We commonly encounter practitioners seeking alternatives for clients not required to use U.S. GAAP.
As the staff of AICPA’s Center for Plain English Accounting (CPEA) (www.aicpa.org/cpea) conduct onsite training at member firms on FASB’s revenue recognition standard (FASB ASC 606), we suggest they consider non-GAAP special purpose accounting frameworks as possible alternatives. Specifically, we recommend AICPA’s Financial Reporting Framework for Small- and Medium-Sized Entities (FRF for SMEs).
The FRF for SMEs offers more comprehensive and consistent financial statements compared to other special purpose frameworks, like income tax or cash bases of accounting. The FRF for SMEs offers an inviting non-GAAP alternative to adopting the revenue recognition standard.
Compared to the voluminous FASB ASC 606 and its vastly different approach to accounting for revenue, the Revenue chapter of the FRF for SMEs is six pages long, comprising broad, principles-based guidance on revenue recognition. Under the FRF for SMEs, the rules for revenue recognition are familiar and traditional to accountants and practitioners, requiring revenue to be recognized when performance is achieved, and ultimate collection is reasonably assured. So, it’s little surprise that CPEA member firms are showing growing interest in the FRF for SMEs and asking for information on how to start using the framework.
The first step is to educate client management about the framework. An ideal time for practitioners to introduce the FRF for SMEs is when discussing FASB’s revenue standard with client management. The next step is determining if the company is a good fit for the Framework. The Preface to the Framework thoroughly discusses the different type of entities the FRF for SMEs is intended for and helps practitioners decide if their client is a good candidate.
Next is an evaluation of the company’s current accounting policies to determine those that would change under the FRF for SMEs, and drafting mockup financial statements (we are aware of a practitioner who did simple pencil changes). This is a central step in the process. Preparing draft financial statements in accordance with the FRF for SMEs allows management to get their arms around what the Framework is all about. They can see, in many cases, how very similar the financial statements are, compared to what they are used to seeing.
The next step is identifying and educating the client’s third-party financial statement users and stakeholders. Face-to-face conversations are best. The typical outside financial statement users are bankers or other lenders. The conversation with them should involve the relationship banker and those in the credit department who analyze the financial statements, assess ratios and make lending decisions.
Finally, bankers and other financial statement users often want an audit. This is not a problem. Just like U.S. GAAP-based financial statements, FRF for SMEs-based financial statements can be audited, reviewed, and compiled. The Framework is about the accounting and not about the attest services being performed. Bankers and others should be happy to know that the audit, review, or compilation of the financial statements is unaffected by the framework used for financial reporting.
If your clients are concerned about adopting the new revenue recognition standard, FRF for SMEs may be an ideal and cost-saving alternative for them and their financial statement users. Introducing and transitioning your clients to the FRF for SMEs will underscore your role as their trusted business advisor.