THE FINANCIAL REPORTING FRAMEWORK FOR SMALL- AND
MEDIUM-SIZED ENTITIES—AN OVERVIEW, PART 1
CPA Firm Support Services, LLC
By Larry L. Perry, CPA
LEARNING OBJECTIVES
 To understand basic principles and concepts of the FRF for SMEs.
 To distinguish FRF for SMEs from U.S. GAAP
 To identify the basic elements of financial statements and footnotes for the FRF
for SMEs.
 To know when it is appropriate to use the FRF for SMEs and how to make the
transition from another applicable reporting framework.
INTRODUCTION
The AICPA has recognized that many non-public, small- and medium-sized companies
are not required to use U.S. GAAP as their reporting framework. These companies are
generally those with long-range ownership interests, those in specialized industries and/or
those with no intentions to file for public offerings of their securities. While other special
purpose frameworks may be appropriate for some of these entities, others are looking for
ways to provide more comprehensive financial information to financial statement users
that are not as burdensome as U.S. GAAP. Detailed guidance for the FRF for SMEs is
available at www.aicpa.org.
For these reasons, the AICPA has developed this non-authoritative, special-purpose
framework to provide simplified, consistent and relevant financial statements.
Characteristics of the framework include:





A combination of traditional accounting methods from special purpose
frameworks such as the cash basis and the income tax basis.
A historical cost basis with some modifications for market values.
Specific, simplified footnote disclosures.
Uncomplicated, consistent and principles-based accounting.
A consolidation model that excludes variable interest entities.
In these materials, part one of a four-part series, we will present these foundational
concepts of the FRF for SMEs:





Basic financial statement objectives.
Qualitative characteristics of financial statements.
Elements of financial statements.
General principles of financial statement presentation and accounting policies
Recognition and measurement criteria.
1



Materiality concepts.
Basic differences between the FRF for SMEs and U.S. GAAP
Guidance for transition to the FRF for SMEs.
BASIC FINANCIAL STATEMENT ISSUES
Financial Statements
Financial statements prepared on a U.S. GAAP framework normally include a balance
sheet, a statement of income, a statement of changes in equity and a statement of cash
flows. Notes to financial statements are an integral part of such statements.
Financial statements are based on management’s representations of past, rather than
future, transactions and events. Estimates sometimes must be made to approximate the
measurements of future transactions and events. Material financial statement
classifications should not be netted unless permitted by this framework.
For the FRF for SMEs, common financial statement titles are:
 Statement of Assets, Liabilities and Equity
 Statement of Revenues and Expenses
 Statement of Cash Flows
 Notes to Financial Statements
Other descriptive titles may also be used, such as those in Appendix A of these materials.
Customary references, such as balance sheet or income statement, are used in some of the
following text materials.
Objective of Financial Statements
The objective of financial statements is to communicate information about the entity that
is useful to management, creditors, and other users and provide information about, and
changes in, an entity's economic resources, obligations, and equity and its economic
performance.
Materiality
Materiality describes the significance of financial statement information to stakeholders.
An item, or an aggregate of items, is material if its omission or misstatement would
influence or change a decision of financial statement users. Materiality is a matter of
professional judgment based on the facts circumstances in which it is considered.
Qualitative Characteristics of Financial Statements
Qualitative characteristics are the characteristics of information in financial statements
that make that information meaningful to users. The four principal qualitative
2
characteristics are understandability, relevance, reliability, and comparability and are
similar to those for any reporting framework.
Elements of Financial Statements
Elements of financial statements are the basic categories of items included in financial
statements. Certain elements describe the economic resources, obligations, and equity of
an entity at a point in time (balance sheet elements) and others that describe changes in
economic resources, obligations, and equity over a period of time (income statement
elements). Net income generally includes all transactions and events increasing or
decreasing the equity of the entity, except for equity transactions.
RECOGNITION CRITERIA
Recognition, generally, is defined as the process of including items in financial
statements classifications, such as inventory or sales. Footnotes to financial statements
generally provide additional information about items, recognized or not recognized, in
the statements. The professional judgment of the preparer of the statements will
determine when items meet the recognition criteria.
Basic recognition criteria in the FRF for SME include:
 The item has an appropriate measurement basis that can be reasonably estimated.
 It is probable that the events creating items which will obtain or give up future
economic benefits (such as receivables and payables) will actually occur.
 The accrual basis of accounting will be used to recognize items in financial
statements.
 Revenues are generally recognized when they are earned, or partially earned in
the context of contracts in process, and there is reasonable assurance concerning
measurement and collectability of the monetary consideration.
 Gains are generally recognized when they are realized.
