Financial Reporting Framework
for Small- and Medium-Sized Entities
FRF for SMEs™ Accounting Framework
Name of presenter
Audience
Date
Copyright © 2013 American Institute of CPAs
Instructions To Firms
Below are some suggestions when using this
PowerPoint to introduce your team members to the
FRF for SMEs Framework
• This PowerPoint is an overview of the framework. Reviewing this
is not a substitute for reading and understanding the actual
guidance.
• Several slides have a comment note for you to consider based on
your processes or to consider incorporating relevant examples.
• To make this most useful for your team, look for other points
within the presentation where you have relevant examples or
experiences.
Once you have tailored this PowerPoint to your firm’s
current practices, delete this slide and the other red
notes you’ll find in the following slides.
Private Companies Practice Section
2
Current Special Purpose Financial Reporting
Framework Environment
Small and medium-sized entities (SMEs) may not
need GAAP-based financials
If GAAP isn’t required, a special purpose
framework may be the financial reporting option
currently used
•
•
•
•
Tax
Cash
Regulatory
Contractual
Special Purpose Framework is the term that
replaces OCBOA
Private Companies Practice Section
A New Non-GAAP Special Purpose Financial
Reporting Framework
AICPA has released the
Financial Reporting
Framework for SMEs
• Non-GAAP
• Streamlined
• Based on traditional and
proven accounting methods
• Provides meaningful
financial reports without
needless complexity
Private Companies Practice Section
An Additional non-GAAP Framework
Private Companies Practice Section
Separate from FAF and Private Company
Council
Private Company Council
Is GAAP
Modifies GAAP for
private companies
FRF for SMEs
Not GAAP - Special
Purpose Framework
Is developed
specifically for private
small businesses
Complementary to
efforts by FAF’s PCC
Private Companies Practice Section
Useful Resources
Financial Reporting Framework for Small- and
Medium-Sized Entities
An Introduction to the Financial Reporting
Framework for Small- and Medium-Sized Entities
Comparison of FRF for SMEs to Other Bases of
Accounting
Illustrative Financial Statements
Illustrations of the Application of Certain Principles
and Criteria
www.aicpa.org/FRF-SMEs
Private Companies Practice Section
What entities may want to use FRF for SMEs?
Owner-managed – closely held
For-profit
No regulatory reporting requirements that
essentially require GAAP-based financial statements
No intention of going public
Not in an industry that requires highly-specialized
accounting guidance, such as financial institutions
and governmental entities
Does not have overly complicated transactions
Does not have significant foreign operations
Key users of the financials have direct access to the
entity’s management
Private Companies Practice Section
Authority and effective date
Use of the framework is purely optional
The AICPA has no authority to require the use of the
FRF for SMEs accounting framework for any entity
Management represents that such financial
statements have been prepared in accordance with
the AICPA’s FRF for SMEs accounting framework, a
special purpose frame-work
Because use of the framework is optional, there is
no effective date for its implementation
Private Companies Practice Section
Advantages of FRF for SMEs
The framework is concise and self-contained.
The framework will be stable.
• Frequent changes to the framework
are not expected.
Financial statements will more closely align with
income tax returns because there will be fewer
book-to-tax adjustments.
Private Companies Practice Section
Advantages of FRF for SMEs
Historical cost is the primary measurement basis
• Avoids complicated fair value measurements.
Accounting policy options will allow management to
select what is best for their purposes
• Example - current taxes payable method or the deferred tax
method
Goodwill is amortized over the same period
as for federal tax purposes.
• No impairment testing is required
Private Companies Practice Section
Advantages of FRF for SMEs
Only relevant principles are included and the
accounting is simplified.
• Accounting for long-lived assets follows an
amortized/depreciated cost approach.
- No impairment testing is required
• No other comprehensive income (OCI)
• No variable interest entities (VIEs). Parent-only financial
statements are allowed
• No complicated accounting for stock compensation and
derivatives
• No hedge accounting
Disclosures are targeted to small business issues.
Private Companies Practice Section
Advantages of FRF for SMEs
FIRM: Note your new disclosure checklist process for
engagements using FRF for SMEs.
