A Publication of WTVP

What is this… and why would I want to know?

The acronyms stand for the financial reporting framework (FRF) for small- and medium-sized entities (SMEs). The FRF for SMEs framework is a new basis of accounting option, developed by the American Institute of Certified Public Accountants (AICPA), for small- and medium-sized entities that require reliable non-GAAP (generally accepted accounting principles) financial statements for internal use and external users. The term financial reporting framework is defined as a set of criteria used to determine measurement, recognition, presentation and disclosure of all material items appearing in the financial statements.

Have you ever asked yourself the following?

You may find that FRF for SMEs is the perfect fit for your accounting needs.

What is a small- and medium-sized entity?
There is no standard definition of SME in the United States. Additionally, the task force and the AICPA who developed the framework deliberately did not quantify size criteria for determining what constitutes a small- and medium-sized entity. Rather, they provided characteristics of typical entities that may utilize the framework. It is important to note these characteristics are not all-inclusive and not intended to be a list of required characteristics entities must possess in order to utilize the framework.

The entity does not have regulatory reporting requirements that require it to use GAAP.

How does the FRF for SMEs framework differ from other special purpose frameworks like tax and cash basis of accounting?
Unlike tax or cash basis of accounting, the FRF for SMEs framework has undergone public exposure and professional scrutiny and contains explicit and comprehensive accounting principles.

Is the FRF for SMEs framework authoritative?
No. The FRF for SMEs framework is a type of special-purpose framework developed by the AICPA. It has not been approved, disapproved or otherwise acted upon by a senior technical committee of the AICPA or the Financial Accounting Standards Board and has no official or authoritative status.

How do CPAs report on financial statements prepared under the FRF for SMEs framework?
CPA practitioners performing audit, review or compilation engagements on financial statements prepared under the FRF for SMEs framework follow the same professional standards as they do when reporting on other special-purpose framework financial statements. The auditor or accountant’s report indicates the basis of accounting on which the financial statements are presented.

How will the FRF for SMEs framework be maintained in the future?
A key feature of the FRF for SMEs framework is that it will be a stable, yet nimble framework. The task force intends to review and propose new amendments every three or four years. Amendments will be primarily based on input from stakeholders and developments in accounting and financial reporting.

How does the FRF for SMEs framework differ from GAAP and avoid needless complexity and cost?
The FRF for SMEs framework is comprised of accounting principles, quite similar to GAAP, but are especially suited and relevant to a typical SME. For example, the framework uses historical cost as its measurement basis and steers away from complicated fair value measurements. The framework does not require complicated accounting for derivatives, hedging or stock compensation, and has no concept of variable interest entities (VIEs). Additionally, the framework’s disclosure requirements are targeted, providing users of financial statements with relevant information while recognizing those users can obtain additional information from management if they desire. Furthermore, the accounting for leases is consistent with the existing and familiar treatment and will not be amended to incorporate the current proposed changes to lease accounting.

Will lenders and financial institutions accept financial statements prepared under the FRF for SMEs framework?
Owner-managers and their CPA practitioners will need to consult with lenders and other key external stakeholders about the use of the FRF for SMEs framework. Because of the many commonalities to GAAP and the potential significant cost-benefit factors, the AICPA believes the lending community will accept financial statements prepared under the FRF for SMEs framework.

How does the FRF for SMEs framework fit in with the FAF’s Private Company Council and standard setting in the U.S.?
The AICPA and Financial Accounting Foundation (FAF) are both committed to the private-company financial reporting constituency; however, the objectives of these efforts are different. The FAF’s Private Company Council focuses on modifications to U.S. GAAP for private companies that need or are required to have financial statements prepared in accordance with GAAP, i.e. “Little GAAP.” The FRF for SMEs framework is a concise, highly relevant framework for owner-managers of SMEs and their external stakeholders where U.S. GAAP financial statements are not required.

Ultimately, the decision regarding which accounting framework best meets an entity’s financial reporting needs rests with management. Consult with your CPA practitioner to discuss what financial reporting framework will work best for you. Additional information on the FRF for SMEs framework can also be found on the AICPA’s website at iBi