 Expenses and losses are generally recognized when an expenditure or previously
recognized asset does not have future economic benefit (when they are probable
and can be estimated).
 Expenses are recorded in a period based on transactions or events occurring in
that period or by some allocation method.
 Expenses are recognized in the statement of income on the basis of a direct
relationship with the earning and recording of specific income items. This process
3
is commonly referred to as the matching concept, i.e., the matching of costs and
revenues.
 When economic benefits are expected to occur over several accounting periods
and the relationship with income items can only be broadly or indirectly
determined, expenses are recognized on a systematic and rational method of
allocation. An example would be depreciation or amortization.
 An expense is recognized in the statement of income when it produces no future
economic benefits or when future economic benefits do not qualify for
recognition in the balance sheet as an asset.
COMPARATIVE STATEMENTS
As with other reporting frameworks, financial statements may be prepared in a
comparative format; however, they are not required by this framework. Comparative
statements are ordinarily considered the most meaningful presentation. In some
circumstances, such as a significant change in an entity’s chart of accounts, comparative
statements may not be the most meaningful or practical. Such changes ordinarily would
not be a change in accounting principle but, if comparative statements are presented,
prior periods’ information should be reclassified to conform to the current period.
Disclosure of Accounting Policies
Accounting policies are normally disclosed in the first note to the financial statements for
all reporting frameworks. Recurring policies and other information is included to enable
readers of financial statements to understand the financial position and results of
operations of a reporting entity. Accounting policies disclosures are outlined in various
chapters of the proposed FRF for SMEs. General guidance for these disclosures in the
first note is summarized below.
 This basis of presentation should be described in the notes to financial statements,
including a brief description of how this basis differs from U.S. GAAP. Following
is an illustrative note patterned after the note in the proposed framework:
o 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 framework differs from accounting principles generally accepted in
the United States of America in that it generally does not utilize fair value
accounting.
 An operating cycle different than one year should be described.
 Reclassifications of prior year information for comparative presentations should
be disclosed.
4
 Accounting policies significant to an entity’s operations should be described,
along with management’s reasoning when deciding among alternative principles.
Fair Presentation Framework Concepts
The Preface to Codification of Statements on Auditing Standards, the first of the Clarified
Auditing Standards effective for periods ending after December 15, 2012, contains
information regarding financial reporting frameworks. Among them is a “fairpresentation framework:”
Fair-presentation framework— Refers to a financial reporting framework that
requires compliance with the requirements of the framework and acknowledges
explicitly or implicitly that, to achieve fair presentation of the financial
statements, it may be necessary for management to provide disclosures beyond
those specifically required by the framework; or acknowledges explicitly that it
may be necessary for management to depart from a requirement of the framework
to achieve fair presentation of the financial statements. Such departures are
expected to be necessary only in extremely rare circumstances.
Underpinning the principles in this audit standard, the concepts of professional
skepticism and professional judgment are discussed in the application material.
Professional skepticism includes being alert for contradictory audit evidence, information
that brings doubt as to the reliability of documents and managements responses to
inquiries and errors or fraud that indicate the need for additional substantive procedures.
Professional judgment is necessary on every engagement when considering audit risk and
materiality, the nature, extent and timing of audit procedures, evaluating the
appropriateness and reasonableness of financial statement assertions and the applicable
financial reporting framework. Such matters are also discussed in the FRF for SMEs.
Fair Presentation in Accordance With the FRF for SMEs
As with other reporting frameworks, financial statements should fairly present the
financial position, results of operations, and cash flows of an entity in accordance with
the elements of financial statements and the recognition and measurement criteria
applicable to this framework. A fair presentation framework includes providing clear,
understandable, appropriate information and disclosures about transactions and events
that have a material effect on financial statements.
Related to the discussion above regarding the Clarified Auditing Standards, management
is first responsible for exercising professional judgment in preparing financial statements
in accordance with this framework. Auditors, then, are responsible for evaluating the
appropriateness and reasonableness of management’s selection of the framework and
their application of its principles.
Going Concern Issues
When preparing financial statements, management is responsible for making an
assessment of whether a going concern basis of accounting is appropriate. A going
5
concern basis of accounting is appropriate unless a significant part of management’s
decision-making concerns discontinuance or liquidation of the entity’s business. An
entity that is not a going concern should use only the liquidation basis of accounting.
If an entity has profitable operations and adequate financing, a going concern basis of
accounting normally is appropriate. On the other hand, management must consider all
future information up to 12 months from the reporting date. If there are significant
threats to the continuance of the entity’s business, currently or in this future period,
management is required to disclose the threats and its plans to overcome them in the
notes to its financial statements. Auditors, of course, would be required to evaluate the
effects of the threats and management’s plans, and to determine an appropriate audit
report.
