Financial Reporting Framework
for Small- and Medium-Sized Entities
FRF for SMEs™ Accounting Framework
Copyright © 2013 American Institute of CPAs
America’s Main Street businesses
Small- and medium-sized
entities pervade the business
world and form the backbone of
the US economy
They provide goods and
services in a wide-range set of
activities and are active in
many industry groups
No standard definition of SME
in US
Current SPF reporting environment
Special Purpose Frameworks (OCBOA):
US GAAP Not Required
GAAP not required for many small- and mediumsized entities
IFRS for SMEs
Lack of familiarity, higher learning curve, not UScentric, form of GAAP
Other Special Purpose Frameworks
Tax or modified cash basis may be inappropriate
or insufficient for some SMEs/users
Another option…
... a framework to deliver tailored financial
reporting for America’s small business
community
… a framework with streamlined,
common-sense requirements based on
traditional and proven accounting
methods
… a framework to provide robust,
meaningful financial reports to business
owners, lenders, insurers and others
without needless complexity
It’s here
An additional non-GAAP framework
Separate from FAF and PCC
FRF for SMEs
- Not GAAP - Special
Purpose Framework
- Complementary to
efforts by FAF’s PCC
- AICPA fully supports the
work of the PCC, FAF and
FASB to address the
private company
environment
Private Company Council
- GAAP
- Modify GAAP for private
companies
HISTORIC TIME
FRF for SMEs overview
Responsive
Addresses well-documented financial reporting
issues and concerns among SMEs
Cost effective
Comprehensive yet relevant information
Tailored
Designed to suit financial reporting needs of
SMEs and users of their financial statements
Who could use it?
For use when GAAP-based financial
statements are not needed
– Small and medium-sized entities
– Owner-managed/for-profit
– Can be used by any industry group
– Incorporated and unincorporated
Who is it for?
Owner-Managers
Depend on reliable financial statements to
– Confirm assessments of performance
– Determine what they owe/own
– Understand cash flows
Users
External financial statement users who have
direct access to management
Non-issuers
No intent of going public
Characteristics of typical entities
– Entity does not operate in an industry that has highly
specialized accounting guidance
– such as financial institutions and governmental entities
– The entity does not engage in overly complicated
transactions
– The entity does not have significant foreign operations
– Financial statement users may have greater interest in
cash flows, liquidity, statement of financial position strength
and interest coverage
Features
– Standalone framework
– Concise
– Suitable criteria for general-use
financial statements
– Accrual based
– Blend of traditional accounting and
accrual income tax methods
– Fewer adjustments from book to tax
Features
– Excess narrative avoided
– Eschews prescriptive rules
– Use of professional judgment
– Intuitive and understandable
– Stable yet nimble
Features
Relevant
Only relevant financial reporting topics
included
(e.g., no comprehensive income/OCI)
Simplified
Simplified principles (e.g., no VIEs, no
complicated derivative/hedge accounting
or stock compensation rules)
Authority and effective date
The AICPA has no authority to require the use of the FRF for
SMEs accounting framework for any entity
Use of the framework is purely optional
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
Benefits
CPAs
CPAs serve as …
... a credible, knowledgeable professional who
applies the most up-to-date accounting tools
and practices
... a trusted business advisor with the broad
perspective to provide strategic insights
The FRF for SMEsTM framework
delivers
SME owner-managers
Owner-managers need ...
... reliable and understandable financial
information to inform business decisions
... ways to control costs
The FRF for SMEs framework delivers
Lending community/users
Bankers, sureties and other interested
parties ...
