Financial Reporting Framework for Small- to Medium-Sized Entities: Questions and Answers

By Charles Hall | Accounting and Auditing

Aug 17

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?

  • For-profit
  • Closely-held
  • Not a public company
  • No regulatory requirements for GAAP
  • Individuals with controlling ownership also manage the company

What entities should not use FRF for SME?

  • Nonprofits
  • Those with complex transactions
  • Governments

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?

  • No comprehensive income
  • Investments will be at historical cost (market value used when held-for-sale)
  • Derivatives (e.g., swaps) are not recognized on the balance sheet
  • There is no hedge accounting
  • Goodwill amortized over the same period as that used for tax purposes or 15 years
  • All intangibles are amortized over their economic life
  • Income taxes recognized using taxes payable method (what you owe at period-end) or the deferred income tax method (as GAAP requires)
  • No requirement to accrue uncertain tax positions (no FIN 46)
  • Leases are recognized as operating or capital leases 
  • Policy choice to consolidate subsidiaries or account for them using the equity method
  • Parent-only presentation is allowed (use equity method accounting for subsidiaries)
  • Variable interest entities are not consolidated
  • No assessment of long-lived assets for impairment
  • Going concern assessment required by management 
  • Revenue recognition is principles-based (disclose how you recognize revenue); percentage-of-completion can be used by contractors
  • Stock-based compensation not booked as a liability (disclosure only)
  • Defined benefit plan liabilities can be recognized using contribution payable method (record current pension plan payments not made; no projected benefit obligation required)
  • Disclosure requirements are greatly simplified

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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About the Author

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.

Leave a Comment:

(8) comments

James Ulvog August 17, 2013

Great post.

Much of the discussion of FRF or SMEs is making a big deal that it isn’t like GAAP; it isn’t as ‘good’ as GAAP. That is obviously true. That’s also the point. It is an *alternative* to GAAP.

A couple years ago I added up the number of pages in each section of the printed version of Accounting Standards Codification. Came up with 7,692 pages.

In the modern age, a person can’t throw that kind of statement into the conversation without providing a citation, so here it is:

Charles Hall August 17, 2013

Jim, Thanks for the page number count; it is a beast!

armando balbin August 18, 2013

Well explained. I definitely like the simplicity for the SME, as it is impracticable and too expensive to apply GAAP to the SME. It would be great if FRF for SME would include NFPs and if/when it becomes the “Little GAAP” because being an alternative to GAAP I see overload in keeping up with the standards as I will not be able to ignore GAAP.

KleinHall August 20, 2013

Great post and thoroughly explained, as Armando says the simplicity for SME is nice however it’s just too costly. Great info. Thanks!

Charles Hall August 21, 2013

Thanks Armando. I had someone else ask me just today if they could use FRF for SME for a nonprofit. But FRF for SME is designed for private businesses. I have used modified cash for nonprofits, and that seems to work okay – not the best solution, but it works.

Charles Hall August 21, 2013

Thanks Klein. Glad you liked it.

Ed Quintana December 27, 2013

Has the NASBA endorsed the FRF for SME’s?

If not how does this affect their use by CPAs in their particular states and with their boards of accounting?

Charles Hall January 3, 2014

Ed, NASBA has not (and probably will not) endorse FRF for SMEs. NASBA has openly opposed the Framework, though they have reconciled, at least somewhat, with the AICPA.

I am not aware of any prohibition–in any of the 50 states–to using the Framework; nor do I expect any.

The State Boards have not previously prohibited the use of other OCBOA such as cash basis, modified basis, or tax basis; since the Framework is another OCBOA, I don’t expect any prohibitions to its use.

Thanks for the questions. What are your thoughts?

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