FRF FOR SMEs DIFFERENCES FROM U.S. GAAP
The focus in this section will be on some of the areas of differences in the FRF for SMEs
from U.S. generally accepted accounting principles. For each area, brief descriptions of
the disclosure requirements for the FRF for SMEs are included.
Inventories
U.S. GAAP:
Inventories are valued under FIFO, LIFO and average cost methods at the lower of cost
or market. While market is usually considered replacement cost it is not permitted to
exceed the ceiling of net realizable value (selling price less costs of completion and
disposal) or be less than the floor of net realizable value (ceiling of net realizable value
less a normal profit margin).
FRF for SMEs:
Inventories are valued at the lower of cost or net realizable value (selling price less
estimated costs of completion and disposal). General disclosures are:
 Accounting policies and costing method.
 Carrying amounts of inventories in total and by appropriate classifications, e.g.,
raw materials, work-in-progress, finished goods, merchandise, supplies, etc.
 Costs of goods sold for periods presented.
 Unusual or material losses resulting from costing methods.
 Material purchase commitments and any expected loss when the purchase price
exceeds market value.
 Any interest costs capitalized in inventories.
Goodwill
U.S. GAAP:
Goodwill is not amortized but, instead, is tested for impairment (by a qualitative or twostep quantitative method) at least annually or triggering event arises (such as going
concern or other profitability issues affecting a subsidiary)
6
FRF for SMEs:
Goodwill may be amortized using the federal income tax time period or 15 years. No
tests for impairment are required for long-lived assets, tangible or intangible. General
disclosures are:
 Aggregate carrying amounts of goodwill should be presented as a separate line
item in the statement of financial position.
 Aggregate amortization expense for the period and the amortization period and
rate used.
Intangible Assets
U.S. GAAP:
Indefinite-lived intangible assets are tested for impairment with qualitative or two-step
quantitative methods similar to goodwill. Definite-lived intangible assets are amortized
over their useful lives and long-lived intangibles are also tested for impairment as a result
of certain triggering events indicating possible impairment.
FRF for SMEs:
All intangible assets will be assigned estimated useful lives and amortized over that
period. No tests for impairment are required for long-lived assets, tangible or intangible.
Any long-term assets no longer used are written off. Management may elect either to
expense development phase intangibles or to capitalize their costs. General disclosures
are:
 Aggregate carrying amounts of intangibles should be classified separately on the
statement of financial position.
 Aggregate amortization expense for the period and the amortization period and
rate used.
 Accounting policy elected for internally developed intangible assets including
development costs.
Investments
U.S. GAAP:
Financial assets and liabilities are classified in the balance sheet based on managements
intentions, i.e., to trade, hold for sale or retain until maturity. Trading securities and
available-for-sale securities are valued at fair value. Unrealized appreciation or
depreciation for trading securities is recorded in operating income; for available-for-sale
securities such amounts are recorded in comprehensive income. Held-to-maturity
securities are carried at amortized cost.
FRF for SMEs:
Investments in entities over which a company has significant influence are accounted for
under the equity method. All other investments are accounted for based on historical
cost, except for securities held for sale which are valued at market value (changes are
included income). Income from investments should be presented separately or disclosed
in the footnotes. Equity method investees should follow the same method of accounting
7
as the as the investor. An entity’s share of any discontinued operations, changes in
accounting policies or corrections of errors and capital transactions of an equity method
investee should be presented and disclosed separately. General disclosures are:
 Accounting basis for all classes of investments.
 Events and transactions occurring between different reporting periods for the
entity and equity-method investees should be disclosed or recorded by the
investor.
 Name, description, carrying amount and ownership percentage for each
significant investment.
Fair Value Accounting
U.S. GAAP:
The definition of fair value in the accounting standards is “the price that would be
received to sell an asset or paid to transfer a liability in an orderly transaction between
market participants at the measurement date.” The standards provide guidance on
valuation techniques (market approach, income approach, cost approach) and the
hierarchy of inputs (levels one, two, three) for determining fair value.
FRF for SMEs:
The term “market value” is used instead of fair value. The definition is: “The amount of
the considerations that would be agreed upon in an arm’s length transaction between
knowledgeable, willing parties who are under no compulsion to act.” Since the FRF for
SMEs uses a cost approach primarily, measurement using market values is limited to
business combinations, some non-monetary transactions and marketable equity and debt
securities that are available for sale.
Derivatives
U.S.GAAP:
Generally, derivatives are accounted for as assets or liabilities and are measured at their
fair values; changes in fair values are accounted for based on the use of the derivative. An
entity is permitted to use hedge accounting.
