The AICPA just released the much anticipated Financial Reporting Framework for Small- and Medium-Sized Entities (FRF for SMEs). Its size is less than 200 pages (compared to several thousand pages for U.S. GAAP).
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A Short History
I still recall sitting in a University of Georgia graduate class in 1983 (back in the days of David Bowie, Prince, and Phil Collins) as we discussed the big-GAAP-little-GAAP issue. Even then there was a cry that GAAP had become too burdensome. It took thirty years, but we finally have relief – even though FRF for SMEs is not considered GAAP.
About five years ago the International Accounting Standards Board issued IFRS for SMEs, and I really liked it (and still do). It, like FRF-SMEs, is small in size (about 230 pages), but it never took root here in America. I’m not sure why. Canada also issued its own set of small business accounting standards.
About three years ago, the Blue Ribbon Panel – made up of representatives of the AICPA, the Financial Accounting Foundation (FAF), and the National Association of State Boards of Accountancy (NASBA) – recommended the establishment of “a separate private company standards board” under the FAF’s oversight.
The FAF (the parent of FASB) declined to follow the recommendation, and, in its place, created the Private Company Council (PCC) to work with the Financial Accounting Standards Board to create exceptions to U.S. GAAP for small businesses.
The AICPA, soon after the FAF’s PCC announcement, decided it would create the FRF for SMEs.
You might say the FAF and the AICPA diverged, but they have politely (and publicly) referred to the two approaches as complementary.
Interestingly, the day the AICPA issued FRF for SMEs, FASB voted to issue three PCC initiatives for public exposure.
Applauding the AICPA
I applaud the AICPA for creating and issuing FRF for SMEs. I believe it will provide CPAs (and their clients) with a long sought-after solution to the standards overload issue. Small for-profit businesses have enough problems without being burdened with overly complex accounting standards and the cost of creating compliant financial statements.
Will We (American CPAs) Use FRF for SMEs?
I’m now waiting to see the CPA community’s response to FRF for SMEs. Will we move forward with these standards, or will we ignore them, as was done with IFRS for SMEs?
Personally I believe CPAs around the U.S. will embrace FRF for SMEs. In scanning these new standards, I see the following interesting aspects (to name a few):
- No other comprehensive income presentation
- Lease accounting remaining much like our present GAAP rules
- Consolidations not required
- VIE standards not in play
- Goodwill can be amortized
- Simplified disclosures
- More historical accounting; less fair value accounting
When GAAP is Required
Keep in mind that if your small business client needs GAAP-based financial statements (e.g., debt covenant requirement), they will still need to follow FASB guidance, but if there is no need for GAAP-based financial statements, the client will have the option to use the FRF for SMEs. (You may want to check with your clients to see if they have any debt agreements requiring GAAP financial statements.)
OCBOA – Still an Option
Of course clients still have the option to issue cash-basis, modified-cash or tax-basis statements.
How About You?
Will you and your clients use FRF for SMEs?