For years, the financial performance reporting options for small businesses have been limited to Generally Accepted Accounting Principles (GAAP) or special-purpose frameworks known as other comprehensive basis of accounting (OCBOA). OCBOA’s appeal is that it allows businesses to use a cash or tax basis of accounting to report financial results.
Recently, the American Institute of Certified Public Accountants (AICPA) introduced a new OCBOA called the “Financial Reporting Framework for Small- and Medium-Sized Entities” (FRF for SMEs). Designed to provide a simpler, cost-effective reporting solution for businesses that aren’t required to use GAAP, it blends traditional and accrual income tax accounting methods.
Designed for small businesses
The FRF for SMEs addresses transactions encountered by small and midsize, private, for-profit entities, and it shows the business’s profitability, assets and available cash. Companies don’t have to meet specific definitions of a smaller business to use the FRF for SMEs — and use of the framework is completely optional. But if you decide that the framework is appropriate for your business, you can begin using it immediately.
The new framework differs from GAAP in several ways. Instead of using fair value as the primary measurement basis, it uses historical cost. Also, the framework isn’t expected to be amended frequently — which can be helpful for small businesses with limited resources. However, the AICPA plans to update the FRF for SMEs when significant developments affect financial reporting by SMEs.
Although the FRF for SMEs may provide some appealing features, not everyone is on board with the new framework. The National Association of State Boards of Accountancy (NASBA) initially declined to endorse the framework, instead advocating following GAAP standards for private companies once they’re issued by the Financial Accounting Standards Board. Recently, however, NASBA has agreed to work with the AICPA to help users of the statements understand that reporting under the FRF for SMEs is a viable alternative to GAAP in some circumstances.
If you’re interested in using an FRF for SMEs, discuss it with your CPA to determine whether it’s appropriate for your business. If you do decide to use an FRF for SMEs, your advisor will be able to audit, review and compile statements just like GAAP statements to provide credibility and assurance.
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