FRF for SMEs:
This framework requires a disclosure approach only with recognition at settlement on a
cash basis. Disclosures include:
 The face, contract or notional principal amount (upon which payments are
calculated).
 The nature, terms, cash requirements and credit and market risks
 The entity’s purposes in holding the derivatives.
 At the reporting date, the net settlement amounts of the derivatives.
Hedge accounting is not permitted.
Lease Accounting
8
U.S. GAAP:
Traditionally, a lessee treats leases as capital or operating leases depending on certain
criteria. Capital leased assets and capital lease obligations are recorded in financial
statements. Operating leases are disclosed. A lessor treats leases as sales type, direct
financing or operating leases.
FRF for SMEs:
Accounting approaches are generally similar to traditional U.S. GAAP. A lessee either
records capital leases or discloses operating leases. A lessor either records sales type or
financing leases or discloses operating leases. General disclosures include:
 Capital Leases—Lessees:
o Cost of the leased asset, accumulated amortization and the amortization
method used.
o Interest rate, maturity date and the outstanding balance of the obligation.
o Any security for the lease.
o Interest expense related to lease obligations.
o Aggregate payments in each of the five years after the reporting date.

Direct Financing and Sales-Type Leases—Lessors:
o Net investment in each type of lease and implicit interest rates.

Operating Leases
o Lessees—future minimum lease payments in total and for each of the five
years after the reporting date.
o Lessors—cost of assets held for leasing and the related accumulated
amortization.
Income Tax Accounting
U.S. GAAP
A deferred income tax method is use to determine the effects of temporary differences
between financial and tax reporting. The standards require management to evaluate and
disclose uncertain tax positions for all open tax years, for all taxing jurisdictions. Any
estimated liabilities for unsustainable positions should be recorded in the financial
statements.
FRF for SMEs:
Management may elect either an income taxes payable method or the deferred income
taxes method. Uncertain tax positions are not required to be evaluated or accrued.
General disclosures include:
 The accounting policy—income taxes payable or deferred taxes method.
 For the income taxes payable method:
o Provision for income tax expense or benefit include in net income or loss
before discontinued operations.
o Explanation or reconciliation of the differences between statutory rates
and the effective rate.
9


o Unused loss or tax credit carryforwards.
o Any allocation of expense or benefit to equity transactions.
For the deferred taxes method:
o Current and deferred income tax expense or benefit included income or
loss before discontinued operations.
o Any allocation of expense or benefit to equity transactions.
o Total amount of unused tax losses and credits and amounts of any
temporary differences for which no deferred tax asset has been
recognized.
o Explanation or reconciliation of the differences between statutory rates
and the effective rate.
o Unused loss or tax credit carryforwards.
Pass-through entities will disclose they are not subject to income taxes.
Retirement and Postemployment Benefits
U.S. GAAP:
Accounting standards use a projected benefit obligation model that requires accounting
for the aggregate of periodic pension costs and the overfunded and underfunded status of
defined benefit and post-retirement benefits plans. Defined contribution plans’ costs are
accounted for as period expenses.
FRF for SMEs:
Management may elect to account for plans using a current contribution payable method
or one of the accrued benefit obligation methods similar to U.S. GAAP. General
disclosures include:
 Description of the plan and the period cost recognized.
 Multi-employer plans description, period cost and any liability that would result
from a probable withdrawal.
 Description of deferred compensation plans, their participants and how payments
are determined.
 For defined benefit plans:
o Description, plan participants and how benefits are determined.
o Funded status information including benefit obligation, market value of
plan assets and the under-funded or over-funded status at the reporting
date.
o Under the current contribution method, the current and following years
contributions.
o Expected rate of return on assets and the discount rate used to determine
the benefit obligation.
o Any current period termination benefits.
Comprehensive Income
U.S. GAAP:
10
Items of comprehensive income, such as the unrealized appreciation on available for sale
securities and prior service costs for defined benefit pension plans, are reported in a
separate statement of comprehensive income or a single statement combined with
operating income.
FRF for SMEs:
This framework does not recognize items of comprehensive income.
Revenue Recognition
U.S. GAAP:
Revenue is recognized when it is earned or realized based on evidence of the
arrangement, the occurrence of a point of sale or delivery, a fixed sales price and
reasonable assurance of collectability. Contracts for production or construction are
accounted for currently under the percentage of completion or completed contract
methods. Future standards for recognizing revenue under the contract method will likely
require revenue recognition as performance obligations are completed.