Targeted Disclosures
Disclosures are streamlined to avoid
excess detail, complexity, and
extraneous information
If a user requires additional information,
management can tailor the nature and extent of
disclosures to suit those needs
Private Companies Practice Section
A Look at Key Principles of FRF for SMEs
Primarily uses historical cost basis
• Avoids complicated fair value measurements
• Most relevant and reliable measurement basis for small
business financial reporting needs
• Well-suited as a metric for evaluating an entity’s cash flow
• Objective, verifiable, straight-forward
• Directly relates to the past experience and past decisions of an
entity
Private Companies Practice Section
A Look at Key Principles of FRF for SMEs
Optionality in Certain Accounting Policies
Income taxes
• taxes payable or deferred income taxes method
Subsidiaries
• consolidate or equity method
Joint ventures
• equity method or proportionate
consolidation
Long-term contracts and service contracts
• percentage of completion or the completed contract method
Private Companies Practice Section
A Look at Key Principles of FRF for SMEs
Intangible assets acquired in a business
combination
•
separately recognize or include in goodwill
Internally-generated intangible assets –
• either expense or capitalize development costs
Certain interest costs
• expense or capitalize if related to certain items of inventories,
internally-generated intangible assets, and PP&E
Defined benefit plans
• current contribution payable or one of the accrued benefit
obligation (ABO) methods
Private Companies Practice Section
Content of the FRF for SMEs
FIRM: Note where the
downloaded framework
is saved in your
practice.
Note where the
downloaded
implementation
materials are also.
Framework and other
resources can be
downloaded at
www.aicpa.org/FRFSMEs.
Private Companies Practice Section
Chapter 2: General Principles
When preparing financial
statements, management
should make an assessment
of whether the going
concern basis of accounting
is appropriate
Private Companies Practice Section
Going Concern
Requires management assessment of whether the going concern
basis of accounting is appropriate.
When management becomes aware of material uncertainties
relating to events or conditions and concludes that a known event or
condition is probable of having a severe impact on the entity’s ability
to realize its assets and discharge its liabilities in the ordinary
course of business…
…the entity should disclose those uncertainties along with its plans
for dealing with the adverse effects of the conditions and events
Private Companies Practice Section
Chapter 3: Transition
This chapter …
• Requires an entity to prepare an
opening statement of financial position
at the date of transition
• Allows management to elect certain
exemptions to the principle that the
opening statement of financial position
should comply with the framework
• Requires certain disclosures including
the amount of each charge or credit to
equity at the date of transition
Guidance is available in the
“Illustrations and Applications”
resource.
Private Companies Practice Section
Chapter 13: Intangibles
Goodwill is amortized over the same period as
that used for federal income tax purposes or 15
years.
No impairment testing.
All intangible assets are considered to have a
finite useful life and are amortized over their
estimated useful lives.
Private Companies Practice Section
Chapter 21: Income Taxes
This chapter…
• Allows an accounting policy choice to use either the
- taxes payable method
- only current income tax assets and liabilities are recognized
- or deferred income taxes method
- recognize a deferred income tax liability whenever recovery
or settlement of the carrying amount of an asset or liability
would result in deferred income tax outflows;
- recognize a deferred income tax asset whenever recovery or
settlement of the carrying amount of an asset or liability
would generate deferred income tax reductions
• States that no provision for income taxes should be made in the
financial statements of businesses if income is taxed directly to the
owners
Private Companies Practice Section
Chapters 22: Subsidiaries
Allows management to make an accounting policy
choice to either consolidate its subsidiaries or use
the equity method
Subsidiary is an entity that is more than 50% owned
by the reporting entity
All subsidiaries should be accounted for using the
same method.
Private Companies Practice Section
Chapters 23: Consolidated Financial
Statements and Noncontrolling Interests
A material difference in the basis of accounting
between a parent and a subsidiary precludes the
preparation of consolidated financial statements and
the use of the equity method.
Combined financial statements may be useful, but
are not a substitute for consolidated financial
statements.
When combined financial statements are prepared,
similar principles to those used when preparing
consolidated financial statements apply.
Private Companies Practice Section
Chapter 25: Leases
Familiar accounting
Overriding concept of
transferring substantially all the
benefits and risks of ownership
to the lessee.