... need to get financial information that is
relevant and clear so they can make informed
decisions
... want to help customers realize cost-savings
and efficiencies where possible
The FRF for SMEs framework delivers
Reaching Out to
Lenders/Users
FRF for SMEs answers banker needs
– With substantial relevance
and cost-benefit factors, the
AICPA believes that the
lending community will
accept financial statements
prepared under the FRF for
SMEs
– Reliable, principles-based
framework
Lending community/users can rely on FRF
for SMEs
– CPAs across the country worked to develop the
Framework
– Considered the needs of users of private company
financial statements
– Framework subjected to rigorous professional scrutiny
and public input
Outreach goals – lending community
– Inform and educate
– Explain benefits
– Drive home…
…reliability of FRF for
SMEs
…ability of FRF for
SMEs to deliver relevant
information
Banking regulators/acceptance
– Discussed FRF for
SMEs with
regulators/exam chiefs
– Bankers accept OCBOA
today
– Flexible with smaller
businesses
Key Principles
Historical cost
Framework primarily uses historical cost
basis, steering away from 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
Historical cost
Directly relates to the past experience
and past decisions of an entity
Sound basis for financial forecasts
Best measurement basis to help evaluate
the performance of a small business.
Stands the test of time
Optionality in certain accounting policies
More relevant and tailored approach
to financial reporting
Answers the varying informational
needs of different financial statement
users
Financial reporting that is truly
representative of the underlying
economics of a small business
Optionality in certain accounting policies
Provide users with the most decisionuseful information
Optionality nothing new to
accountants – make choices today
Well-suited to small business
community where financial statement
users commonly have direct access to
management.
Primary accounting policy options
Income tax accounting − taxes
payable method or deferred
income taxes method
Subsidiary accounting −
consolidate or equity method
Joint venture accounting − equity
method or proportionate
consolidation (only applicable to
unincorporated entities when it is
an established industry practice)
Primary accounting policy options
Long-term contracts and service contracts −percentage of
completion method or the completed contract method
• Completed contract method is used when the entity cannot
reasonably estimate the extent of progress toward
completion.
• Completed contract method may also be used if both of the
following conditions are met:
a. Used for income tax reporting purposes.
b. Financial position and results of operations would
not vary materially from those resulting from the use of
the percentage of completion
Primary accounting policy options
Intangible assets acquired in a business combination − separately
recognize or subsume into goodwill
Internally-generated intangible assets − expenditures during
development phase, either expense or capitalize
Certain Interest costs − expense or capitalize interest costs related to
certain items of inventories, internally-generated intangible assets, and
PP&E
Defined benefit plans − current contribution payable method or one of
the accrued benefit obligation (ABO) methods
Targeted disclosures
Only targeted disclosures in
the financial statements
Stakeholders receive the
pertinent, understandable
information they need
Avoid excess narrative or
irrelevant “noise” in the
financial reports
Targeted disclosures
External users of a small business’s financial statements
usually possess a familiarity and knowledge about the
entity
They have direct access to the management
The value of financial statements to such users lies in its
capacity to confirm and supplement a user’s knowledge
and expectations about the business
Targeted disclosures
Results −
Financial disclosures that are relevant,
transparent, clear and decision-useful
No sifting through voluminous
information in search of the pertinent
information
If a user requires additional information
about the business, management can
tailor the nature and extent of
disclosures to suit those needs
Specific Accounting
Areas
Table of contents
(comprehensive yet relevant)
Financial Statement Concepts
General Principles of Financial
Statement Presentation and
Accounting Policies
Transition
Accounting Changes, Changes in
Accounting Estimates, and
Correction of Errors
Risks and Uncertainties
Equity, Debt and Other Investments
Statement of Financial Position
Inventories
Current assets/liabilities
Intangible Assets
Special Accounting Considerations
for Certain Financial
Statement of Operations
Statement of cash flows
Property, Plant and Equipment
Disposal of Long-lived Assets and
Discontinued Operations
Table of contents
(comprehensive yet relevant)
Commitments
Interests in Joint Ventures
Contingencies
Leases
Equity
Revenue
Related Party Transactions
Subsequent Events
Retirement and Other Postemployment Benefits
Business Combinations
Income Taxes
New Basis (Push-Down) Accounting
Subsidiaries
Nonmonetary Transactions
Consolidated Financial Statements and
Noncontrolling Interests
Foreign Currency Translation
Lease accounting
Familiar accounting/Aligned
with U.S. tax code
Criteria for capitalizing a lease
for tax purposes generally
matches criteria in FRF for
SMEs
Overriding concept of
transferring substantially all the
benefits and risks of ownership
to the lessee
Reduction of book to tax
adjustments
Subsidiaries & consolidation
Entity should make an
accounting policy choice
to either
- consolidate its
subsidiaries OR
- account for its
subsidiaries using the
equity method
Parent-only
(unconsolidated) financial
statements permitted
No Concept of
Variable Interest
Entities (VIEs)
Simplified Model
Investments
Investor that is able to exercise significant influence over
an investee that is not a subsidiary follows the equity
method
Not able to exercise significant influence - follow the cost
method
If the investor holds 20 percent or more of the voting
interest in the investee, there is a rebuttable
presumption that the investor has the ability to exercise
significant influence
Investments held for sale
Equity and debt investments
held for sale should be
recognized and measured at
market value. Changes in
market value should be
recognized in net income in
the period incurred.
