Financial Statements and Transition to the FRF for SMEs
After management of an entity has made a decision to adopt the AICPA’s FRF for SMEs, it should prepare an opening statement of financial position as the basis for the entity’s accounting under the framework, which framework should be consistent with that used at the end of the year of adoption. Adjustments necessary to transition from a previously applied framework should be recognized directly in equity at the date of transition.
As discussed in previous blogs, financial statements should include all information necessary for a fair presentation under this framework. Financial statements, in addition to notes and supporting schedules should include:
- Statement of financial position
- Statement of operations
- Statement of changes in equity unless detailed in the notes or another statement
- Statement of cash flows
Other descriptive titles of these statements may be used.
The first note to financial statements should describe the accounting policies that are significant to the entity’s operations and the primary differences in this framework from generally accepted accounting principles. Minimum disclosures for accounting policies should include the use of alternative principles and those used in specific industries.
Management may elect exemption from certain principles in the framework upon transition. These principles, which will be discussed in future blogs, are:
- Business combinations
This election is to not apply the provisions of the framework regarding business combinations retrospectively. Restatement of prior business combinations requires future application of principles in the framework.
- Components of certain assets or liabilities
This election exempts management from classifying the components of a financial instrument separately when it contains both a liability and equity component.
- Asset retirement obligations
Management may elect to measure asset retirement obligations not previously recognized as of the transition date and estimate the carrying amount based on its original and remaining life of the obligation.
Retrospection application of certain principles in the framework is prohibited. These include:
- Derecognition of financial assets and liabilities is only permitted prospectively.
- Management’s estimates in its opening statement under the framework must be consistent with previous accounting policies.
- Accounting for equity changes in accordance with the framework will only be permitted prospectively.
Future blogs will discuss these and other principles that guide financial statement presentations under the FRF for SMEs. Four, two-hour webcasts on this framework will be presented this fall. You can obtain more information and register for the webcasts by clicking the “Live Webcasts” box on the left side of my home page, 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.