1. Financial Reporting Framework for Small- and Medium-Sized Entities
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Financial Reporting Framework for Small- and Medium-Sized Entities
FRF for SMEs™ Accounting Framework
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Copyright © 2013 American Institute of CPAs

2. Instructions To Firms
Below are some suggestions when using this PowerPoint to introduce your team members to the FRF for SMEs Framework
This PowerPoint is an overview of the framework. Reviewing this is not a substitute for reading and understanding the actual guidance.
Several slides have a comment note for you to consider based on your processes or to consider incorporating relevant examples.
To make this most useful for your team, look for other points within the presentation where you have relevant examples or experiences.
Once you have tailored this PowerPoint to your firm’s current practices, delete this slide and the other red notes you’ll find in the following slides.

3. Current Special Purpose Financial Reporting Framework Environment
Small and medium-sized entities (SMEs) may not need GAAP-based financials
If GAAP isn’t required, a special purpose framework may be the financial reporting option currently used
Tax
Cash
Regulatory
Contractual
Special Purpose Framework is the term that replaces OCBOA
Special Purpose Framework is the term that replaces OCBOA (other comprehensive basis of accounting). This term was presented with the release of the clarified auditing standards in 2012.

4. A New Non-GAAP Special Purpose Financial Reporting Framework
AICPA has released the Financial Reporting Framework for SMEs
Non-GAAP
Streamlined
Based on traditional and proven accounting methods
Provides meaningful financial reports without needless complexity

5. An Additional non-GAAP Framework
First, let’s note that FRF for SMEs doesn’t replace tax or cash bases of accounting. They can still be used, as can regulatory or contractual bases where applicable.
FRF for SMEs is essentially a next generation type of special purpose framework (SPF).

6. Separate from FAF and Private Company Council
Is GAAP
Modifies GAAP for private companies
FRF for SMEs
Not GAAP - Special Purpose Framework
Is developed specifically for private small businesses
Complementary to efforts by FAF’s PCC
In 2012, the Financial Accounting Foundation (FAF) created the Private Company Council in part to consider exceptions and modifications for private companies to financial reporting standards that cause unnecessary complexity and cost because they are not relevant in a private company environment. Any exceptions or modifications approved by the PCC must be endorsed by FASB before they are written into GAAP. The PCC is considering alternatives within GAAP in certain areas.
When the AICPA announced, in May 2012, its plans to develop a non-GAAP financial reporting framework for small, owner-managed, for-profit entities, the FAF called the project “important and complementary” to its own efforts to modify GAAP for private companies.
FAF and FASB did not review or comment on the technical aspects of the FRF for SMEs.

7. Useful Resources
Financial Reporting Framework for Small- and Medium-Sized Entities
An Introduction to the Financial Reporting Framework for Small- and Medium-Sized Entities
Comparison of FRF for SMEs to Other Bases of Accounting
Illustrative Financial Statements
Illustrations of the Application of Certain Principles and Criteria
As we get ready to dive into the framework, here are a few resources you’ve hopefully already taken a look at. If not, you’ll find them at the AICPA website. OK, let’s get started…

8. What entities may want to use FRF for SMEs?
Owner-managed – closely held
For-profit
No regulatory reporting requirements that essentially require GAAP-based financial statements
No intention of going public
Not in an industry that requires highly-specialized accounting guidance, such as financial institutions and governmental entities
Does not have overly complicated transactions
Does not have significant foreign operations
Key users of the financials have direct access to the entity’s management
The FRF for SMEs has been developed for small- to medium-sized entities that do not require GAAP-based financial statements. This framework can be used by entities, whether incorporated or unincorporated, in many industry groups. So, what is a small- and medium – sized entity (SME)? There is no set quantifiable definition in the U.S. (dollar amount of revenues, number of locations, etc.) for determining what an SME is.
These are some of the guidelines for management and other stakeholders to consider when determining the appropriateness and suitability of the FRF for SMEs accounting framework. Ultimately, the decision regarding which accounting framework best meets an entity’s financial reporting needs rests with management.

9. Authority and effective date
Use of the framework is purely optional
The AICPA has no authority to require the use of the FRF for SMEs accounting framework for any entity
Management represents that such financial statements have been prepared in accordance with the AICPA’s FRF for SMEs accounting framework, a special purpose frame-work
Because use of the framework is optional, there is no effective date for its implementation

10. Advantages of FRF for SMEs
The framework is concise and self-contained.
The framework will be stable.
Frequent changes to the framework
are not expected.
Financial statements will more closely align with income tax returns because there will be fewer book-to-tax adjustments.
OWNER-MANAGERS OF SMALL BUSINESSES need ways to work smarter, control costs and gain strategic operational insights. The FRF for SMEs framework assists small business owner-managers and other stakeholders in focusing on the performance of the company and its assets, liabilities, and cash flows.
Management of smaller to medium-sized private companies may find the FRF for SMEs framework an appealing financial reporting option because it closely aligns with how they run their businesses.
One key advantage is that FRF for SMEs is targeted and addresses only accounting and financial reporting matters that are relevant to these types of entities. In fact, the entire FRF for SMEs accounting framework is only approximately 200 pages.