FRF for SMEs:
Revenue recognition is more principles-based and revenues will be recorded based on
performance and reasonable assurance of collectability. When the risks and rewards of
ownership of goods are transferred to a customer, performance of a transaction is
accomplished. For services in long-term contracts, such as construction or production
contracts, the percentage of completion or completed contract methods may be used. The
consideration received for the service will indicate accomplishment of stages of
performance of a service. General disclosures include:
 Revenue recognition policy for all types of transactions in Note A.
 Accounting policies for multi-deliverables.
 Explanation of why the completed contract method is used instead of the
percentage-of-completion method, if applicable.
 Revenue and contingent assets from any contract-related claim.
 Major categories of revenue disclosed on the statement of operations.
 Any unrecorded claims if claims are not recorded until received or awarded.
Stock-Based Compensation Plans
U.S. GAAP:
This form of compensation may be accounted for as either a liability or equity amount,
depending on management’s intentions, at fair values. Fair value will be determined
based on this hierarchy: 1) a fair value accounting method when it can be reasonably
determined, 2) calculated-value method if it can be reasonably estimated or 3) intrinsic
value method when neither of these methods can be used.
FRF for SMEs:
11
This framework requires only footnote disclosures for such plans. The disclosures
include:
 The terms of awards under the plan.
 Vesting requirements.
 The maximum terms of options granted.
 Separate disclosures for multiple plans.
Going Concern Issues
U.S. GAAP:
There currently is no requirement in the accounting standards for management to assess
and disclose going concern issues and whether a going-concern basis of accounting is
appropriate. Future accounting standards will likely create this responsibility for
management, along with the requirement to develop and disclose plans to mitigate
significant threats to the continuance of an entity. Clarified Auditing Standards for nonpublic entities published by the AICPA’s Auditing Standards Board, require auditors to
evaluate significant threats to continued existence of an entity and to request management
to provide plans for mitigating such threats.
FRF for SMEs:
This framework requires management to assess whether the going concern basis of
accounting is appropriate. When business or environment events or conditions create
material uncertainties about business continuance, the entity should include footnote
disclosures of these circumstances, along with its plans to mitigate the uncertainties.
Consolidation and Subsidiaries
U.S. GAAP:
An entity having a controlling financial interest (normally more than 50% ownership) in
another entity is required to consolidate the subsidiary. When the entity cannot maintain
significant influence over the operation of the subsidiary, such as in the case of external
events like bankruptcy, the subsidiary would not be consolidated. For investments in
variable interest entities, investors that have the power to significantly influence the
operations of such entities will usually be deemed “primary beneficiaries.” In such
circumstances, primary beneficiaries are required to consolidate variable interest entities.
Either the equity method or cost method would be used otherwise.
FRF for SMEs:
Management can elect to consolidate more than 50%-owned subsidiaries or account for
them using the equity method (if it exercises significant influence over the entity). When
significant influence is not exercised over the subsidiary, the cost method should be used
to report the investment. Equity and debt securities that are available for sale, however,
should be recognized at market values with changes in such values included in periodic
net income. General disclosures include:
 Consolidation policy.
12



When consolidated, the names of all subsidiaries, income from each and the
percentage of ownership.
Descriptions of the periods for subsidiaries’ financial statements that don’t
coincide with the parent’s reporting date, along with any significant events or
transactions in the intervening periods.
When financial statements are not consolidated, method of accounting for its
subsidiaries, descriptions, names, carrying amounts, income and percentage of
ownership for each.
Business Combinations
U.S. GAAP:
The acquisition method of accounting is required. The acquisition-date fair values of
assets, liabilities, goodwill and non-controlling interests in an acquired entity are used for
measurement in financial reporting.
FRF for SMEs:
This framework essentially requires the acquisition method of accounting using
acquisition-date market values. It permits, however, management to elect to account for
an intangible asset either separately or as a part of goodwill. General disclosures similar
to U.S. GAAP are required for material and immaterial business combinations.
Push-Down (New Basis) Accounting
U.S. GAAP:
There is no requirement to permit new-basis accounting for acquired entities.
FRF for SMEs:
When an acquirer gains more than 50% control of an entity, the assets and liabilities of
the acquired entity may be comprehensively revalued in its financial statements,
assuming the new values are reasonably determinable. This results in similar values
being used in the acquired entity’s financial statements and the acquirer’s consolidated
statements. General disclosures include:
 First applications:
o Date push-down accounting was first applied and the date of the related
purchase transaction.
o Description of the situation resulting in push-down accounting and the
amounts of changes to major classes of assets, liabilities and equity.
 In addition for the following fiscal period:
o Amount of the revaluation adjustment and the equity account in which it
was recorded.
o Amount of reclassified retained earnings and the equity account in which
it was recorded.
