AICPA's Proposed FRF for SMEs Measurement Criteria
Measurement is the process of assigning amounts to items recognized in the financial statements. Financial statements are primarily based on the historical cost of transactions and events recognized in financial statements. Amounts recognized are based on cash or cash equivalents paid or received or the fair values assigned.
Other bases of measurement may be used in limited circumstances:
- Replacement cost. The amount that would be paid to acquire an identical or similar asset, generally fair market value. Inventories valued at the lower of historical cost or replacement cost would be an example.
- Realizable value. The exit price received for selling an asset. Investments may be valued at realizable value or an estimate of realizable value using an existing market value.
- Present value. The discounted amount of future expected cash flows from an asset or used to settle a liability. Pension or post-retirement benefits may be determined with present value calculation.
Changes in the purchasing power of currency, i.e., inflation or deflation, during the period will not precipitate an adjustment of an entity’s capital.
The going concern assumption is inherent in financial statement preparation. It is assumed the entity will continue in operation for the foreseeable future and realize its assets and settle its liabilities in the normal course of business. When an entity is expected to discontinue its operations, different basis of measurement may be required (such as the liquidation basis).
It is likely this FRF will be beneficial for tens of thousands of small and medium-size entities once it is released by the AICPA. If you work for or provide services for such entities, you will benefit from reading my blog over the next few months as I summarize the important elements of this framework.
In 2014, Wiley & Sons will publish my book, Performing Audits, Reviews and Compilations for Entities Using the AICPA’s Financial Reporting Framework for Small and Medium-Size Entities. The contents of this book will be integrated with Wiley & Sons’ Advantage Audit, providing complete electronic documentation for audits of small and medium-size entities using this and other reporting frameworks. To receive advance information on the progress of my book, you may sign up for my future newsletters at www.cpafirmsupport.com .
by Larry Perry, CPA, CPA Firm Support Services, LLC - Larry has over 40 years experience as a CPA practitioner, author of accounting and auditing manuals, author and presenter of live staff training seminars and author of webcast and self-study CPE programs. He is co-founder of CPA Firm Support Services, LLC (www.cpafirmsupport.com), an organization providing resources, training and consulting to smaller CPA firms. Larry writes a weekly blog on AccountingWEB.com focusing on small audits, reviews and compilations. He is currently developing documentation manuals and handbooks for small audits, reviews and compilations and related electronic practice aids.