Criteria for capitalizing
a lease generally
matches criteria for tax
purposes
Reduces book to tax
adjustments
Private Companies Practice Section
Chapter 25: Leases
Classifies leases from the point of view of the
lessee as either:
• Operating
- A lease in which the benefits and risks of ownership are
substantially retained by the lessor should be accounted for
as an operating lease
• Capital
- A lease that transfers substantially all the benefits and risks
of ownership from the lessor to the lessee should be
accounted for as a capital lease
Private Companies Practice Section
Chapter 25: Leases
Classifies leases from the point of view of the lessor
as either:
• Operating
- A lease in which the benefits and risks of ownership are
substantially retained by the lessor should be accounted for
as an operating lease
• Sales-type or Direct Financing
- A lease that transfers substantially all the benefits and risks
of ownership from the lessor to the lessee should be
accounted for as a sales-type or direct financing lease by the
lessor
Private Companies Practice Section
Chapter 29: New Basis (Push-Down)
Accounting
Assets and liabilities may be comprehensively
revalued by means of push-down accounting when
an acquirer gains control of an entity
Control of an entity is gained when more than 50
percent of the outstanding residual equity interests
in the entity have been acquired
When an acquirer gains control of an entity a new
cost basis for a continuing entity is established
Private Companies Practice Section
Comparisons with other frameworks
FRF for SMEs
U.S. GAAP
Tax basis OCBOA
IFRS for SMEs
Private Companies Practice Section
Reporting under FRF for SMEs
Financial statements prepared under the FRF for
SMEs can be
• Audited
• Reviewed
• Compiled
The same standards apply when reporting on other
SPF financial statements
• Compilation: AR section 80, Compilation of Financial
Statements
• Review: AR section 90, Review of Financial Statements
• Audit: AU-C section 800, Special Considerations—Audits of
Financial Statements Prepared in Accordance With Special
Purpose Frameworks
Private Companies Practice Section
Sample Reports
Firm: Use this slide to
indicate where staff can
find the sample reports
for audited, reviewed or
compiled financials.
Sample reports can be
found in the
Introduction to the
Financial Reporting
Framework for Smalland Medium-Sized
Entities
Private Companies Practice Section
Sample standard review report
Independent Accountant’s Review Report
Board of Directors
XYZ Company
↓
[last paragraph]
Based on our review, we are not aware of any material
modifications that should be made to the accompanying
financial statements in order for them to be in conformity
with Financial Reporting Framework for Small- and
Medium-Sized Entities™, as described in Note 1.
[Signature of accounting firm or accountant, as appropriate]
[Date]
Private Companies Practice Section
Sample basis of presentation note
The accompanying financial statements have been
prepared in accordance with the Financial Reporting
Framework for Small- and Medium-Sized Entities issued
by the American Institute of Certified Public Accountants.
This special purpose framework, unlike generally accepted
accounting principles (GAAP) in the United States of
America, does not require the recognition of deferred
taxes. We have chosen the option to recognize only
current income tax assets and liabilities.
Other primary differences would be described as
necessary.
Private Companies Practice Section
Presentation and Disclosure Checklist
Firm: Note where you
have located the
checklist within your
methodology
resources.
Disclosures are
streamlined to avoid
excess detail,
complexity, and
extraneous information
Private Companies Practice Section
Outreach to clients
Firm: Use this point in the presentation to discuss
what you’re doing within your practice to introduce
clients to the FRF for SMEs. Make sure staff know
where these tools are as they’re talking to clients.
Intro to FRF for SMEs
PowerPoint
FAQs
Flyer
Short video
Backgrounder
Article for newsletters
Sample letters
Private Companies Practice Section
Do you have a client that may benefit from
FRF for SMEs?
Firm: Ask your staff if they’ve thought of clients that
may be interested in this reporting alternative. Who
should they inform?
Identify the clients that you think may benefit from
FRF for SMEs.
Private Companies Practice Section
Benefits to Financial Statement Users
Bankers, surety companies and other users will get
information that is
• Relevant
• Reliable
• Consistent
FRF for SMES uses traditional accounting principles
and accrual income tax accounting methods familiar to most users
FRF for SMEs has undergone public comment and
professional scrutiny
Private Companies Practice Section
Outreach to bankers and others
FIRM: Indicate what you’ve done or are planning
to do to reach out to financial statement users.
Toolkit tailored to financial statement users to
help explain the new framework
• Introduction
• PowerPoint
• Backgrounder
• FAQs
Available at aicpa.org/FRF-SMEs
Private Companies Practice Section
Questions?
Private Companies Practice Section