FINANCIAL STATEMENTS AND TRANSITION TO THE FRF FOR SMES
13
After management of an entity has made a decision to adopt the AICPA’s FRF for SMEs,
it should prepare an opening statement of financial position as the basis for the entity’s
accounting under the framework, which framework should be consistent with that used at
the end of the year of adoption. Adjustments necessary to transition from a previously
applied framework should be recognized directly in equity at the date of transition.
As discussed previously, financial statements should include all information necessary
for a fair presentation under this framework. Financial statements, in addition to notes
and supporting schedules should include:




Statement of financial position
Statement of operations
Statement of changes in equity unless detailed in the notes or another statement
Statement of cash flows
Other descriptive titles of these statements may be used.
As discussed above, the first note to financial statements should describe the accounting
policies that are significant to the entity’s operations and the primary differences in this
framework from generally accepted accounting principles. Minimum disclosures for
accounting policies should include the use of alternative principles and those used in
specific industries.
Management may elect exemption from certain principles in the framework upon
transition. These principles are:



Business combinations
This election is to not apply the provisions of the framework regarding business
combinations retrospectively. Restatement of prior business combinations
requires future application of principles in the framework.
Components of certain assets or liabilities
This election exempts management from classifying the components of a financial
instrument separately when it contains both a liability and equity component.
Asset retirement obligations
Management may elect to measure asset retirement obligations not previously
recognized as of the transition date and estimate the carrying amount based
on its original and remaining life of the obligation.
Retrospection application of certain principles in the framework is prohibited. These
include:
 De-recognition of financial assets and liabilities is only permitted prospectively.
 Management’s estimates in its opening statement under the framework must be
consistent with previous accounting policies.
 Accounting for equity changes in accordance with the framework will only be
permitted prospectively.
14
Deciding to Use the FRF for SMEs
The AICPA has developed a Decision Tool for Adopting an Accounting Framework
which is available at www.aicpa.org. This guidance includes detailed questions for
management to facilitate answering these basic questions:
1. Are GAAP-based financial statements required by users?
2. Does the entity’s industry require complex accounting guidance not provided by
non-GAAP frameworks?
3. Does the applicable financial reporting framework currently used by the entity
meet the needs of financial statement users or would another framework be more
appropriate?
4. Are there additional practical reasons that affect the decision to use a certain
reporting framework like the FRF for SMEs?
Summary of Opportunities for Increased Efficiency using the FRF for SMEs
Practical reasons for using the FRF for SMEs as an entity’s applicable financial reporting
framework center on efficiencies in the preparation and auditing of financial statements
and footnotes. Following is a summary of opportunities for efficiencies:
 An uncomplicated, primarily historical cost basis will limit the time necessary to
comply with the fair value accounting requirements of U.S. GAAP.
 Specific, simplified, consistent footnote disclosure requirements with a disclosure
checklist will require less time than the voluminous disclosure checklists for U.S.
GAAP.
 Because management can elect the equity method of accounting for greater than
50%-owned subsidiaries, variable interest entities and other investments over
which it has significant influence, complex, time-consuming consolidated
financial statements can be eliminated. With the historical cost method used for
all other investments, time spent on the difficult to apply and disclose fair-value
accounting rules under U.S. GAAP can be avoided and related audit time can be
reduced.
 Basic financial statement preparation and accounting principles (such as revenue
and expense recognition) are similar to U.S. GAAP and do not require preparers
to learn a new set of complicated criteria.
 Inventories valuation at the lower of cost or the ceiling of net realizable value
eliminates complicated costing and valuation methods common to U.S. GAAP.
 Goodwill and all other intangible assets can be amortized and no tests for
impairment are required for any intangible or other long-lived assets, thereby
reducing financial statement preparation and audit time.
 Lease accounting requirements will remain similar to traditional U.S. GAAP,
even if new accounting standards become applicable. This can eliminate the
capitalization of many operating leases which may be required by future U.S.
GAAP.
15
 The income taxes payable method can be elected by management. The timeconsuming deferred taxes method under U.S. GAAP can be avoided.
 Accounting for pension and post-employment plans under a current contribution
payable method can simplify accounting, save financial statement preparation
time and reduce auditor’s time charges and the use of costly specialists.
 With only footnote disclosures required for such items as derivatives and stockbased compensation plans, costly accounting methods under U.S. GAAP can be
avoided.
 While the acquisition method is required for business combinations similar to
U.S. GAAP, push-down (new basis) accounting is permitted for acquired entities
resulting in similar values being recorded in the acquired entity’s financial
statements. This can simplify and save time for future consolidations.
While the aggregate time-savings for accounting, financial statement and footnote
preparation and audit fees will differ based on the facts and circumstances in each
reporting entity, it is clear that the FRF for SMEs can significantly reduce these
administrative costs for most reporting entities.
