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Financial Reporting Framework for Small- and Medium-Sized Entities
An Introduction for [Name of Client or Financial Statement User]
Overview
• What is the Financial Reporting Framework for Small- and Medium-Sized Entities?
• Why was it developed?• Who can use it?• What does it change?• When can it be implemented?• How will you benefit?
What Is It?
• New special purpose framework, or other comprehensive basis of accounting, for preparing financial statements
• Developed by the AICPA and released June 2013.• Provides an alternative to other frameworks:– GAAP– Income tax basis– Cash basis– IFRS for SMEs
Why Was It Developed?
• In response to—– Accounting complexity– Disclosure overload
• To better meet the needs of small businesses and their financial statement users
Needs of Small Businesses
• Relevant, streamlined reporting, more robust than cash or income tax basis
• Flexibility in choosing accounting policies• Simplified guidance for typical, plain vanilla
transactions• Targeted disclosures• Concise, plain-English standards that are easy
to follow and keep up with
Who Can Use It?
• Entities that—– Are not required to prepare GAAP-based financial statements.– Have no plans to go public in the foreseeable future.– Operate for profit.– Are owner-managed.– Do not operate in an industry with highly-specialized
accounting guidance, for example, no financial institutions or governments.
– Have no overly complicated transactions or significant foreign operations.
– Give their financial statement users direct access to management.
What Does It Change?
• Basic features• Contents of the FRF for SMEs• Primary differences from GAAP• How your financial statements will change
Basic Features
• Historical cost based• Blend of traditional GAAP and accrual income
tax basis• Principles-based with little prescriptive
guidance• Fair presentation framework• Same objective as GAAP: To account for
transactions according to their economic substance
Contents of the FRF for SMEs
• General principles• Guidance on specific financial statement
elements• Complete set of disclosure requirements• Transition guidance• Glossary• No industry-specific guidance
Primary Differences from GAAP
• Income taxes: Choice between taxes payable method (current income tax assets and liabilities only) or deferred income taxes method. No accounting for uncertainty.
• Intangible assets acquired in a business combination: Choice to not separately recognize them but include them in goodwill.
• Goodwill: Must amortize consistent with income tax treatment or over 15 years if not amortized for income taxes.
Primary Differences from GAAP
• Reporting of subsidiaries: Choice between consolidation or equity method for all subs. Parent-only financial statements permitted.
• Leases: Similar to the method used for income tax purposes. Lease classification guidance less prescriptive than GAAP.
• No concept of comprehensive income and accumulated other comprehensive income.
Primary Differences from GAAP
• Asset impairment: No requirement to assess assets for impairment; however, there are disclosures. Left up to judgment.
• Investments in debt and equity securities: Recorded at cost unless held for sale, in which case recorded at market value with changes recognized in income.
• Variable interest entities: No such concept.
Primary Differences from GAAP
• Stock-based compensation: Compensation expense not recognized. Certain disclosures required.
• Defined benefit plans: Choice between current contributions payable method (expense for current year contribution only) or an accrued benefit obligation method.
How Your Financial Statements Will Change
• [Content to be developed for specific client or financial statement user]
When Can It Be Implemented?
• Conversion is entirely optional• Can be implemented at any time• Precondition for implementation: Acceptance
by financial statement users
How Will You Benefit?
• Information in financial statements is more relevant for small business decision-making
• Disclosures are more targeted and understandable
• Financial statements are easier and less costly to prepare and audit (or review)
• Standards are stable; changes over time are expected to be minimal
Additional Resources
• Read the Financial Reporting Framework for Small- and Medium-Sized Entities
• Visit our website at [URL address]• Read our newsletter• Review the AICPA toolkit for small businesses
[or financial statement users] at www.aicpa.org/FRF-SMEs
[CPA Firm Logo]
Questions?