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Journal Entry — AICPA Publishes Non-GAAP Framework for Financial Reporting

Published on: Jun 14, 2013

On June 10, 2013, the AICPA released its Financial Reporting Framework for Small- and Medium-Sized Entities (the FRF for SMEs), an optional, comprehensive basis of accounting for businesses that are not required to use U.S. GAAP. The FRF for SMEs is intended to be an alternative that is both useful to financial statement users and practical to implement. Specifically, the AICPA describes the framework as “a cost-beneficial solution for management, 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 professional scrutiny.”

The FRF for SMEs is more robust than a cash (or tax) basis of accounting but not as stringent or demanding as U.S. GAAP. Drawing on a blend of traditional accounting principles and accrual income tax methods of accounting, the principles-based framework gives businesses options for developing their accounting policies. The FRF for SMEs also simplifies accounting and reporting by generally using a measurement method based on historical cost (rather than fair value) and allowing greater flexibility in disclosures. Examples of simplified accounting under the framework include the following:

  • Consolidation analysis does not involve the concept of variable interest entities; an entity can make an accounting policy choice to either consolidate its subsidiaries or use the equity method to account for them.
  • Stock compensation expense is not recognized; the ultimate exercise of stock options is accounted for as a normal stock issuance transaction.
  • Derivatives, while disclosed, are not recognized until settlement (based on the net cash paid or received).
  • Goodwill is amortized generally over the same period that is used for federal income tax purposes; all other intangible assets are viewed as having a definite life (over which they are amortized).

There are no strict criteria (e.g., size tests) for determining whether an entity may use the FRF for SMEs. However, the framework lists various characteristics that would be typical of entities using it, including the following:

  • The entity is not subject to regulatory provisions that require GAAP-based financial statements.
  • The controlling interest has no intention of taking the entity public.
  • The entity is for-profit.
  • The entity is owner-managed (i.e., closely held with owners involved in management).

Ultimately, management must determine whether such a framework meets the entity’s financial reporting needs — and critical to this assessment will be the framework’s acceptability to other stakeholders (e.g., lenders). Financial statements prepared under the FRF for SMEs can be audited by CPA practitioners under the same standards used for reporting on other special-purpose-framework financial statements.

Because the FRF for SMEs is optional, there is no effective date. For further details, refer to the AICPA’s Frequently Asked Questions about the framework.

Editor’s Note: The National Association of State Boards of Accountancy (NASBA) has issued a statement discouraging private companies from adopting the FRF for SMEs. NASBA has previously taken the position that this initiative, if pursued, should start after the results of the effort of the Financial Accounting Foundation’s Private Company Council to amend U.S. GAAP for private companies become known — an effort that, NASBA notes, has recently shown signs of progress. NASBA cites concerns that the development of the FRF for SMEs lacked due process and support from certain stakeholders, including accounting regulators. NASBA indicated that it will be providing the Boards of Accountancy with recommended rule language that would prohibit the use of nonauthoritative standards.

 

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