Financial Reporting Framework for Small- and Medium-Sized Entities An Introduction for [Name of Client or Financial Statement User] Overview • What is the Financial Reporting Framework for Small- and Medium-Sized Entities? • Why was it developed? • Who can use it? • What does it change? • When can it be implemented? • How will you benefit? What Is It? • New special purpose framework, or other comprehensive basis of accounting, for preparing financial statements • Developed by the AICPA and released June 2013. • Provides an alternative to other frameworks: – – – – GAAP Income tax basis Cash basis IFRS for SMEs Why Was It Developed? • In response to— – Accounting complexity – Disclosure overload • To better meet the needs of small businesses and their financial statement users Needs of Small Businesses • Relevant, streamlined reporting, more robust than cash or income tax basis • Flexibility in choosing accounting policies • Simplified guidance for typical, plain vanilla transactions • Targeted disclosures • Concise, plain-English standards that are easy to follow and keep up with Who Can Use It? • Entities that— – Are not required to prepare GAAP-based financial statements. – Have no plans to go public in the foreseeable future. – Operate for profit. – Are owner-managed. – Do not operate in an industry with highly-specialized accounting guidance, for example, no financial institutions or governments. – Have no overly complicated transactions or significant foreign operations. – Give their financial statement users direct access to management. What Does It Change? • • • • Basic features Contents of the FRF for SMEs Primary differences from GAAP How your financial statements will change Basic Features • Historical cost based • Blend of traditional GAAP and accrual income tax basis • Principles-based with little prescriptive guidance • Fair presentation framework • Same objective as GAAP: To account for transactions according to their economic substance Contents of the FRF for SMEs • General principles • Guidance on specific financial statement elements • Complete set of disclosure requirements • Transition guidance • Glossary • No industry-specific guidance Primary Differences from GAAP • Income taxes: Choice between taxes payable method (current income tax assets and liabilities only) or deferred income taxes method. No accounting for uncertainty. • Intangible assets acquired in a business combination: Choice to not separately recognize them but include them in goodwill. • Goodwill: Must amortize consistent with income tax treatment or over 15 years if not amortized for income taxes. Primary Differences from GAAP • Reporting of subsidiaries: Choice between consolidation or equity method for all subs. Parent-only financial statements permitted. • Leases: Similar to the method used for income tax purposes. Lease classification guidance less prescriptive than GAAP. • No concept of comprehensive income and accumulated other comprehensive income. Primary Differences from GAAP • Asset impairment: No requirement to assess assets for impairment; however, there are disclosures. Left up to judgment. • Investments in debt and equity securities: Recorded at cost unless held for sale, in which case recorded at market value with changes recognized in income. • Variable interest entities: No such concept. Primary Differences from GAAP • Stock-based compensation: Compensation expense not recognized. Certain disclosures required. • Defined benefit plans: Choice between current contributions payable method (expense for current year contribution only) or an accrued benefit obligation method. How Your Financial Statements Will Change • [Content to be developed for specific client or financial statement user] When Can It Be Implemented? • Conversion is entirely optional • Can be implemented at any time • Precondition for implementation: Acceptance by financial statement users How Will You Benefit? • Information in financial statements is more relevant for small business decision-making • Disclosures are more targeted and understandable • Financial statements are easier and less costly to prepare and audit (or review) • Standards are stable; changes over time are expected to be minimal Additional Resources • Read the Financial Reporting Framework for Small- and Medium-Sized Entities • Visit our website at [URL address] • Read our newsletter • Review the AICPA toolkit for small businesses [or financial statement users] at www.aicpa.org/FRF-SMEs [CPA Firm Logo] Questions?