CPAs have asked for relief from the burden of complying with GAAP for many years. So, a few years back the AICPA created the Financial Reporting Framework for Small- to Medium-Sized Entities (aka FRF for SME). The following is a Q&A that will assist you in understanding this reporting framework.
What is FRF for SMEs?
It’s an other comprehensive basis of accounting (OCBOA) that can be used as an alternative to generally accepted accounting principles (GAAP) as issued by the Financial Accounting Standards Board.
Who created FRF for SME?
What is the size of FRF for SME?
A little over 200 pages.
What is the size of GAAP?
Thousands of pages.
How often will FRF for SME change?
About once every three to four years. That’s one of the beauties of it: Stability.
Why was FRF for SME created?
GAAP had become too complex for small- to medium-sized private businesses, driving up the costs of creating GAAP-compliant financial statements. Existing OCBOA (e.g., modified-cash basis) lacked standardization.
Does FRF for SME define a small- to medium-sized entity? Is there a dollar threshold?
No. It’s subjective. There is no dollar threshold.
Is “FRF for SME” GAAP?
No. It’s not GAAP.
Can entities with debt covenants requiring GAAP use FRF for SMEs?
No. But they can see if the lender will amend the debt agreement to allow its use.
Can financial statements created using FRF for SME be audited, reviewed or compiled?
Yes (for all three).
What are some of the characteristics of companies that might use FRF for SME?
What entities should not use FRF for SME?
Is FRF for SME principles-based?
Yes. Use the flexibility and disclose the accounting policies used.
Do the FRF for SME financial statements look like GAAP statements?
Yes. This is a downside (at least to me). I do think a user might mistakenly believe the financial statements are GAAP. You will need to clearly disclose that FRF for SME was used. Also, your opinion or SSARS report will refer to FRF for SME (rather than GAAP).
What are some key points of FRF for SME?
Can’t I just continue issuing tax-basis financial statements?
Yes. But tax-basis statements do not incorporate some of the more traditional accounting concepts of FRF for SME.
How will the use of FRF for SME change the peer review process?
No change; FRF for SME is just another OCBOA – like tax-basis or modified-cash basis.
Does the AICPA offer any implementation tools?
Yes. Click here for toolkits.
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Charles Hall is a practicing CPA and Certified Fraud Examiner. For the last thirty years, he has primarily audited governments, nonprofits, and small businesses. He is the author of The Little Book of Local Government Fraud Prevention and Preparation of Financial Statements & Compilation Engagements. He frequently speaks at continuing education events. Charles is the quality control partner for McNair, McLemore, Middlebrooks & Co. where he provides daily audit and accounting assistance to over 65 CPAs. In addition, he consults with other CPA firms, assisting them with auditing and accounting issues.
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