Derivatives
Recognized at settlement – net cash paid or received
Disclose pertinent information
- Face or contract amount (or notional principal amount)
- Nature and terms
- Discussion of the credit and market risk and cash
requirements
- Description of objectives
- Net settlement amount
Revenue
Recognition
Performance
Revenue from sales and
service transactions should
be recognized when the
requirements regarding
performance are satisfied,
provided that at the time of
performance, ultimate
collection is reasonably
assured
The seller of the goods has
transferred to the buyer the
significant risks and rewards
of ownership
Reasonable assurance
exists regarding the
measurement of the
consideration
Goodwill
No impairment testing
Goodwill should be
amortized generally over the
same period as that used for
federal income tax purposes
or if not amortized for
federal income tax purposes
then a period of 15 years
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
Reporting by CPAs
Reporting by CPAs
CPAs performing audit, review or
compilation engagements on financial
statements prepared under the FRF for
SMEs will follow the same standards as
they do today 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
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 MediumSized Entities™, as described in Note 1.
[Signature of accounting firm or accountant, as appropriate]
[Date]
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.
Peer review implications
Responsibilities no different from what they are
today
Needs familiarity with the performance and reporting
standards of the SASs or the SSARS, as well as the
FRF for SMEs framework.
Must apply professional judgment to determine if the
recognition, measurement, presentation and
disclosure principles followed are appropriate in
determining whether the CPA’s report is correct
FRF for SMEs Toolkits
Slide No. 52
Toolkit tour
Visit aicpa.org/FRF-SMEs
3 toolkits available
Slide No. 53
Toolkit tour
CPA toolkit – client-facing materials and internal resources
Option for B&I members
Slide No. 54
CPA landing page
Segmented by firm size
Slide No. 55
Resources: Client-facing materials
And more….
Slide No. 56
Summarizes chapters in FRF for SMEs
Includes sample
CPA reports:
- Compilation
- Review
- Audit
Slide No. 57
Illustrative financial statements
Slide No. 58
Comparisons with other frameworks
FRF for SMEs
U.S. GAAP
Tax basis OCBOA
IFRS for SMEs
Slide No. 59
PowerPoint for use with clients/users
Brand with firm name/information
Slide No. 60
Logo for firm use
Guidelines, FAQ on website
Slide No. 61
Backgrounder
Slide No. 62
Flyer for clients, users
Hand out / mail
QR code to mobile
page with information
and educational
resources
Slide No. 63
Client letter - template
Send to potential adopters
Slide No. 64
Disclosure checklist
Slide No. 65
Application guidance
Slide No. 66
Additional resources
Social media support (LinkedIn, Facebook, Tweets,
Foursquare)
#MainStFinancials – ongoing conversation
Article for website and/or newsletter/mailer
Short video – social media, meetings, presentations
Slide No. 67
Questions?
Financial Reporting Framework
for Small- and Medium-Sized Entities
FRF for SMEs™ Accounting Framework
Copyright © 2013 American Institute of CPAs