The AICPA has issued a special-purpose reporting framework that is attracting the interest of smaller private businesses — the “Financial Reporting Framework for Small- and Medium-Sized Entities” (FRF for SMEs). This framework is intended as a less-complicated, lower-cost alternative basis of accounting for entities that are not required to provide GAAP-based financial statements.
Here we highlight principles used in the framework where they differ from (or are less prescriptive than) GAAP:
- The AICPA’s framework does not include sections on earnings per share, segment reporting, other comprehensive income, interim reporting, and stock-based compensation.
- The framework moves away from the use of fair value and relies primarily on historical cost as the measurement basis.
- The framework does not use the concept of variable interest entities as criteria for consolidation of other entities. Instead, an entity may make an accounting policy election to either consolidate its subsidiaries or use the equity method to account for them.
- Derivatives are disclosed but are not recognized until settlement (based on the net cash paid or received).
- The accounting for leases is closely aligned with the requirements of the Internal Revenue Code for US federal income taxes.
- The framework does not require testing of goodwill for impairment. Instead, goodwill is amortized over the same period used for US federal income tax purposes or over 15 years. All other intangible assets are viewed as having a definite life over which they are amortized.
- In cases where the framework does not specifically address a transaction, event or condition, the AICPA’s framework suggests, “… management should use its judgment and apply the general principles, concepts, and criteria contained in the framework when developing accounting policies.”
At Mayer Hoffman McCann we continue to monitor progress on the framework and have drafted the MHM Messenger below to provide you with more details about the AICPA’s FRF for SMEs. Please let us know if you have any questions about these developments.