By Jason Bramwell
Nearly half (46 percent) of CPAs say they are familiar with the new Financial Reporting Framework for Small- and Medium-Sized Entities (FRF for SMEs) released by the American Institute of CPAs (AICPA) on June 10, according to a recent special report by Thomson Reuters.
In a survey of more than 200 accounting firms, 40 percent of those familiar with the FRF for SMEs say the biggest challenge will be acceptance by lenders, 31 percent believe it will be acceptance and understanding by the firm, and 29 percent state it will be acceptance by clients, according to the Thomson Reuters special report, Financial Reporting Framework for Small- and Medium-Sized Entities.
Additionally, 56 percent of respondents say they expect one or more of their clients to consider using the FRF for SMEs, 10 percent report they do not expect their clients to use the framework, and 34 percent were unsure.
"While there have been a number of critics, many CPAs who deal with complexity on a daily basis have expressed support for the framework and have applauded the AICPA's efforts to provide a more comprehensive alternative to GAAP", Steve Eason, director of Audit and Accounting Editorial for Thomson Reuters, said in a written statement. "We've talked with a number of practitioners who intend to further evaluate using the framework."
The FRF for SMEs provides a new accounting option for preparing streamlined, relevant financial statements for privately held, owner-managed businesses that are not required to use US Generally Accepted Accounting Principles (GAAP).
The AICPA states that the framework complements the recent efforts made by the Financial Accounting Standards Board (FASB) and the Private Company Council (PCC) to modify US GAAP for private companies.
AICPA President and CEO Barry Melancon, CPA, CGMA, emphasized last month the FRF for SMEs is not US GAAP and it is not intended to become US GAAP. He stated it is another comprehensive basis of accounting with a framework around it for enhanced financial reporting.
The purpose of the FRF for SMEs is to help small businesses prepare financial statements that clearly and concisely report what a business owns, what it owes, and its cash flow, according to the AICPA. The framework, which draws on a blend of traditional accounting principals and accrual income tax methods of accounting, includes the following key approaches:
- Uses historical cost - steering away from complicated fair value measurements.
- Offers a degree of optionality - businesses can tailor the presentation of statements to their users.
- Includes targeted disclosure requirements.
- Reduces book-to-tax differences.
- Produces reliable financial statements that can be compiled, reviewed, or audited.
The AICPA framework has been criticized by the National Association of State Boards of Accountancy (NASBA), which recommended to privately held businesses that they not use the FRF for SMEs because it goes against the efforts made by the FASB and the PCC to modify US GAAP.
The NASBA contends that the AICPA created the FRF for SMEs as an other comprehensive basis of accounting (OCBOA), or special-purpose framework, without appropriate due process, against an agreement made by the US Securities and Exchange Commission and the AICPA forty years ago to vest all standard-setting authority with the FASB, and without substantial support from stakeholders, including accounting regulators.
"I expect the majority of clients and users of client financial statements are completely unaware of the framework, what it means, and if they can use it. It's going to take some education", Robin Barnett, a CPA with St. Albans, Vermont–based firm Kittell Branagan & Sargent, said in a written statement. "Assuming it's well-received, it could be a great fit for some of our client base. There are millions of small businesses in the United States, so I have to believe there is a demand for it, especially as the FASB continues to approve complex accounting standards that are costly for small businesses to implement and difficult to understand."
The Thomson Reuters special report also includes a description of the framework, the differences between US GAAP and the AICPA's framework, the typical characteristics of SMEs, and an explanation of required disclosures – interwoven with analysis and observations to help practitioners become familiar with the framework.