The American Institute of CPAs has released its much-anticipated Financial Reporting Framework for Small- and Medium-Sized Entities, which is aimed at providing an alternative reporting option for small businesses that aren’t required to use GAAP.
With the goal of making reporting simpler for small businesses, the FRF for SMEs takes what the institute describes as a “common-sense” approach based on traditional accounting methods, including using historical cost instead of complicated fair value measurements; reducing book-to-tax differences to eliminate a variety of adjustments; and allowing a degree of optionality so businesses can tailor the presentation of statements.
"The creation of the Private Company Council by the Financial Accounting Foundation and today's issuance of the FRF for SMEs gives private business owners two more viable options,” said Barry Melancon, CPA, CGMA, president and CEO of the AICPA. “The FRF for SMEs has been developed to provide consistent and simpler financial statements for small and medium-sized entities where GAAP is not required.”
“This really is a game-changer,” said Bob Durak, director of Private Company Financial Reporting Accounting Standards at the AICPA. “Once it’s released, the millions of small businesses across the country will have another set of standards to choose from. And it’s tailored to their needs. It’s cost-effective, and a simplified approach -- it’s really a response to market demand. It had become very clear to us that there was a need for a non-GAAP reporting option, and this is the CPA profession in action, responding to the needs of the small business community.”
The framework also focuses specifically on the types of information, like business profitability and cash available, that are of most use to the primary users of the financial statements of small private businesses, such as lenders and insurers.
“It has more targeted disclosures,” Durak explained. “We know who the users of these statements are, so we can create more targeted reports. And that let’s us avoid needless narratives and excess reporting.”
In discussing the ways in which the new framework was more appropriate to the needs of small private businesses, Durak cited its simplified consolidation model, as well as the fact that it doesn’t allow variable-interest entities.
What it is (and isn’t)
The AICPA began work on the new framework last year, and released an exposure draft of it in November. (See “AICPA Releases OCBOA Draft.”) It is based on a set of private company principles that had been developed in Canada by the Canadian Institute of Chartered Accountants (which has since merged with other organizations to create CPA Canada).
“We were fortunate in that we were able to utilize the Canadian private company principles from the CICA,” Durak said. “We took a look at their handbook, and it was very appropriate, and really on target for what we wanted to achieve. And it was very well-received up there. We used theirs as a base, and then went in and tailored it and scrubbed it. So we didn’t have to start from scratch -- we had a really strong foundation to build on.”
One point that he -- and others -- were quick to make clear is the relationship of the FRF for SMEs to GAAP. “This is not meant to replace GAAP,” he said. “It’s for those who don’t need GAAP.”
And in the statement announcing the release, Melancon noted, “The FRF for SMEs is not GAAP and it is not intended to become GAAP. It is another comprehensive basis of accounting with a framework around it for enhanced financial reporting.”
The FAF, the parent of both the PCC and the Financial Accounting Standards Board, which sets GAAP, issued a simultaneous release clarifying the differences between the two. “The AICPA, with its Financial Reporting Framework, is creating a non-GAAP, special purpose framework … for smaller, owner-managed, ‘Main Street’ businesses, whose lenders or investors do not require the comprehensiveness of GAAP financial statements,” said FAF vice president of communication Robert Stewart. “We appreciate that the AICPA has made it clear … that its new framework is not -- and is not intended to be -- GAAP. The AICPA also has made it clear that businesses and accounting firms should carefully consider which financial reporting methodology -- GAAP or non-GAAP -- is most appropriate, given the business' unique circumstances.
In the end, giving small businesses another “appropriate” methodology was one of the institute’s primary goals: “The FRF for SMEs expands the accounting options for CPAs and private companies, while providing comprehensive, consistent and cost-beneficial financial statements,” explained Richard Caturano, chairman of the AICPA Board of Directors, in a statement. “I think this new accounting framework is exactly what business owners, CPAs and community bankers have been looking for as a viable and reliable alternative.”
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