CONCLUSION
The FRF for SMES may quickly become the most popular framework for reporting
entities and their financial statement users that are not required to use U.S. GAAP. This
special-purpose framework contains practical guidance for application and
comprehensive illustrations of financial statements and footnotes. Its principles and
concepts are easy to understand and apply and are not likely to change significantly in the
future. In short, for entities not required touse U.S. GAAP as their applicable reporting
framework, this framework offers management of small- and medium-size reporting
entities, their financial statement users and their auditors a cost-beneficial reporting
alternative.
16
APPENDIX A—ILLUSTRATIVE FINANCIAL STATEMENTS FOR A SMALL
REPORTING ENTITY
ALWAYS BEST CORPORATION
STATEMENT OF ASSETS, LIABILITIES AND EQUITY
(FRF for SMEs Basis)
December 31, 2014
ASSETS
CURRENT ASSETS
Cash
Accounts receivable—trade
Accounts receivable—related parties
Inventories
Prepaid expenses
Total Current Assets
$
13,000
488,000
55,000
400,000
1,300
957,300
INVESTMENTS
260,000
PROPERTY AND EQUIPMENT
Land
Buildings
Machinery and equipment
Office furniture and equipment
5,000
90,000
85,000
6,000
186,000
(108,000)
Less accumulated depreciation
Net Property and Equipment
78,000
OTHER ASSETS
Note receivable
Deposits
36,000
5,800
Total Other Assets
41,800
TOTAL ASSETS
$1,337,100
17
LIABILITIES AND EQUITY
CURRENT LIABILITIES
Current portion of long-term debt
Accounts payable
Accrued expenses
Income taxes payable
Payroll tax liabilities
$
Total Current Liabilities
75,000
410,000
10,500
24,000
1,100
520,600
LONG-TERM DEBT, net of current portion
125,000
TOTAL LIABILITIES
645,600
EQUITY
Common stock—no par value, 450 shares authorized, issued
and outstanding
Retained earnings
45,000
646,500
TOTAL EQUITY
691,500
TOTAL LIABILITIES AND EQUITY
$.1,337,100
See Independent Accountant’s Review Report and Notes to Financial Statements.
18
ALWAYS BEST CORPORATION
STATEMENT OF REVENUES AND EXPENSES
(FRF for SMEs Basis)
Year Ended December 31, 2014
NET SALES
$ 4,185,000
COST OF SALES
3,700,000
GROSS PROFIT
485,000
OPERATING EXPENSES
Selling, general and administrative
Interest expense
543,900
17,000
Total operating expenses
560,900
OPERATING INCOME (LOSS)
( 75,900)
OTHER INCOME
Vending machine franchise income
Interest and dividends on investments
Gain on sale of fully-depreciated assts
Cell towers rent
Miscellaneous income
121,000
24,000
8,900
24,000
14,100
Total Other Income
192,000
PROVISION FOR INCOME TAXES
21,000
NET INCOME
$
95,100
See Independent Accountant’s Review Report and Notes to Financial Statements.
19
ALWAYS BEST CORPORATION.
STATEMENT OF CASH FLOWS
Year Ended December 31, 2014
CASH FLOWS FROM OPERATING ACTIVITIES
Net income
Adjustments to reconcile net income to net cash
provided by operating activities
Depreciation
Increase in accounts receivable
Decrease in inventories
Decrease in prepaid expenses
Increase in accounts payable and accrued expenses
Decrease in income taxes payable
$ 95,100
32,000
(137,000)
100,000
900
30,100
(11,100)
Net Cash Provided by Operating Activities
110,000
CASH FLOWS USED BY INVESTING ACTIVITIES
Purchase of machinery and equipment
Purchase of marketable securities
(20,000)
(10,000)
Net Cash Used By Investing Activities
(30,000)
CASH FLOWS USED BY FINANCING ACTIVITIES
Payments on debt obligations
(100,000)
NET DECREASE IN CASH
(20,000)
CASH AT BEGINNING OF YEAR
33,000
CASH AT END OF YEAR
$
13,000
See Independent Accountant’s Review Report and Notes to Financial Statements.
20
ALWAYS BEST CORPORATION
NOTES TO FINANCIAL STATEMENTS
Year Ended December 31, 2014
NOTE A—SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of the Organization
The Corporation manufactures precast concrete products, including various types of blocks and
patio and yard decorations. Its business is located in Anywhere, USA.
The Corporation is wholly-owned and is classified as a “C” corporation for income tax purposes.
The sole shareholder of the Corporation has controlling investments in several other corporations
that purchase its products. All transactions with affiliates are at fair market values and the
Corporation has no monetary investment in, or significant influence over, the affiliated
corporations.