11. Advantages of FRF for SMEs
Historical cost is the primary measurement basis
Avoids complicated fair value measurements.
Accounting policy options will allow management to select what is best for their purposes
Example - current taxes payable method or the deferred tax method
Goodwill is amortized over the same period
as for federal tax purposes.
No impairment testing is required

12. Advantages of FRF for SMEs
Only relevant principles are included and the accounting is simplified.
Accounting for long-lived assets follows an amortized/depreciated cost approach.
No impairment testing is required
No other comprehensive income (OCI)
No variable interest entities (VIEs). Parent-only financial statements are allowed
No complicated accounting for stock compensation and derivatives
No hedge accounting
Disclosures are targeted to small business issues.

13. Advantages of FRF for SMEs
FIRM: Note your new disclosure checklist process for engagements using FRF for SMEs.
Targeted Disclosures
Disclosures are streamlined to avoid
excess detail, complexity, and
extraneous information
If a user requires additional information, management can tailor the nature and extent of disclosures to suit those needs
FIRM: Explain the new disclosure checklist for engagements using FRF for SMEs. Where is the checklist in your process documents?

14. A Look at Key Principles of FRF for SMEs
Primarily uses historical cost basis
Avoids complicated fair value measurements
Most relevant and reliable measurement basis for small business financial reporting needs
Well-suited as a metric for evaluating an entity’s cash flow
Objective, verifiable, straight-forward
Directly relates to the past experience and past decisions of an entity

15. A Look at Key Principles of FRF for SMEs
Optionality in Certain Accounting Policies
Income taxes
taxes payable or deferred income taxes method
Subsidiaries
consolidate or equity method
Joint ventures
equity method or proportionate
consolidation
Long-term contracts and service contracts
percentage of completion or the completed contract method
By providing options, management can decide which methodology will provide financial statement users with the most decision-useful information
This is one reason the FRF for SMEs is well-suited to the small business community where financial statement users commonly have direct access to management.
Note that under the joint venture accounting options, proportionate consolidation is only applicable to unincorporated entities when it is an established industry practice.
Certain requirements exist for use of CCM.

16. A Look at Key Principles of FRF for SMEs
Intangible assets acquired in a business combination
separately recognize or include in goodwill
Internally-generated intangible assets –
either expense or capitalize development costs
Certain interest costs
expense or capitalize if related to certain items of inventories, internally-generated intangible assets, and PP&E
Defined benefit plans
current contribution payable or one of the accrued benefit obligation (ABO) methods

17. Content of the FRF for SMEs
FIRM: Note where the downloaded framework is saved in your practice.
Note where the downloaded implementation materials are also.
Framework and other resources can be downloaded at
The framework consists of 31 chapters covering a comprehensive set of accounting principles. The framework’s streamlined, common-sense requirements are based on traditional accounting principles. Generally, if you know the accrual basis of accounting and aspects of tax accounting, you should find the framework uncomplicated. In the next few slides we’ll cover some of the significant principles.
Comparisons of the FRF for SMEs to other bases of accounting are available to help understand how the principles and requirements of the framework differ from the income tax basis of accounting, U.S. GAAP and IFRS for SMEs.

18. Chapter 2: General Principles
When preparing financial statements, management should make an assessment of whether the going concern basis of accounting is appropriate

19. Going Concern
Requires management assessment of whether the going concern basis of accounting is appropriate.
When management becomes aware of material uncertainties relating to events or conditions and concludes that a known event or condition is probable of having a severe impact on the entity’s ability to realize its assets and discharge its liabilities in the ordinary course of business…
…the entity should disclose those uncertainties along with its plans for dealing with the adverse effects of the conditions and events

20. Chapter 3: Transition This chapter …
Requires an entity to prepare an opening statement of financial position at the date of transition
Allows management to elect certain exemptions to the principle that the opening statement of financial position should comply with the framework
Requires certain disclosures including the amount of each charge or credit to equity at the date of transition
Guidance is available in the “Illustrations and Applications” resource.

21. Chapter 13: Intangibles
Goodwill is amortized over the same period as that used for federal income tax purposes or 15 years.
No impairment testing.
All intangible assets are considered to have a finite useful life and are amortized over their estimated useful lives.

22. Chapter 21: Income Taxes This chapter…
Allows an accounting policy choice to use either the
taxes payable method
only current income tax assets and liabilities are recognized
or deferred income taxes method
recognize a deferred income tax liability whenever recovery or settlement of the carrying amount of an asset or liability would result in deferred income tax outflows;
recognize a deferred income tax asset whenever recovery or settlement of the carrying amount of an asset or liability would generate deferred income tax reductions
States that no provision for income taxes should be made in the financial statements of businesses if income is taxed directly to the owners

23. Chapters 22: Subsidiaries
Allows management to make an accounting policy choice to either consolidate its subsidiaries or use the equity method
Subsidiary is an entity that is more than 50% owned by the reporting entity
All subsidiaries should be accounted for using the same method.

