Basic Financial Statement Concepts for the FRF for SMEs

Larry Perry
CPA Firm Support Services, LLC
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In this and the next few blogs, I’ll summarize basic concepts that underpin the AICPA’s Financial Reporting Framework for Small- and Medium-Size Entities. While these concepts are not dissimilar to financial accounting concepts underpinning U.S. GAAP, they form an essential foundation for this special purpose framework.

Financial Statements

Financial statements normally include a balance sheet, a statement of income, a statement of changes in equity and a statement of cash flows. Notes to financial statements are an integral part of such statements.

Financial statements are based on management’s representations of past, rather than future, transactions and events. Estimates sometimes must be made to approximate the measurements of future transactions and events.  Material financial statement classifications should not be netted unless permitted by this framework.

Objective of Financial Statements

The objective of financial statements is to communicate information about the entity that is useful to management, creditors, and other users and provide information about, and changes in, an entity's economic resources, obligations, and equity and its economic performance.


Materiality describes the significance of financial statement information to stakeholders. An item, or an aggregate of items, is material if its omission or misstatement would influence or change a decision of financial statement users. Materiality is a matter of professional judgment based on the facts circumstances in which it is considered.

Qualitative Characteristics of Financial Statements

Qualitative characteristics are the characteristics of information in financial statements that make that information meaningful to users. The four principal qualitative characteristics are understandability, relevance, reliability, and comparability and are similar to those for any reporting framework.

Elements of Financial Statements

Elements of financial statements are the basic categories of items included in financial statements. Certain elements describe the economic resources, obligations, and equity of an entity at a point in time (balance sheet elements) and others that describe changes in economic resources, obligations, and equity over a period of time (income statement elements). Net income generally includes all transactions and events increasing or decreasing the equity of the entity, except for equity transactions. Future blogs will discuss these elements in more detail.

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 contain references to, and illustrations from, Wiley & Sons’ Advantage Audit, an electronic documentation system for audits, reviews and compilations in numerous industries.  The book will contain guidance and illustrations for documentation on 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

About Larry Perry CPA

About Larry Perry CPA

Larry Perry, CPA, is managing member of CPA Firm Support Services LLC.


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