Financial Reporting Framework for
Small- and Medium-Sized Entities
An Introduction for [Name of Client
or Financial Statement User]
Overview
• 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:
–
–
–
–
GAAP
Income tax basis
Cash basis
IFRS for SMEs
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
transactions
• 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
statements.
– 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
management.
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
guidance
• Fair presentation framework
• Same objective as GAAP: To account for
transactions according to their economic
substance
Contents of the FRF for SMEs
• General principles
• Guidance on specific financial statement
elements
• 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
required.
• 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
Change
• [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
understandable
• 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
www.aicpa.org/FRF-SMEs
[CPA Firm Logo]
Questions?