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  • 8/12/2019 FRFforSMEs Introduction FSUsers

    1/11 AN INTRODUCTION TO THE FINANCIAL REPORTING FRAMEWORK FOR SMALL- AND MEDIUM-SIZED ENTITIES | 01

    June 2013

    An Introduction to theFinancial Reporting Framework forSmall- and Medium-Sized EntitiesFOR FINANCIAL STATEMENT USERS

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    Copyright 2013 American Institute of CPAs. All rights reserved.

    New York, NY 10036-8775

    For information about the procedure for requesting permission to make copies of any part of this work, please email [email protected] with yourrequest. Otherwise, requests should be written and mailed to the Permissions Department, AICPA, 220 Leigh Farm Road, Durham, NC 27707-8110.

    The Financial Reporting Framework for Small- and Medium-Sized Entities reproduces substantial portions of the CICA Handbook 2012, published byThe Canadian Institute of Chartered Accountants, Toronto, Canada (CICA), used under licence from CICA.

    NOTICE TO READERS: An Introduction to the Financial Reporting Framework for Small- and Medium-Sized Entities wasdeveloped by the staff of the AICPA. It has not been approved, disapproved or otherwise actedupon by any senior technical committee of the AICPA or the Financial Accounting StandardsBoard and has no of cial or authoritative status.

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    TABLE OF CONTENTSWhy Develop the FRF for SMEs TM Accounting Framework? . . . . . .. . . . . .. . . . . .. . . . . .. 2

    What Types of Organizations May Want to Use the FRF for SMEsAccounting Framework? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3

    Benefits to Stakeholders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5

    Key Features of the FRF for SMEs Accounting Framework . . . . . . . . . . . . . . . . . . . . . . . . . 7

    Additional Resources . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . . . . . . . 8

    http://../13613-830_FRF%20for%20SMEs%20Plain%20English%20Guide%20Booklet_Firms_digital_SA%20Folder/13613-830_FRF%20for%20SMEs%20Plain%20English%20Guide%20Booklet_Firms_digital.pdfhttp://../13613-830_FRF%20for%20SMEs%20Plain%20English%20Guide%20Booklet_Firms_digital_SA%20Folder/13613-830_FRF%20for%20SMEs%20Plain%20English%20Guide%20Booklet_Firms_digital.pdfhttp://../13613-830_FRF%20for%20SMEs%20Plain%20English%20Guide%20Booklet_Firms_digital_SA%20Folder/13613-830_FRF%20for%20SMEs%20Plain%20English%20Guide%20Booklet_Firms_digital.pdfhttp://../13613-830_FRF%20for%20SMEs%20Plain%20English%20Guide%20Booklet_Firms_digital_SA%20Folder/13613-830_FRF%20for%20SMEs%20Plain%20English%20Guide%20Booklet_Firms_digital.pdfhttp://../13613-830_FRF%20for%20SMEs%20Plain%20English%20Guide%20Booklet_Firms_digital_SA%20Folder/13613-830_FRF%20for%20SMEs%20Plain%20English%20Guide%20Booklet_Firms_digital.pdfhttp://../13613-830_FRF%20for%20SMEs%20Plain%20English%20Guide%20Booklet_Firms_digital_SA%20Folder/13613-830_FRF%20for%20SMEs%20Plain%20English%20Guide%20Booklet_Firms_digital.pdfhttp://../13613-830_FRF%20for%20SMEs%20Plain%20English%20Guide%20Booklet_Firms_digital_SA%20Folder/13613-830_FRF%20for%20SMEs%20Plain%20English%20Guide%20Booklet_Firms_digital.pdfhttp://../13613-830_FRF%20for%20SMEs%20Plain%20English%20Guide%20Booklet_Firms_digital_SA%20Folder/13613-830_FRF%20for%20SMEs%20Plain%20English%20Guide%20Booklet_Firms_digital.pdfhttp://../13613-830_FRF%20for%20SMEs%20Plain%20English%20Guide%20Booklet_Firms_digital_SA%20Folder/13613-830_FRF%20for%20SMEs%20Plain%20English%20Guide%20Booklet_Firms_digital.pdfhttp://../13613-830_FRF%20for%20SMEs%20Plain%20English%20Guide%20Booklet_Firms_digital_SA%20Folder/13613-830_FRF%20for%20SMEs%20Plain%20English%20Guide%20Booklet_Firms_digital.pdfhttp://../13613-830_FRF%20for%20SMEs%20Plain%20English%20Guide%20Booklet_Firms_digital_SA%20Folder/13613-830_FRF%20for%20SMEs%20Plain%20English%20Guide%20Booklet_Firms_digital.pdfhttp://../13613-830_FRF%20for%20SMEs%20Plain%20English%20Guide%20Booklet_Firms_digital_SA%20Folder/13613-830_FRF%20for%20SMEs%20Plain%20English%20Guide%20Booklet_Firms_digital.pdfhttp://../13613-830_FRF%20for%20SMEs%20Plain%20English%20Guide%20Booklet_Firms_digital_SA%20Folder/13613-830_FRF%20for%20SMEs%20Plain%20English%20Guide%20Booklet_Firms_digital.pdf

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    WHY DEVELOP THEFRF FOR SMEsACCOUNTING FRAMEWORK?

