November 2017 Financial Reporting Framework for Small- and Medium-Sized Entities s e i t i t n E d e z i S - FRF m for u i d e M d n a SMEs - ll aicpa.org/FRF-SMEs a m S F r i o na f n rk ci o al R ew eporting Fram ™ iii Notice to Readers Financial Reporting Framework for Small- and Medium-Sized Entities was developed by a task force of CPA practitioners and professionals serv- ing and working at small- and medium-sized entities and the staff of the AICPA. Financial Reporting Framework for Small- and Medium-Sized Enti- ties has not been approved, disapproved, or otherwise acted upon by any tech- nical committee of the AICPA or the Financial Accounting Standards Board and has no official or authoritative status. AICPA FRF for SMEs Task Force (2012–2013) David Morgan, Chair Marc Parkinson Theresa Bible Pat Piteo DeAnn Hill Thomas A. Ratcliffe Karen Kerber Eric P. Wallace Kenneth R. Odom AICPA Staff Charles E. Landes Vice President Professional Standards and Services Robert Durak Director, Private Company Financial Reporting Accounting Standards Daniel Noll Director Accounting Standards FRF-SME v Preface About Financial Reporting Framework for Small- and Medium-Sized Entities The FRF for SMEsTM accounting framework has been developed by the AICPA FRF for SMEs Task Force (task force) and the staff of the AICPA as a special purpose framework for small- and medium-sized entities. It is a self-contained financial reporting framework not based on account- ing principles generally accepted in the United States of America (GAAP). Special purpose frameworks, with the exception of the contractual basis of accounting, are commonly referred to as other comprehensive bases of accounting or OCBOA. Special purpose frameworks include cash basis, modified cash basis, tax basis, regulatory basis, contractual basis, and other non-GAAP bases of accounting that utilize a definite set of logical, reasonable criteria that is applied to all material items appearing in the financial statements. The FRF for SMEs accounting framework draws upon a blend of tradition- al accounting principles and accrual income tax methods of accounting. It utilizes historical cost as its primary measurement basis. In addition, it provides management with a suitable degree of optionality when choosing accounting policies to better meet the needs of the end users of the finan- cial statements. The framework eschews prescriptive, detailed standards and voluminous disclosure requirements. Being a more intuitive and un- derstandable framework for small business owners and the users of their financial statements, the framework lays out principles that encourage the use of professional judgment in the particular circumstances of a transac- tion or event. The FRF for SMEs reporting option is a cost-beneficial solution for man- agement, owners, and others who require financial statements that are prepared in a consistent and reliable manner in accordance with a non- GAAP framework that has undergone public comment and profession- al scrutiny. The accounting principles comprising it are appropriate for the preparation of small- and medium-sized entity financial statements, based on the needs of the financial statement users and cost and benefit considerations. The task force that developed the FRF for SMEs accounting framework with AICPA staff consisted of professionals who have an abundance of ex- perience serving smaller- to medium-sized entities. The task force and staff believe that the FRF for SMEs accounting framework is criteria suitable for the preparation of general use finan- cial statements and external use of the statements in situations that do not require GAAP financial statements. As such, the framework has the following attributes: s Objectivity. The framework is free from bias. s Measurability. The framework permits reasonably consistent mea- surements. s Completeness. The framework is sufficiently complete so that those relevant factors that would alter a conclusion about the financial statements are not omitted. s Relevance. The framework is relevant to financial statement users. FRF-SME vi Scope and Characteristics of Entities Utilizing the FRF for SMEs Accounting Framework The FRF for SMEs accounting framework has been developed for small- to medium-sized entities that require reliable non-GAAP financial state- ments for internal use and external uses. The task force believes that this framework can be used by entities in many industry groups and may also be used by unincorporated, as well as incorporated, entities. The frame- work is not intended to be a substitute for GAAP when GAAP-based fi- nancial statements are necessary, as determined by the management of a private company and its financial statement users. A standard definition of small- and medium-sized entities does not exist in the United States. However, the term is intuitive, widely recognized, and effectively descriptive of the scope of entities for which the FRF for SMEs accounting framework is intended. The task force and staff deliberately did not develop quantified size criteria for determining what is a small- and