost based
• Blend of traditional GAAP and accrual income
tax basis
• Principles-based with little prescriptive
• Fair presentation framework
• Same objective as GAAP: To account for
transactions according to their economic
Contents of the FRF for SMEs
• General principles
• Guidance on specific financial statement
• Complete set of disclosure requirements
• Transition guidance
• Glossary
• No industry-specific guidance
Primary Differences from GAAP
• Income taxes: Choice between taxes payable
method (current income tax assets and liabilities
only) or deferred income taxes method. No
accounting for uncertainty.
• Intangible assets acquired in a business
combination: Choice to not separately recognize
them but include them in goodwill.
• Goodwill: Must amortize consistent with income
tax treatment or over 15 years if not amortized
for income taxes.
Primary Differences from GAAP
• Reporting of subsidiaries: Choice between
consolidation or equity method for all subs.
Parent-only financial statements permitted.
• Leases: Similar to the method used for
income tax purposes. Lease classification
guidance less prescriptive than GAAP.
• No concept of comprehensive income and
accumulated other comprehensive income.
Primary Differences from GAAP
• Asset impairment: No requirement to assess
assets for impairment; however, there are
disclosures. Left up to judgment.
• Investments in debt and equity securities:
Recorded at cost unless held for sale, in which
case recorded at market value with changes
recognized in income.
• Variable interest entities: No such concept.
Primary Differences from GAAP
• Stock-based compensation: Compensation
expense not recognized. Certain disclosures
• Defined benefit plans: Choice between
current contributions payable method
(expense for current year contribution only) or
an accrued benefit obligation method.
How Your Financial Statements Will
• [Content to be developed for specific client or
financial statement user]
When Can It Be Implemented?
• Conversion is entirely optional
• Can be implemented at any time
• Precondition for implementation: Acceptance
by financial statement users
How Will You Benefit?
• Information in financial statements is more
relevant for small business decision-making
• Disclosures are more targeted and
• Financial statements are easier and less costly
to prepare and audit (or review)
• Standards are stable; changes over time are
expected to be minimal
Additional Resources
• Read the Financial Reporting Framework for
Small- and Medium-Sized Entities
• Visit our website at [URL address]
• Read our newsletter
• Review the AICPA toolkit for small businesses
[or financial statement users] at
[CPA Firm Logo]