24. Chapters 23: Consolidated Financial Statements and Noncontrolling Interests
A material difference in the basis of accounting between a parent and a subsidiary precludes the preparation of consolidated financial statements and the use of the equity method.
Combined financial statements may be useful, but are not a substitute for consolidated financial statements.
When combined financial statements are prepared, similar principles to those used when preparing consolidated financial statements apply.

25. Chapter 25: Leases Familiar accounting
Overriding concept of transferring substantially all the benefits and risks of ownership to the lessee.
Criteria for capitalizing a lease generally matches criteria for tax purposes
Reduces book to tax adjustments

26. Chapter 25: Leases
Classifies leases from the point of view of the lessee as either:
Operating
A lease in which the benefits and risks of ownership are substantially retained by the lessor should be accounted for as an operating lease
Capital
A lease that transfers substantially all the benefits and risks of ownership from the lessor to the lessee should be accounted for as a capital lease

27. Chapter 25: Leases
Classifies leases from the point of view of the lessor as either:
Operating
A lease in which the benefits and risks of ownership are substantially retained by the lessor should be accounted for as an operating lease
Sales-type or Direct Financing
A lease that transfers substantially all the benefits and risks of ownership from the lessor to the lessee should be accounted for as a sales-type or direct financing lease by the lessor

28. Chapter 29: New Basis (Push-Down) Accounting
Assets and liabilities may be comprehensively revalued by means of push-down accounting when an acquirer gains control of an entity
Control of an entity is gained when more than 50 percent of the outstanding residual equity interests in the entity have been acquired
When an acquirer gains control of an entity a new cost basis for a continuing entity is established

29. Comparisons with other frameworks
FRF for SMEs
U.S. GAAP
Tax basis OCBOA
IFRS for SMEs

30. Reporting under FRF for SMEs
Financial statements prepared under the FRF for SMEs can be
Audited
Reviewed
Compiled
The same standards apply when reporting on other SPF financial statements
Compilation: AR section 80, Compilation of Financial Statements
Review: AR section 90, Review of Financial Statements
Audit: AU-C section 800, Special Considerations—Audits of Financial Statements Prepared in Accordance With Special Purpose Frameworks

31. Sample Reports
Firm: Use this slide to indicate where staff can find the sample reports for audited, reviewed or compiled financials.
Sample reports can be found in the Introduction to the Financial Reporting Framework for Small- and Medium-Sized Entities

32. Sample standard review report
Independent Accountant’s Review Report
Board of Directors
XYZ Company ↓
[last paragraph]
Based on our review, we are not aware of any material modifications that should be made to the accompanying financial statements in order for them to be in conformity with Financial Reporting Framework for Small- and Medium-Sized Entities™, as described in Note 1.
[Signature of accounting firm or accountant, as appropriate]
[Date]

33. Sample basis of presentation note
The accompanying financial statements have been prepared in accordance with the Financial Reporting Framework for Small- and Medium-Sized Entities issued by the American Institute of Certified Public Accountants. This special purpose framework, unlike generally accepted accounting principles (GAAP) in the United States of America, does not require the recognition of deferred taxes. We have chosen the option to recognize only current income tax assets and liabilities.
Other primary differences would be described as necessary.

34. Presentation and Disclosure Checklist
Firm: Note where you have located the checklist within your methodology resources.
Disclosures are streamlined to avoid excess detail, complexity, and extraneous information

35. Outreach to clients
Firm: Use this point in the presentation to discuss what you’re doing within your practice to introduce clients to the FRF for SMEs. Make sure staff know where these tools are as they’re talking to clients.
Intro to FRF for SMEs
PowerPoint
FAQs
Flyer
Short video
Backgrounder
Article for newsletters
Sample letters

36. Do you have a client that may benefit from FRF for SMEs?
Firm: Ask your staff if they’ve thought of clients that may be interested in this reporting alternative. Who should they inform?
Identify the clients that you think may benefit from FRF for SMEs.
Anticipating and meeting client needs in a changing and complex world can present an important service opportunity. Which clients can benefit from a non-GAAP alternative?

37. Benefits to Financial Statement Users
Bankers, surety companies and other users will get information that is
Relevant
Reliable
Consistent
FRF for SMES uses traditional accounting principles and accrual income tax accounting methods -familiar to most users
FRF for SMEs has undergone public comment and professional scrutiny
Financials prepared utilizing the FRF for SMEs offer streamlined, relevant financial statements for privately held small- and medium-sized entities that do not need GAAP-compliant reports. The financial statements will clearly and concisely report what a business owns, what it owes and its cash flow. Lenders and others can clearly understand key measures of a business and its credit-worthiness. The framework consists of traditional accounting principles and accrual income tax accounting methods that are very familiar to lenders and other users and should be welcomed as an insightful alternative reporting framework. A banker serving SMEs was part of the task force that developed the framework.

38. Outreach to bankers and others
FIRM: Indicate what you’ve done or are planning to do to reach out to financial statement users.
Toolkit tailored to financial statement users to help explain the new framework
Introduction
PowerPoint
Backgrounder
FAQs
Available at aicpa.org/FRF-SMEs

39. Questions?