medium-sized entity because they decided that developing quantified size tests is not feasible and not an effective way of describing the kinds of entities for which the framework is intended. Rather, characteristics of typical entities that may utilize the framework are presented in the follow- ing text. These characteristics are not all-inclusive and are not presented as a list of required characteristics an entity must possess in order to uti- lize the framework. The AICPA has no authority to prevent or require the use of a special purpose framework like the FRF for SMEs accounting framework. These characteristics are presented as helpful guidelines for management and other stakeholders when determining the appropriate- ness and suitability of the FRF for SMEs accounting framework in the preparation of financial statements. Ultimately, the decision regarding which accounting framework best meets an entity’s financial reporting needs rests with management. The FRF for SMEs accounting framework should only be used if the resulting financial statements are intended to be consistent with the concepts, principles, and criteria described in chap- ter 1, “Financial Statement Concepts,” of Financial Reporting Framework for Small- and Medium-Sized Entities. Certain Characteristics of Small- and Medium-Sized Entities Utilizing the FRF for SMEs Accounting Framework This list presents certain characteristics of typical entities that may uti- lize the FRF for SMEs accounting framework. As stated previously, these characteristics are not all-inclusive and not presented as a list of required characteristics an entity must possess in order to utilize it: s The entity does not have regulatory reporting requirements that es- sentially require it to use GAAP-based financial statements. s A majority of the owners and management of the entity have no in- tention of going public. s The entity is for-profit. s The entity may be owner-managed, which is a closely held company in which the people who own a controlling ownership interest in the entity are substantially the same set of people who run the company. s Management and owners of the entity rely on a set of financial state- ments to confirm their assessments of performance, cash flows, and of what they own and what they owe. FRF-SME vii s The entity does not operate in an industry in which the entity is involved in transactions that require highly-specialized accounting guidance, such as financial institutions and governmental entities. s The entity does not engage in overly complicated transactions. s The entity does not have significant foreign operations. s Key users of the entity’s financial statements have direct access to the entity’s management. s Users of the entity’s financial statements may have greater interest in cash flows, liquidity, statement of financial position strength, and interest coverage. s The entity’s financial statements support applications for bank fi- nancing when the banker does not base a lending decision solely on the financial statements but also on available collateral or other evaluation mechanisms not directly related to the financial state- ments. Application of FRF for SMEs Accounting Framework Principles, Concepts, and Criteria The task force and AICPA staff have developed the FRF for SMEs account- ing framework to address transactions that are typically encountered by private, for-profit, small-, and medium-sized entities. If the framework does not specifically address a transaction, other event, or condition, manage- ment should use its judgment and apply the general principles, concepts, and criteria contained in the framework when developing accounting poli- cies. The development and application of those policies should result in financial information that is intended to be consistent with the financial statement concepts described in chapter 1 of Financial Reporting Frame- work for Small- and Medium-Sized Entities. Authority and Effective Date of the FRF for SMEs Accounting Framework The AICPA has no authority to require the use of the FRF for SMEs ac- counting framework for any entity. Therefore, use of the framework is purely optional. Management that prepares an entity’s financial state- ments in accordance with the framework may represent or assert that such financial statements have been prepared in accordance with the AICPA’s FRF for SMEs accounting framework, a special purpose frame- work. Because use of the framework is optional, there is no effective date for its implementation. Maintenance of the FRF for SMEs Accounting Framework Appreciating the limited accounting resources that typical entities utiliz- ing the FRF for SMEs accounting framework have, as well as the nature of their financial reporting, the framework is intended to be a stable platform that does not undergo frequent amending or updating. At the same time, it is intended to be responsive to the financial reporting needs of small- and medium-sized entities and, therefore, will be modified in response to significant developments in accounting and financial reporting matters af- fecting those entities.