AICPA Releases Financial Reporting Framework

For Small/Medium Sized Entities

In early June, the American Institute of Certified Public Accountants (AICPA) issued its Financial Reporting Framework for Small and Medium Sized Entities (referred to as FRF for SMEs).  

This is another comprehensive basis of accounting special-purpose framework for private entities that do not need and are not required to issue U.S. GAAP financial statements.

FRF for SMEs draws upon a blend of traditional accounting principles and accrual income tax methods of accounting.  It utilizes historical cost as its primary measurement basis.  FRF for SMEs allows for accounting policy elections in more areas and also has significantly fewer disclosure requirements than U.S. GAAP.

A few examples of the differences between GAAP and FRF for SMEs are:

  • While U.S. GAAP requires entities subject to income taxes to use the deferred income taxes method, FRF for SMEs allows either the deferred tax method or a taxes payable method (whereby only current income tax assets and liabilities are recognized).
  • While U.S. GAAP no longer allows for the amortization of goodwill, FRF for SMEs has goodwill being amortized (generally over the same period used for federal income tax purposes).
  • While U.S. GAAP requires consolidation of entities that meet the definition of a ‘Variable Interest Entity,’ FRF for SMEs does not even include the concept of a Variable Interest Entity in the new reporting framework.

An SME is not specifically defined; however, the FRF for SMEs provides a listing of characteristics an entity may consider in determining if they may use this framework.  The characteristics include items such as:

  • The entity does not have regulatory reporting requirements that require the entity to prepare information on a GAAP basis;
  • Entity is owner-managed;
  • There is no intention by management or a majority of the owners to take the entity public;
  • The entity does not have significant foreign operations;
  • The key users of the entity’s financial statements have direct access to management; and
  • The entity is not a financial institution or insurance entity, or such entity that operates in an industry involved in transactions which require highly specialized accounting guidance.

An implementation guide will be released shortly to help financial statement preparers to properly prepare financial statements using FRF for SMEs.

FRF for SMEs is not to be confused with the FASB and its Private Company Council initiative in progress to provide modifications or exceptions to U.S. GAAP for private companies that issue U.S. GAAP financial statements.

This release does not have an effective date as it is optional.

Please note that this framework was developed for small- to medium-sized entities that want reliable non-GAAP financial statements for internal and external uses.  However, it is not intended for entities that require GAAP-based financial statements.   If you are interested in exploring the possibilities of utilizing FRF for SMEs, it is important to ensure that there are no GAAP requirements for your entity (for example, if you have debt with a financial institution, GAAP-based financial statements may be required; however, it may be worth a discussion with the financial institution to determine if they would accept this framework in place of GAAP-based financial statements).

Please contact your Meaden & Moore representative or Kelli Bernstein at (216) 241-3272 for more information.