    Recent efforts by the U.S. accounting profession to provideadditional nancial reporting options for private companies revealeda clear and strong demand by small- and medium-sized entities(SMEs), the CPAs who serve them, and those who use their nancialstatements for a more robust and reliable accounting frameworkwhen GAAP is not required. These stakeholders expressed aneed for a framework that is targeted to Main Street businesses.Other special-purpose frameworks, such as income tax or cashbases of accounting, remain and could be appropriate. Main Streetbusinesses and users of their nancial information looking for morecomprehensive and consistent nancial statements may want toexplore the FRF for SMEs reporting option.

    In response to that marketplace demand, American Institute of CPAs(AICPA) staff and a task force consisting of CPA practitioners anda representative from the banking community developed the FRFfor SMEs TM accounting framework. It is a new non-GAAP specialpurpose framework developed by the CPA profession, underscoringthe CPAs role as trusted business advisors for Americas smallbusiness community.

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    WHAT TYPES OF ORGANIZATIONSMAY WANT TO USE THE FRF FORSMEs ACCOUNTING FRAMEWORK ?

    The FRF for SMEsTM accounting framework has been developedfor small- to medium-sized entities that require reliable non-GAAPfinancial statements for internal and external uses. This frameworkcan be used by entities, whether incorporated or unincorporated, inmany industry groups.

    What is a small- and medium-sized entity (SME) ? There is noset quantifiable definition in the United States (dollar amount of

    revenues, number of locations, etc.) for determining what an SMEis. However, the term is intuitive, widely recognized and effectivelydescriptive of the scope of entities for which the FRF for SMEsaccounting framework is intended. AICPA staff and the task forceidentified certain characteristics of typical entities that might utilizethe framework. The following is a list of those characteristics toconsider. This list is not all-inclusive and an entity does not have tohave these characteristics in order to utilize the framework.

    Characteristics of Small- and Medium-Sized EntitiesUtilizing the FRF for SMEs Accounting Framework

    The entity may be closely held and owner-managed. The entity does not have regulatory reporting requirements that

    essentially require it to use GAAP-based financial statements.

    The entity is for-profit.

    A majority of the owners and management of the entity have nointention of going public.

    Continued on Page 4

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    Management and owners of the entity rely on a setof financial statements to confirm their assessmentsof performance, cash flows and of what they ownand what they owe.

    The entity does not operate in an industry in whichthe entity is involved in transactions that requirehighly specialized accounting guidance, such asfinancial institutions and governmental entities.

    The entity does not engage in overlycomplicated transactions.

    The entity does not have significant foreign operations.

    Key users of the entitys financial statements havedirect access to the entitys management.

    Users of the entitys financial statements may havegreater interest in cash flows, liquidity, statement offinancial position strength and interest coverage.

    The entitys financial statements supportapplications for bank financing when the bankerdoes not base a lending decision solely on thefinancial statements but also on available collateralor other evaluation mechanisms not directly relatedto the financial statements.

    These characteristics are presented as helpfulguidelines for management and other stakeholders toconsider when determining the appropriateness andsuitability of the FRF for SMEs accounting frameworkin the preparation of financial statements. Ultimately,the decision regarding which accounting frameworkbest meets an entitys financial reporting needsrests with management . The FRF for SMEs accountingframework should only be used if the resulting financialstatements are intended to be consistent with theconcepts, principles, and criteria described in Chapter 1of Financial Reporting Framework for Small- andMedium-Sized Entities .

    The framework is not intended tobe a substitute for GAAP whenGAAP-based fnancial statementsare necessary , as determined bythe management of an entity and its

    nancial statement users (i.e., bankers,sureties, etc.).

    The AICPA has no authority to preventor require the use of a special purposeframework like the FRF for SMEsaccounting framework.

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    The FRF for SMEsTM framework is designed speci cally to suit theneeds of small- and medium-sized entities and their stakeholders.

    BANKERS, SURETY COMPANIES AND OTHER FINANCIALSTATEMENT USERS that receive nancial statements preparedbased on the FRF for SMEs will nd relevant information they need tounderstand the company and its nances. It will enable bankers andother nancial statement users to help their customers because use of

    the framework by small- and medium-sized businesses is cost-effective.The bottom line is the nancial statement users get the informationthey need to make a credit or business decision while the companypotentially saves money.

    More speci cally, bankers and other users need nancial statementsthat are prepared in a reliable and consistent manner in accordancewith a framework that has undergone public comment and professionalscrutiny. The FRF for SMEs is that kind of framework. The accountingprinciples composing the FRF for SMEs are intended to be the mostappropriate for the preparation of a smaller businesss nancialstatements based on the needs of bankers and other users.

