Financial reporting framework for small- and medium-sized entities
Contributed by: Kimberly McLaughlin, CPA – Supervisor
Show Accounting frameworks provide information on how to measure, recognize, present, and disclose the information included in an entity’s financial statements. There are various frameworks that businesses can elect to adopt, depending on their financial needs. Many businesses utilize Generally Accepted Accounting Principles (GAAP) their financial statements. However, in 2013, the American Institute of Certified Public Accountants (AICPA) issued the Financial Reporting Framework for Small- and Medium-Sized Entities (FRF for SMEs). Per the AICPA, “It delivers financial statements that provide useful, relevant information in a simplified, consistent, cost-effective way.” At Leone, McDonnell & Roberts, we are continuously assessing the various accounting frameworks and legislations to ensure we provide our clients with the best possible financial and tax advice. Electing to adopt FRF for SMEs could save our clients both time and money. Taking a deeper dive into the framework’s details can provide the insight needed to determine if it’s an appropriate alternative to GAAP basis financial statements for clients. Understanding the Guidelines of What
Constitutes a Small- to Medium-Sized Organization The Pros and
Cons of Financial Reporting Framework for Small- and Medium-Sized Entities One of the biggest cons about the FRF for SME is that financial statement users are not familiar with the framework. Also, it may not be an accepted framework by the financial statement users, such as banks and lending institutions. When Is It a Good Idea to Consider Using the FRF for SMEs Framework? Accounting Standard Update (ASU) 2014-09, Revenue from Contracts with Customers, was issued by the Financial Accounting Standards Board (FASB) in 2014. For private companies, this was supposed to be effective January 1, 2019. However, due to COVID-19, this was delayed a year. Nonetheless, it’s time consuming and costly to implement these new revenue recognition standards and for some nonpublic companies, they would rather not spend the time and incur the cost of implementing these standards. As such, it may be beneficial to consider if the FRF for SMEs would better meet the needs of the end users of the financial statements as ASU 2014-09 is not applicable for the FRF for SMEs. To learn more about the AICPA’s FRF for SMEs Accounting Framework, click here. Contact Leone, McDonnell & Roberts Today to Learn More The Financial Reporting Framework for Small and Medium-Sized Entities (“FRF for SMEs”) is a self-contained financial reporting framework issued by the American Institute of CPAs (“AICPA”). It is a Special Purpose Framework that was designed to be useful and manageable. In comparison to the Financial Accounting Standards Board’s (“FASB’s”) codification, which is approximately 8,000 pages, the framework consists of approximately 200 pages of guidance. It was first issued in 2013 and has had several subsequent updates. The AICPA released the FRF for SMEs as an alternative to accounting principles generally accepted in the U.S. (“GAAP”) with the goal of making it easier for privately owned businesses to prepare their financial statements. The task force and AICPA staff that developed the framework did not quantify size criteria for determining what constitutes a small or medium-sized entity because they determined that size tests were not effective at describing the kinds of entities for which the framework is intended. However, the AICPA did identify the following characteristics that are typical of SMEs:
The framework was developed to address transactions that are typical for private, for-profit, and small and medium-sized entities. If the framework does not specifically address a transaction, other event or condition, management should use its judgement and apply the general principles, concepts and criteria contained in the framework when developing accounting policies. The use of the framework is purely optional, and there are no effective implementation dates. In the year of adoption, the company would restate opening balances using the new framework and then apply the framework to the current year. The AICPA and FASB are both committed to the private company financial reporting constituency, however, their objectives differ. The PCC focuses on modifications to U.S. GAAP for private companies that need or are required to have financial statements prepared in accordance with GAAP. The FRF for SMEs framework is a concise, highly relevant framework that can be used when U.S. GAAP financial statements are not required. The FRF for SMEs retains its existing and familiar accounting for revenue recognition and leases, offering approaches that are well-known and long used by entities. The GAAP changes in those areas create another opportunity for smaller to medium-sized, for-profit private entities that are not required to use GAAP to consider whether the FRF for SMEs framework suits their financial reporting needs.
Due to the reporting requirements by lenders and investors, it is highly recommended that real estate investors, developers and others in this sector consult with their business advisors to select the most appropriate basis of accounting. * See “FRF for SMEs: The GAAP Alternative That Can Save the Day” for additional information on these topics under the framework. What is a small and mediumSmall and medium-sized entities are entities that: (a) do not have public accountability, and. (b) publish general purpose financial statements for external users. Examples of external users include owners who are not involved in managing the business, existing and potential creditors, and credit rating agencies.
What is the difference between IFRS and IFRS for SME?IFRS requires the use of the equity method in the consolidated accounts (or proportionate consolidation for JCEs). IFRS for SMEs, entities can use the cost model, the equity method or the fair value model, which gives entities much greater flexibility to select a policy most appropriate to their business.
Why is IFRS not useful for SMEs?The cost burden of applying the full set of IFRS Standards may not be justified on the basis of user needs. Further, much of the current reporting framework is based on the needs of large business, so SMEs perceive that the full statutory financial statements are less relevant to the users of SME accounts.
Which entities can use IFRS for SMEs?All entities apart from public companies, state- owned companies and certain non-profit companies are allowed to apply the IFRS for SMEs. Profit companies, other than state owned or public companies, whose public interest score for the particular financial year is at least 350.
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