Basis of Accounting and Financial Statement Presentation
Financial statement presentation is based on the American Institute of Certified Public
Accountants’ Financial Reporting Framework for Small- and Medium-Size Entities (FRF),
which is a special purpose framework. This FRF differs from U.S. generally accepted
accounting principles. For example, this FRF does not require the consolidation of variable
interest entities and, instead of tests of impairment of goodwill, permits its amortization.
Accounts Receivable
The Corporation records all trade receivables at gross amounts billed to customers. A directwrite-off method is used for bad debts due to insignificant uncollectible accounts in the past.
Management continually analyzes accounts with slow-paying customers and they are written off
as bad debts if they are deemed uncollectible.
Inventories of Raw Materials and Finished Goods
The inventory consists of raw materials (sand, gravel and cement), concrete construction blocks,
patio blocks and various landscaping precast products. The d inventory is stated at the lower of
cost or net realizable value and accounted for on an average cost basis.
Property and Equipment
Property and equipment expenditures of $1,000 or more are capitalized at cost and depreciated
over the estimated useful lives of the respective assets on a straight-line basis. Buildings are
depreciated over 30 years, 7 years for machinery and equipment and 5 years for office furniture
and equipment. Routine repairs and maintenance are expensed as incurred.
21
Income Taxes
The Corporation has elected the taxes payable method for recording income taxes. Current
income taxes payable or refundable are recorded as a liability or asset and are based on income
tax rates and laws enacted and effective at the reporting date. Statutory rates do not differ
significantly from the effective tax rates used to calculate the provision for income taxes. There
are no unused tax loss or tax credit carryforwards.
Use of Estimates
The preparation of financial statements in conformity with the Financial Reporting Framework
for Small- and Medium-Sized Entities requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those estimates.
Concentrations Risk
Concentrations risk consists of cash deposits. The Corporation maintains its cash in various
bank deposit accounts that, at times, may exceed federally insured and other insured limits. The
Corporation currently has no deposits in excess of insured limits, has not experienced any losses
in such accounts and does it expect to incur any such losses in the future.
Cash
Cash consists of funds on deposit at financial institutions. The Corporation has no cash
equivalents.
Subsequent Events
Management of the Corporation has evaluated subsequent events through April 30, 2015, the
date financial statements are available to be issued.
NOTE B—INVESTMENTS
The Corporation has invested in various marketable equity securities. All of the investments are
accounted for at cost since the Corporation does not have significant influence over the iinvestee
companies.
Description
Shares
Dorcus, Intl.
Pork Belly Feeds
Shovels, Inc.
Bean Bagger Co.
100
390
510
10,105
Ownership %
.00001
.00005
.0001
.0007
22
Carrying Amount
$ 25,000
40,000
80,000
75,000
U.S. Motors
215
.00001
40,000
$ 260,000
NOTE C—RELATED PARTY TRANSACTIONS
The Corporation sells products to companies that are wholly or partially owned by its President
and sole shareholder. Transactions with these companies are at sales prices charged other
customers.
Sales Volume
Pine Tree Lumber Co.
$ 275,000
Open Space Development Co. $ 430,000
Accounts Receivable at December 31, 2014
$ 22,000
33,000
$ 55,000
A note balance of $36,000 is receivable from the Corporation’s President and sole shareholder.
The note bears interest at 7% compounded annually and payments are due on demand.
NOTE D—DEBT OBLIGATIONS
Debt obligations as of December 31, 2014 consist of:
Note payable to bank, payable in monthly installments of
$ 8,000 including interest at 5.0%, collateralized
by inventories
$ 200,000
Less current portion
(75,000)
Long-term debt
$ 125,000
Principal maturities on these obligations are:
Year Ending December 31,
2015
2016
2017
$ 75,000
85,000
40,000
$146,098
Interest paid during the year ended December 31, 2014 amounted to $ 17,000.
23
NOTE E—CHANGES IN EQUITY
Balance at January 1, 2014
Common
Stock
Retained
Earnings
$ 45,000
$ 551,400
Net income
95,100
Balance at December 31, 2014
$ 45,000
$ 646,500
NOTE F—OPERATING LEASE
The Corporation leases three GMC delivery trucks under an operating lease for a 36 month
period which provides for all vehicle maintenance and repairs. The residual value at the end of
the lease term is the fair market value of the vans; there is no bargain purchase option. This lease
is classified as an operating lease because the risks and rewards of ownership are retained by the
lessor. Rent expense classified in costs of goods for the period ended December 31, 2014 was
$72,000. Future lease payments are as follows:
Years Ending December 31,
2015
2016
$ 72,000
72,000
24