Are FRF for SMEs the answer to new GAAP standards?
The new GAAP revenue recognition (effective for December 2019 year-ends) and lease accounting (effecting December 2021 year-ends) standards are causing concern with private companies. Concerns about their ability to implement the standards appropriately, the effect of the pronouncements on the financial statements to third-party users, and the time necessary to maintain books and records under the new guidance are all legitimate factors that a company weighs.
Consequently, many of these companies have considered alternatives to GAAP. One such alternative that is being discussed more now than at any other point in its history is the Financial Reporting Framework for Small- and Medium-Size Entities (FRF for SMEs).
FRF for SMEs was introduced by the AICPA in 2013 as an alternative framework to generally accepted accounting principles. As a framework, FRF for SMEs differs in presentation and standards from GAAP but does not alter an entity’s scope of engagement, meaning that a company could have compiled, reviewed, or audited financial statements under FRF for SMEs, just like they can with cash basis or income tax basis accounting methods.
As companies, lenders, boards of directors and other financial statement users consider FRF for SMEs, let’s take a look at some of the pros and cons of implementing this reporting framework.
As GAAP has implemented standards over the past 15-20 years, such as variable interest entity consideration, that have been met with resistance from private companies, the Financial Accounting Standards Board (FASB) implemented the Private Company Council (PCC) in 2012. The idea of the PCC was to streamline some of the more complex standards that were established initially with public companies in mind.
Companies who implement some of the PCC’s alternatives are already able to avoid the consolidation of a variable-interest entity and amortize goodwill over a straight-line basis, making some of the FRF for SME standards less unique.
What to do going forward:
If you or your company believe that FRF for SMEs could be beneficial, there are a number of steps that you should do.
1) Familiarize yourself with the differences between FRF for SMEs and your current framework CHART : AICPA’s FRF for SMEs Comparison
2) Speak to your external CPA, who performs the compilation, review, or audit of your financial statements to see if the framework makes sense for you
3) Speak to your external financial statement users (lender, bonding company, board of directors, governmental agency, etc.) to see if they will accept FRF for SMEs
4) Consider industry-specific matters (as an example, FRF for SMEs allows completed contract accounting for contractors under $25 million in average annual gross receipts instead of percentage of completion accounting)
The FRF for SMEs framework will no doubt be beneficial to certain organizations, and there will be those for whom it will not be ideal. Education and communication will be the two keys to determining which camp you and your company fall under.
