Proposed Financial Reporting Framework for Small- and Medium-Sized Entities
By Rick Cyr, Audit Principal
On November 1, 2012, the American Institute of Certified Public Accountants (AICPA) released an Exposure Draft that would offer privately owned small and medium-sized entities (SME’s) in the U.S. an alternative framework of financial reporting. This new financial reporting framework (FRF) is intended for companies that are not required to use Generally Accepted Accounting Principles (GAAP), and offers a framework of financial reporting that is less costly and less complicated than GAAP. Barry Melancon, President and CEO of the AICPA has stated that “the new guidance is intended to make reporting easier to understand, simpler to create, and more affordable to prepare than the traditional GAAP financial statements.”
Once finalized, the FRF for SME’s will neither be approved nor disapproved by the AICPA or the FASB; rather, it will become a non-authoritative financial reporting framework that can be used by entities that do not require GAAP financial statements. This differs from the objective of the Financial Accounting Foundation (FAF) and the FAF Private Company Council’s reporting project, which focuses on modifications or exceptions to U.S. GAAP for private companies that are required to have financial statements prepared in accordance with GAAP. Both projects are considered extremely important to the simplification of financial reporting for small companies in the U.S.
The new FRF for SME’s is being developed by a group of CPA’s and AICPA staff with many years of experience serving small and medium-sized businesses. The FRF for SME’s is based upon a combination of traditional methods of accounting with some accrual income tax accounting methods. The accounting principles under the FRF for SME’s are intended to comprise the most important elements of financial reporting based upon the needs of the ultimate end-user (i.e. owners, managers, lenders, etc.). Notable differences between the new FRF and traditional GAAP include use of historical cost basis as the only measurement basis for all assets, fewer financial statement footnote disclosures, and removal of some of the more complex GAAP accounting areas (i.e. derivatives and hedging, VIE consolidation, stock compensation, etc.). Additional information regarding the proposed framework and differences from GAAP is available on the AICPA’s website.
It is expected that the new FRF for SME’s will be embraced by small and medium sized entities and their external stakeholders, as it will offer a concise, understandable and less costly reporting framework that is not expected to change significantly year-to-year. Additionally, the new FRF for SME’s will not be impacted by ongoing convergence projects between U.S. GAAP and International Financial Reporting Standards (IFRS) as the new FRF for SME’s is specifically for entities that do not need or are not required to have GAAP financials.
The new FRF for SME’s are currently exposed to public comment through January 31, 2013. Comments will be considered and scrutinized, and a final framework is expected to be issued in the first half of 2013.
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