Do You Really Need GAAP-based Financial Statements?

I many cases, privately owned, small- and medium-sized businesses would be better served with a more relevant, less-complicated and cost-beneficial framework for their financial reporting needs. Bankers and other financial statement users who have direct access to management also need useful financial statements that are easier to understand.

These are the needs that the AICPA aimed to fulfill with its Financial Reporting Framework for Small- and Medium-Sized Entities (FRF for SMEs). When the final document is released (May or June 2013) the FRF for SMEs will be a stand-alone, self-contained, special-purpose framework available for use by SMEs when GAAP-based statements are not required. If may be used by reporting entities in every industry group and by unincorporated and incorporated entities. While not intended for use by not-for-profit entities, there is no preclusion to using the guidance.

Key features of the FRF for SMEs include:

  • A stand-alone framework with a blend of income tax and traditional accounting methods.
  • Compact and concise and written in plain English.
  • Stable-to be updated every three to four years.
  • When compared to statements prepared using GAAP, fewer exceptions between book and tax
  • Historical cost is the primary measurement notion. When fair value is the measurement objective, that amount is considered to be the amount of consideration that would be agreed upon in an arm’s-length transaction between knowledgeable and willing parties who are under no compulsion to act.
  • Comprehensive income display issues go away.
  • Disclosures are reduced, while still providing users with relevant information they need.
  • Only relevant financial reporting topics; familiar and traditional accounting methods are employed.
  • Less costly preparation of financial statements.

Examples of the framework’s simplification as compared to GAAP:

  1. Goodwill: Shall be recognized at its amortized amount and shall be amortized over the same period as used for federal income tax purposes. If not amortized for federal income tax purposes, a 10 year amortization period will be used.
  2. Income Taxes: The framework allows for either the taxes payable method or the deferred income taxes method to be used. Under the taxes payable method, only current income tax assets and liabilities are recognized. Also, the uncertain tax positions issue goes away under the FRF for SMEs.

A key assessment of the FRF for SMEs will be whether end-users of the financial statements will accept them prepared using the guidance. This includes bankers and other lenders as well as investors such as private equity groups and venture capitalists. Time will tell, but I believe if end-users will educate themselves on this new framework, they will see that there is a place for financial statements prepared in accordance with the Financial Reporting Framework for Small- and Medium-Sized Entities.

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