New Financial Reporting Framework Provides Options Small- and Medium-Sized Businesses by Robert Aldir

Posted on December 05, 2013 by Robert Aldir

Currently, generally accepted accounting principles in the United States (U.S. GAAP) do not provide separate implementation and adoption requirements for public and nonpublic entities. As a result, in recent decades there has been a growing voice of concern from nonpublic entities and their stakeholders for a financial reporting framework that is better tailored to meet their specific needs. In June of 2013, the American Institute of Certified Public Accountants (AICPA) introduced a self-contained and nonauthoritative financial reporting framework (FRF) that provides small- and medium-sized entities (SMEs) with the option to adopt a more simplified and less costly method of presenting their financial information to their various stakeholders. SMEs are defined by the FRF as entities that do not have a requirement to report financial information in accordance with U.S. GAAP. Given the framework is nonauthoritative, SMEs are not required to adopt this framework and therefore its implementation is optional. Also, because the framework is optional, there is no effective date for implementation and as a result entities may elect to adopt this framework on a retrospective basis.

Perhaps the most significant aspect of the new FRF for SMEs is its departure from the primarily rules-based framework under U.S. GAAP that includes approximately 25,000 pages of literature. At approximately 200 pages of literature, the new principles-based framework utilizes a blend of traditional accounting principles and income tax methods of accounting to present a simplified presentation of an SMEs’ financial position, results of operations, and cash flows. As a result, financial statements produced under the new framework are likely to be desirable by both the preparers of financial information and those relying on them to make sound business decisions.

The FRF for SMEs allows SMEs to primarily use the historical cost convention to present their financial information. This is likely to provide a cost savings versus the preparation of more complex fair value measurements that are required by U.S. GAAP. The new framework also does not recognize the concept of comprehensive income, which is often required under U.S. GAAP for certain types of transactions. Thus, under this framework, all operational results are recognized through the income statement. Revenue recognition, another topic which has been long debated and is continually evolving under U.S. GAAP, has been simplified under one principles-based definition. Other notable changes include the removal of recognition requirements for derivatives, hedging activities and stock-based compensation. However, there are still requirements to present certain disclosures concerning these types of instruments under the FRF for SMEs.

In being central to its theme of removing complexity, the reporting and disclosure requirements of a complex and ever evolving topic under U.S. GAAP, Variable Interest Entities, has been removed altogether from the consolidation requirements under this new framework. In addition, SMEs are allowed the option to present parent company only financial statements which is currently not allowable under U.S. GAAP. SMEs have an option on how to present their income taxes. Currently, under U.S. GAAP, entities are required to use the deferred income tax method of recognition. Under the FRF for SMEs framework, entities can elect either this or another method, income taxes payable method, whereby an entity only reports current period income tax assets and liabilities. The new framework also removes the U.S. GAAP requirement to evaluate and possibly record uncertain tax positions.

Being true to its theme of primarily being a historical cost basis framework, the FRF for SMEs framework eliminates the impairment test requirements for goodwill and long-lived assets. Goodwill will be amortized using a 15 year period under the framework.

In order to facilitate the adoption of this framework, the AICPA has also released an implementation guide which provides a sample set of financial statements with a suggested full set of footnote disclosures, a financial reporting checklist and comparisons between financial statements prepared under FRF for SMEs and other financial reporting frameworks such as U.S. GAAP and International Financial Reporting Standards. In addition, the AICPA has also released adoption toolkits for three distinct types of stakeholders: Preparers, Users and Certified Public Accountants (CPA), to use in the implementation of this framework.

Although this new framework offers simplicity and provides optionality to preparers and users of financial information, all stakeholders should carefully analyze the pros and cons of adopting this new framework. Some notable challenges of adoption can be the inherent risk of losing transparency of the economic activity of an entity that engages in more complex types of transactions, such as those with derivatives and/or stock options. Also, because this framework is primarily principles-based and not industry specific, there is a risk of having two issuers of financial statements prepared under this framework that operate in the same industry that may not provide comparable results of operations. Because of these and many other concerns of adoption, users and stakeholders alike, should carefully examine what is the intended purpose of presenting an organization’s financial information as well as the intended user’s needs. As with other comprehensive bases of accounting, a CPA can compile, review and/or audit financial statements prepared under the FRF for SMEs. Accordingly, any organization that is considering adopting this new framework should consult with a knowledgeable CPA.

At Berkowitz Pollack Brant we have extensive experience providing audit, review and compilation services of financial statements prepared under U.S. GAAP and other comprehensive bases of accounting for companies of all sizes and across a wide range of industries.



About the Author: Robert C. Aldir CPA is a senior manager in the Audit and Attest Services practice of Berkowitz Pollack Brant. For more information, call (305) 379-7000 or e-mail