Financial Reporting Framework for Small and medium-sized entities. AICPA financial statements for privately held firms. AICPA has announced a new financial reporting framework which makes more sense for small entities than GAAP statements.

1. Financial Reporting
Framework for Small- and
Medium-Sized Entities
(FRF for SMEs™ )
Presentation by:
Patrick Mulherin, CPA
Cory Cuffley, CPA, MAC

2. Outline
•
Overview of Financial Reporting environment
•
Why the need for a new reporting framework?
•
Who can use it?
•
Features/Characteristics
•
Comparisons of the FRF for SMEs to Tax and GAAP
basis
•
Additional resources
•
Questions

3. Financial Reporting Environment
•
Small- and medium-sized entities make up a large portion
of business in the United States
•
The AICPA estimates there to be about 20 million SMEs in the
United States
•
Multiple frameworks available for use
•
Major changes coming with certain aspects of financial
reporting
•
Lease accounting

4. 2013 American Institute of CPAs ©

5. Why the need?
•
Generally Accepted Accounting Principles (GAAP) basis financial
statements may not be necessary
•
•
Special reporting frameworks such as tax or modified cash, may not
be sufficient for users
•
•
GAAP basis statements tend to be very detailed and unnecessary depending
on the client’s situation
FRF for SMEs™ is a lot closer to GAAP than the other Special Purpose
Frameworks
The AICPA recognized this need, which led them to develop this
tailored framework.
•
Self contained, Special Purpose Framework (SPF)

6. Who can use the framework?
•
Small, owner-managed, for profit businesses
•
No Industry specific guidance
•
Users have access to owners/management of the companies
•
No standard definition of a small- and medium-sized entity
•
When GAAP reporting is not required.
•
No contractual or regulatory reporting requirements
•
Incorporated or unincorporated
•
Non-issuers with no intent on going public

7. Features/Characteristics
•
Actual framework, constructed by CPAs and business professionals
from around the country.
•
Accrual Based
•
•
•
Blend of traditional methods and accrual income tax methods
Fewer book to tax adjustments
Potentially Cost effective
•
•
•
Cost saving recognized if the situation permits
Includes comprehensive information that is also relevant
Tailored
•
•
Fits the needs of the small- and medium-sized market
No one Precluded from using

8. Comparisons

9. FRF for SMEs™ vs. U.S. GAAP
FRF for SMEs™
•
Intangibles
•
All intangibles are amortized
over their estimated useful
lives.
U.S. GAAP
•
Intangibles
•
Intangibles amortized over
useful lives and evaluated for
impairment upon triggering
event.
•
Indefinite-lived intangibles
(Goodwill) evaluated for
impairment annually.

10. FRF for SMEs™ vs. U.S. GAAP
FRF for SMEs™
•
Revenue
U.S. GAAP
•
Revenue
•
Broad, principle-based
•
Specific criteria for recognition
•
No industry-specific guidance
•
Industry-specific guidance
•
Percentage of Completion and
Completed Contract methods.
•
Percentage of Completion and
Completed Contract methods.

11. FRF for SMEs™ vs. U.S. GAAP
FRF for SMEs™
•
Variable Interest Entities
(VIEs)
U.S. GAAP
•
Variable Interest Entities
(VIEs)
•
No concept of VIEs
•
Yearly analysis of potential VIEs
•
No consolidation of VIEs
•
Potential consolidation
requirement even w/no equity
ownership

12. FRF for SMEs™ vs. U.S. GAAP
FRF for SMEs™
•
Fair Value
U.S. GAAP
•
Fair Value
•
Uses term “Market Value”
•
Uses term “Fair Market Value”
•
Limited circumstances in which
Market Value is required
(business combinations, heldfor-sale securities, etc.)
•
Detailed framework for
measuring; including F.V.
hierarchy
•
Standardized disclosures.
•
Significantly less required
disclosures

13. FRF for SMEs™ vs. U.S. GAAP
FRF for SMEs™
•
Income Taxes
•
•
Policy choice to account for
income taxes using the taxes
payable method or deferred income
taxes method
No evaluation or accrual of
uncertain tax positions
U.S. GAAP
•
Income Taxes
•
Must account for income taxes
using the deferred income taxes
method
•
Must evaluate and accrue
uncertain tax positions

14. FRF for SMEs™ vs. Tax Basis
FRF for SMEs™
•
Installment Sales
•
•
•
Revenue recognized at time of
sale, even if cash is collected in
installments
Sales Returns
•
Tax Basis
Allowed to recognize an
allowance for probable returns
Installment Sales
•
•
Revenue is recognized when sale
price is fixed and all events have
occurred
Sales Returns
•
No allowance
•
Returns only allowed when they
occur

15. FRF for SMEs™ vs. Tax Basis
FRF for SMEs™
•
Long-term contracts
•
Can choose between Percentage
of Completion or CompletedContract Method
Tax Basis
•
Long-term contracts
•
Generally, entities must use
Percentage of Completion method
•
Completed-Contract method
allowed in certain
circumstances

16. FRF for SMEs™ vs. Tax Basis
FRF for SMEs™
•
Receivables
•
Allowed to recognize an
allowance for bad debts
Tax Basis
•
Receivables
•
Not permitted to recognize an
allowance
•
Must use specific charge-off
method
•
Only after all collection efforts
have been exhausted and
deemed worthless
•
No intention of pursuing
collections in the future

17. FRF for SMEs™ vs. Tax Basis
FRF for SMEs™
•
Inventories
Tax Basis
•
Inventories
•
Measured at lower of cost or
net realizable value
•
Measured at lower of cost or
market value
•
Losses recorded when
probable and estimable.
Similar to an allowance
•
Losses allowed only when
offered for sale at lower prices
or is actually sold/discarded

18. FRF for SMEs™ vs. Tax Basis
FRF for SMEs™
•
Prepaid Expenses
•
Recognized as an asset and
amortized to expense
•
Tax Basis
•
Prepaid Expenses
•
Expenses paid in a year are
only deductible in year in
which it applies
Similar to U.S. GAAP
•
Not required to capitalize if
period of rights or benefits is
under 12 months long

19. FRF for SMEs™ vs. Tax Basis
FRF for SMEs™
•
Property, Plant & Equipment
•
Depreciation calculated on the
cost less expected residual value
•
Does not recognize Section 179
and Bonus depreciation
deductions
•
Property, Plant & Equipment
Assets contributed by owner are
valued at Market Value
•
Tax Basis
•
Most PP&E depreciated under
Modified Accelerated Cost
Recovery System (MACRS),
causing more rapid depreciation
than FRF for SMEs™
•
Additional Section 179 and
Bonus depreciation deductions
available
•
Assets Contributed by owner are
valued at the owner’s tax basis

26. Additional Resources
•
Additional information available
at aicpa.org/FRF-SMEs
Patrick Mulherin, CPA
pmulherin@sek.com
Cory Cuffley, CPA, MAC
ccuffley@sek.com

27. Questions?