AICPA Issues Financial Reporting Framework for Small- and Medium-Sized Entities

On June 10, 2013, the AICPA issued the Financial Reporting Framework for Small- and Medium-Sized Entities (FRF for SMEs), which is a special-purpose framework (or other comprehensive basis of accounting) that, by definition, is not part of U.S. generally accepted accounting principles (GAAP). The FRF for SMEs was designed for use by small- and medium-sized entities that are not required to provide financial statements prepared in accordance with GAAP. While what constitutes “small- and medium-sized entities” is not defined in the FRF for SMEs, it does list characteristics that would make an entity a potential candidate for its application.
In general, the FRF for SMEs is a principles-based framework that primarily uses historical cost as its measurement basis. While incorporating many traditional accounting principles, it also incorporates some accrual income tax accounting methods. In some cases, alternative accounting methods are provided, which gives management the flexibility to choose the accounting method most suitable to the entity’s facts and circumstances.

Application of the FRF for SMEs is purely optional. As a result, it does not include an effective date. When evaluating whether the adoption of the FRF for SMEs is the right choice for an entity, management, their advisors and users of the entity’s financial statements should take into consideration the degree of professional judgment that must be exercised in applying the framework to particular transactions or events given its principles-based nature and lack of prescriptive or detailed guidance. Management should perform a thorough analysis of the initial conversion costs in the year of adoption and the potential costs and complexity that would be introduced in the future if the entity is subsequently required to prepare GAAP-based financial statements and weigh those costs against the benefits of adopting the FRF for SMEs.