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?