    NON-GAAP SOLUTION

    The FRF for SMEs is the tool to prepare streamlined, relevant nancialstatements for privately held small- and medium-sized entities thatdo not need GAAP-compliant reports. With this tool, managementof an SME can prepare nancial statements that clearly and conciselyreport what a business owns, what it owes and its cash ow. Lendersand others can clearly understand key measures of a business and itscredit-worthiness. The framework consists of traditional accountingprinciples and accrual income tax accounting methods that are veryfamiliar to lenders and other users and should be welcomed as aninsightful alternative reporting framework.

    BENEFITSTO STAKEHOLDERS

    Continued on Page 6

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    OWNER-MANAGERS OF SMALL BUSINESSES needreliable nancial information to inform their businessdecisions and outside stakeholders. They need waysto work smarter, control costs and gain strategicoperational insights. While GAAP and the other specialpurpose frameworks serve a valuable purpose, theFRF for SMEs provides another non-GAAP alternative.The FRF for SMEs framework assists small businessowner-managers and other stakeholders in focusingon the performance of the company and its assets,liabilities, and cash ows. Moreover, the FRF forSMEs is a cost-effective, simpli ed nancial reportingframework with targeted disclosure requirements.

    Management of smaller- to medium-sized privatecompanies may nd the FRF for SMEs framework anappealing nancial reporting option because it closelyaligns with how they run their businesses.

    Some of the key advantages of FRF for SMEsinclude:

    Historical cost is the primary measurementbasis, steering away from complicated fair

    value measurements.

    Financial statements will more closely align withincome tax returns because there will be fewerbook-to-tax adjustments.

    A number of accounting policy options, like the abilityto choose the current taxes payable method or thedeferred tax method, will allow management to selectwhat is best for their purposes and those of their

    nancial statements users and potentially reduce costs.

    The framework is concise and self-contained withoutexcess narrative and prescriptive rules (the entireFRF for SMEs accounting framework is approximately200 pages.)

    The framework will be stable, yet nimble. Frequentchanges to the framework are not contemplated,however it will be modi ed in response to signi cantdevelopments in accounting and nancial reportingmatters affecting SMEs.

    Only relevant principles are included and theaccounting is simpli ed.

    No other comprehensive income (OCI)

    No variable interest entities (VIEs); parent-onlynancial statements are allowed

    No complicated accounting for stockcompensation and derivatives

    No hedge accounting

    Disclosures are targeted and not excessive

    Accounting for long-lived assets follows anamortized/depreciated cost approach. Noimpairment testing is required.

    Goodwill is amortized over the same period asfor federal tax purposes. No impairment testingis required.

    .

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    Historical Cost Uses historical cost basis, steering away from complicated fairvalue measurements

    Optionality Offers tailored reporting to meet user needs

    Relevant Includes only nancial reporting topics typically encounteredby small businesses

    Simplifed Avoids complicated, prescriptive rules

    Targeted disclosures Provides what a user needs to see in nancial statements

    KEY FEATURES OF THEFRF FORSMEs ACCOUNTING FRAMEWORK

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    Learn more about FRF for SMEs TM by checking out the additionalresources developed by the AICPA to small- to mid-sized privatebusinesses understand the new framework. Youll nd these andother tools at aicpa.org/FRF-SMEs :

    Summary comparison of FRF for SMEs to other bases of accounting

    Short video explaining the bene ts of the framework

    Illustrative nancial statements to give you an idea of whatnancials might look like for businesses using the FRF for SMEs

    Frequently asked questions

    CPAs will be a vital resource as you learn more about the FRF forSMEs. If youd like to know more about the AICPAs outreach effortsto the lending and surety communities, please contact

    Robert Durak, Director Private Company Financial Reportingat: [email protected] .

    Check the website frequently to explore new resources, articles andmore: aicpa.org/FRF-SMEs .

    You can also follow the conversation on Twitter at #MainStFinancials.

    If you have further questions, email us at [email protected] .

    ADDITIONALRESOURCES

    http://www.aicpa.org/INTERESTAREAS/FRC/ACCOUNTINGFINANCIALREPORTING/PCFR/Pages/Financial-Reporting-Framework.aspxmailto:FRFforSMEs%40aicpa.org?subject=FRF%20for%20SMEs%20Questionshttp://www.aicpa.org/INTERESTAREAS/FRC/ACCOUNTINGFINANCIALREPORTING/PCFR/Pages/Financial-Reporting-Framework.aspxmailto:FRFforSMEs%40aicpa.org?subject=FRFforSMEs%20Questions?mailto:FRFforSMEs%40aicpa.org?subject=FRFforSMEs%20Questions?http://www.aicpa.org/INTERESTAREAS/FRC/ACCOUNTINGFINANCIALREPORTING/PCFR/Pages/Financial-Reporting-Framework.aspxmailto:FRFforSMEs%40aicpa.org?subject=FRF%20for%20SMEs%20Questionshttp://www.aicpa.org/INTERESTAREAS/FRC/ACCOUNTINGFINANCIALREPORTING/PCFR/Pages/Financial-Reporting-Framework.aspx

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