By NORMAN G. GRILL
This past summer, the American Institute of Certified Public Accountants (AICPA) released “Financial Reporting Framework for Small- and Medium-Sized Entities” (FRF for SMEs). The organization”™s intent was to ease financial reporting for smaller, privately held, owner-managed companies not required to follow Generally Accepted Accounting Principles (GAAP). This development isn”™t for every business, but it could benefit yours.
Just a suggestion
The origins of the FRF for SMEs lie in the perceived need of business owners and other stakeholders for a more cost-effective way to generate consistent, reliable non-GAAP financial statements.
Many small to midsize companies have seen their statements scrutinized and questioned in part because of how different their reporting methods are from those of GAAP-compliant entities. Using a mix of traditional accounting methods and accrual income tax methods, the FRF for SMEs is intended to streamline the reporting process for businesses while providing added assurance to those who use the financial statements in question.
To be clear, however, the FRF for SMEs holds no authoritative status, and adoption isn”™t required of any business. What”™s more, the National Association of State Boards of Accountancy (NASBA), which works with accounting regulators and practitioners, has said it doesn”™t support the FRF for SMEs. Instead, NASBA supports modifying GAAP through the Financial Accounting Standards Board (FASB) to meet the needs of private companies.
The AICPA has stressed that the FRF for SMEs isn”™t a replacement for GAAP. Rather, it”™s a carefully engineered alternative for companies that aren”™t required to use GAAP and would like a clear-cut but less expensive means of generating reliable financial statements.
Crossbeams and supports
If your company has ever tried to conform to GAAP, or you”™ve personally had some experience dealing with it, you know that the challenge of doing so is significant. GAAP includes complex, detailed and prescriptive standards and many, many disclosure requirements. That said, at the end of the day, the information provided to stakeholders is substantial.
The FRF for SMEs, says the AICPA, delivers data in a much more streamlined format that will be less costly to owners of small to midsize businesses. It does so by focusing on the performance and creditworthiness of the subject company and its assets, liabilities and cash flows. Specific measures in play include:
Ӣ Profitability
Ӣ Liabilities
Ӣ Cash flows and cash available
Ӣ Assets to cover expenses.
Like the literal framework of a house (albeit a modest, “simple” one), this one has several crossbeams and supports. For example, it uses historical cost as its measurement basis, allowing users to avoid complicated fair value measurements. It also doesn”™t require complex accounting for derivatives, hedging activities or stock compensation. These simplifications tend to reduce book-to-tax differences, eliminating multiple adjustments.
The FRF for SMEs allows much greater flexibility than GAAP in how the financial statement provider expresses relevant information to stakeholders based on those end users”™ respective needs. It also makes clear that users may contact the issuer for more information.
Ideal candidates
Small to midsize businesses are clearly the targeted entities of the AICPA”™s efforts. Yet because so many different types of companies may classify themselves as such, the organization didn”™t want to get specific about who should adopt the FRF for SMEs. Instead, it set forth a few guidelines regarding “best fit” candidates.
As mentioned, to adopt the FRF for SMEs, a company can”™t be required to use GAAP-based financial statements ”“ either literally or essentially. The FRF for SMEs is also not intended for nonprofits, public or soon-to-go-public companies or businesses with foreign operations.
Again, the focus is on simplification, so ideal candidates will generally be businesses operating in industries that don”™t call for complex financial transactions or highly specialized accounting guidance. And, typically, the companies that use it will have “owner-managers” ”“ that is, one person or group of people who both own and run the business.
Likely appreciators
You may be able to further determine whether the FRF for SMEs is right for your company based on who uses your financial statements. Specifically consider your lender (or prospective ones in your industry). If it doesn”™t base loan decisions solely on your financial statements, but also looks at collateral or other evaluative metrics, the framework may not rub it the wrong way.
Talk to your lender(s) before switching to the FRF for SMEs. And remind them that financial statements prepared using the framework can still be audited or reviewed by a CPA to provide added assurance.
Simple solution, tough choice
Until FASB modifies GAAP to meet the needs of small and midsize businesses, the AICPA”™s FRF for SMEs offers qualifying private companies an immediate opportunity to streamline the often arduous task of generating financial statements. In doing so, you could save money and precious time. But this is not a decision to undertake lightly. Consult your financial advisers before making the call.
Norm Grill is managing partner of Grill & Partners L.L.C, with offices in Fairfield and Darien, Conn. He can be reached at N.Grill@GRILL1.com.
