Do you provide monthly or quarterly financial statements to your bank or other stakeholders? Are those financial statements required to be prepared using US GAAP (Generally Accepted Accounting Principles) standards? If so, beginning in 2020 you should have been reporting using the new revenue recognition standard, and beginning in 2022 your US GAAP statements should be prepared using the new leasing standard. When your CPA does your audit or review for calendar year 2022 or fiscal year 2023, they will need support from you regarding the steps you took to analyze contracts and leases. This will help ensure these new standards are being properly applied so they can attest to your financial statements being prepared in accordance with US GAAP.
Are you thinking, “Uh-oh, I haven’t done anything with the new standards yet”? If so, let’s look at an alternative that may be of interest to you.
An Alternative Framework: FRF for SMEs
The AICPA has developed a non-GAAP reporting framework called the Financial Reporting Framework for Small and Medium Sized Entities (FRF for SMEs). It is an accrual-based framework that blends traditional accounting and accrual income tax methods. The framework is based on historical cost, provides alternatives for certain accounting policies and includes very targeted disclosures to make the financial statements clear, concise and understandable for the reader.
The FRF for SMEs provides a standardized framework with a comprehensive, integrated set of financial statements, including a cash flow statement and informative disclosures. It is intended to be used by privately held, often owner-managed, for-profit businesses that do not intend on going public and do not operate in an industry with highly specialized accounting guidance like financial institutions, insurance or investment companies. The framework provides owner-managers with reliable financial statements to confirm assessments of performance, determine what they owe and own and understand cash flows. The external financial statement users of a company that is a good candidate for using the FRF for SMEs typically have direct access to management.
The FRF for SMEs framework from beginning to end is approximately 188 pages long and easy to understand. It is intended to remain stable rather than having the significant changes that we see in US GAAP. Your company will continue to receive an audit or review opinion as required by your lending or other agreements.
Stakeholder Education is Essential
We have successfully assisted our clients in adopting the FRF for SMEs framework over the past several years. One of the most important steps is stakeholder education. We recommend meeting with lenders, including the credit analyst. In that meeting you can provide a company specific discussion of any differences from US GAAP and present before and after financial statements and footnotes. There are also many education materials available on the AICPA website including a letter from the American Bankers Association in support of the framework. Loan document wording may have to be modified to remove the language requiring financial statements in accordance with US GAAP. Some alternative wording we have seen used successfully is:
“GAAP” shall mean generally accepted accounting principles consistently applied, or an accounting method approved by the AICPA and agreed to by Bank (i.e., FRF for SME (Financial Reporting Framework for small and midsize enterprises))
Or
Such financial statements shall be prepared in accordance with the financial reporting framework for small and midsize enterprises consistently applied (“FRF for SME”), shall be in such detail as Bank may reasonably require, and shall be compiled by independent certified public accountants of recognized standing selected by Company and acceptable to Bank.
Continue the Conversation
The FRF for SMEs is an excellent solution for some companies. Clayton & McKervey is available to assist you in considering this alternative reporting framework. If US GAAP is the better reporting framework for you, we are happy to help you adopt the new revenue recognition and lease standards. Contact us today to learn more.
*Updated on 12/13/22
