Magazine article The CPA Journal

The AICPA's Financial Reporting Framework for Small and Medium-Sized Entities: Examining Its Key Features

Magazine article The CPA Journal

The AICPA's Financial Reporting Framework for Small and Medium-Sized Entities: Examining Its Key Features

Article excerpt

The IASB has developed IFRS for Small and Medium-Sized Entities (SME), the benefits of which are discussed in the authors' article, "Is IFRS for SMEs a Beneficial Alternative for Private Companies? The IASB's Comprehensive Review" (The CPA Journal, Februaiy 2013). The United States has been slow to adopt IFRS for SMEs. Although the AICPA urged the Financial Accounting Foundation (FAF) to establish a separate board that could create modifications or exceptions to GAAP to benefit SMEs, the FAF declined. The AICPA responded by developing a new other comprehensive basis of accounting (OCBOA) for SMEs: the Financial Reporting Framework for Small- and Medium-Sized Entities (FRF for SMEs).

The AICPA released an exposure draft of the FRF for SMEs, and the final version was issued in June 2013. The framework was developed by a working group of CPAs and AICPA staff with years of SME experience. The framework is a less complicated and less costly reporting option for SMEs that do not need U.S. GAAP-based financial statements. The key features that make it especially suited for and relevant to SMEs, as well as highly useful and responsive to the financial reporting needs of lenders, include the use of familiar and traditional accounting methods, historical cost as the primary basis of measurement, and a reduction in the number of adjustments needed to reconcile tax income with book income. (Exhibit 1 lists these and additional features of the FRF for SMEs.)

The framework is intended for use by entities that are owner-managed and for-profit. Owner-managers rely on financial statements to confirm their assessments of performance and of what they own and what they owe, as well as to understand their cash flows. The framework was developed for SMEs that require reliable financial statements for internal use, as well as for external users with direct access to management.

Organization of the Framework

The framework consists of 31 chapters and a glossary (listed in Exhibit 2). The AICPA plans to provide implementation guidance and tools to assist financial statement preparers, CPA practitioners, and financial statement users in learning about and applying the FRF for SMEs. This will include application examples, illustrative financial statements, a disclosure checklist, and similar tools. In an effort to simplify reporting requirements for SMEs, the framework does not include-

* earnings per share,

* segment reporting,

* other comprehensive income (OCI),

* interim reporting,

* variable interest entities (VIE) consolidation, or

* extraordinary items.

Several key aspects of the FRF for SMEs will be discussed in the following sections.

Historical cost Current accounting standards have moved to increased use of fair values and away from historical costs. Historical cost is the primary measurement basis for the proposed framework, which adheres to a general principle that historical cost is the most usefiil measurement basis for users of SME financial statements and the most cost-beneficial approach for SMEs. Only equity instruments held for sale are reported at fair value.

Financial instruments. Most financial instruments will be reported on the balance sheet at amortized cost; investments in equity instruments should be reported at cost, less any reduction for impairment; all other financial assets should be reported at amortized cost; and financial liabilities should be reported at amortized cost. SMEs will measure investments in equity instruments held for sale at fair value, and changes in fair value should be recognized in net income in the period incurred. Trading, available-for-sale, and held-tomaturity classifications are not part of the framework.

Derivatives. Under the framework, derivatives will be disclosed instead of reported at fair value on the balance sheet, as is done under current GAAP. Disclosures detailed in FRF for SMEs section 6.21 include-

a. …

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