• COVID-19
  • Insights
  • Who We Help
    •   Industrial Automation
    •   Manufacturing & Distribution
    •   A&E Professional Services
    •   International Businesses
      • ◦   Expanding Outside the U.S.
      • ◦   Expanding to the U.S.
  • Services
    •   COVID-19
      • ◦   Cash Flow Confidence Assessment
      • ◦   Maximize Your Loan Forgiveness
      • ◦   5 Key Focus Areas
      • ◦   COVID-19 Resource Center
    •   Client Accounting
      • ◦   Software Solutions
      • ◦   Accounting Support
      • ◦   Reporting
    •   Tax
      • ◦   R&D Tax Credit
      • ◦   Tax Credits & Incentives
      • ◦   Tax Structure
      • ◦   Federal Tax
      • ◦   State & Local Tax
      • ◦   Personal Tax
      • ◦   Other Tax Filings
    •   Advisory & Assurance
      • ◦   Assurance Levels
      • ◦   Reporting
      • ◦   Employee Benefit Plan Audits
      • ◦   Technical Accounting & Reporting
    •   Consulting
      • ◦   Data Analytics
      • ◦   Transaction Services
      • ◦   Business Planning
      • ◦   Succession & Exit Strategies
    •   International
      • ◦   International Tax
      • ◦   Foreign Direct Investment
      • ◦   Global Expansion
      • ◦   International Accounting
  • Events
  • Careers
    •   Why C&M
    •   Students
      • ◦   Campus Events
      • ◦   Internships
      • ◦   Reach Beyond Program
    •   Experienced Professionals
      • ◦   Team member profile videos
    •   Opportunities
    •   Employee Journals
    •   Office Tour
  • About Us
    •   How We Help
      • ◦   Service Approach
      • ◦   Affiliations
      • ◦   Communications & Technology
    •   Meet Our Team
    •   Testimonials
    •   Our Videos
    •   Our Story
  • Contact Us
  • Subscribe
CHANGE COUNTRY:
  • United States
  • 中国
  • Client Login
Clayton & McKervey Logo
  • COVID-19
  • Insights
  • Who We Help
  • Services
  • Events
  • Careers
  • About Us
  • Contact Us
  • Subscribe
    • Most Recent Insights
  1. Home
  2. Insights
  3. AICPA Non-GAAP Financial Reporting Framework (FRF for SMEs)

AICPA Non-GAAP Financial Reporting Framework (FRF for SMEs)

Posted by Julie Killian on August 7, 2013

Julie Killian Julie Killian

On June 10, 2013, the AICPA released its Financial Reporting Framework for Small- and Medium-Sized Entities (FRF for SMEs). This is an optional, comprehensive basis of accounting for businesses that are not required to use US GAAP. In its own words, the AICPA describes the framework as “a cost-beneficial solution for management, owners, and others who require financial statements that are prepared in a consistent and reliable manner in accordance with a non-GAAP framework that has undergone public comment and professional  scrutiny.”

The framework was designed to respond to the unique financial reporting needs of small and medium sized entities. The current authoritative accounting literature, Generally Accepted Accounting  Principles (GAAP), has a very broad scope that does not distinguish between the simple transactions of small- and medium-sized entities and the complex transactions of large entities. The authoritative GAAP standards have been written in a way that makes them difficult to understand and cost prohibitive to apply to small and medium sized entities.

The Financial Accounting Foundation (FAF) is the oversight board for FASB.  In an effort to address the needs of small and medium sized entities, the FAF established the Private Company Council (PCC). The PCC is charged with determining whether exceptions or modifications to existing GAAP are needed to meet the needs of smaller privately held companies. The PCC’s actions, if approved by FASB, would actually amend existing GAAP. The AICPA fully supports the efforts of the PCC for GAAP reporting but has created the FRF for SMEs as an alternative when  GAAP is not required.

The framework does not define a small- and medium-sized entity but describes the target entities as having the following characteristics (this list in not all-inclusive and the criteria are not required to be met):

  • The entity is not required to prepare GAAP-based financial statements
  • The entity does not plan to go public in the foreseeable future
  • The entity is a for-profit entity
  • The owner of the entity is also involved in running the entity
  • There is no highly-specialized accounting guidance for the industry in which the entity operates
  • There are no overly complicated transactions
  • There are no significant foreign operations to report in the financial statements
  • Financial statement users have direct access to management

There are many differences between the new framework and US GAAP. The framework primarily uses historical cost basis, steering away from complicated fair value measurements. The principles in the framework are simplified, staying away from complex US GAAP accounting rules such as derivative/hedge accounting and stock based compensation. A partial overview of some key differences between US GAAP and the FRF for Small- and Medium-sized entities is as follows:

  • Reporting subsidiaries – FRF for SMEs allows the parent entity to choose to consolidate or use the equity method to account for subsidiaries. The guidance allows parent only financial statements and the concept of Variable Interest Entities isn’t recognized in the FRF for SMEs. US GAAP requires that all subsidiaries are consolidated if the parent has control over the entities. US GAAP also requires a reporting entity that is the primary beneficiary of a VIE to consolidate the VIE.
  • Goodwill amortization – When using the FRF for SMEs, goodwill is amortized over 15 years. US GAAP requires impairment testing of goodwill and no amortization.
  • Comprehensive Income – There is no concept of comprehensive income or items of other comprehensive income included in the FRF for SMEs. US GAAP requires certain items to be classified as other comprehensive income and displayed as such in the financial statements.
  • Leases – The FRF for SME’s accounting for leases is similar to how an entity would account for leases for tax purposes. The framework states that if a lease transfers substantially all of the benefits of risk and ownership to the lessee, the lease is a capital lease, otherwise it is an operating lease. US GAAP applies more stringent tests to determine proper lease classification.
  • Income tax accounting – Using the FRF for SMEs, the entity can elect to use the taxes payable method or the deferred income taxes method and there is no evaluation or accrual of uncertain tax positions. US GAAP only permits the deferred income tax method and uncertainty in income taxes must be considered in accounting for income taxes.

The objective of the new framework is to provide owner-managers comprehensive, reliable and understandable financial information to make informed business decisions and to provide the lending community and others  financial statements that provide the information to make sound business and credit decisions. There are millions of small businesses in the United States that struggle with the complex accounting standards approved by the FASB that are costly for small businesses to implement and difficult to understand. This framework may provide a good reporting alternative for these businesses.

Additional resources and information  are available at aicpa.org/FRF-SMEs.

 

Our team is always ready to help.

Please contact us for more information.

Julie Killian

Julie Killian

Shareholder, Advisory & Assurance

Contact Julie   |   Read Julie's bio

related news

How to Calculate R&D Tax Credits

As we’ve seen in the first two installments of this series, business owners often miss out on the R&D tax credit opportunity and the bottom-line infusion it can provide. Many…

Read full story

Doing Business in Mexico: What to Expect this Year

Without a doubt, this year will be interesting for Mexico. To start, it’s an election year and we all know what that means…a lot of uncertainty. As the global pandemic…

Read full story

What Expenses Qualify for R&D Tax Credits?

The R&D tax credit is one of the most overlooked opportunities to boost your bottom line. Many business owners fail to claim it under the mistaken belief that they’re not…

Read full story

Clayton & McKervey Launches The Sound of Automation Podcast

Media Contact: Denise Asker, dasker@claytonmckervey.com; 248.936.9488 Southfield, Mich.—February 17, 2021—Clayton & McKervey, a certified public accounting and business advisory firm helping growth-driven companies compete in the global marketplace, is excited…

Read full story

Misconceptions About the Research & Experimentation Tax Credit

As companies put more emphasis on Industry 4.0 and business processes become more automated and accessible, the opportunities for Research & Experimentation tax credits increase. The Research and Experimentation (R&E)…

Read full story

Categories

Jump directly to the topics that matter to you most.

  • A&E Professional Services
  • About Us
  • Advisory & Assurance
  • Business Owners
  • C&M Press Releases
  • Careers
  • China Consulting
  • Clayton & McKervey
  • Client Accounting Services
  • Consulting
  • COVID-19
  • Data Analytics
  • Estate Planning
  • Expanding Outside the U.S.
  • Expanding to the U.S.
  • From the President
  • Industrial Automation
  • International
  • Manufacturing & Distribution
  • Mexico Consulting
  • Podcasts
  • Private Client Services
  • Tax & Tax Credits
  • Transaction Services
  • Videos

Authors

Read news direct from our managers and stakeholders.

    • Ben Smith
    • Beth Butchart
    • Bryan Powrozek
    • Carlos Calderon
    • Casey Haggerty
    • Clayton & McKervey
    • Dave Van Damme
    • Denise Asker
    • Eric Lin
    • Jim Biehl
    • Julie Killian
    • Kevin Johns
    • Margaret Amsden
    • Miroslav Georgiev
    • Nina Wang
    • Rob Dutkiewicz
    • Ruben Ramirez
    • Sarah Russell
    • Sue Tuson
    • Tarah Ablett
    • Teresa Gordon
    • Tim Finerty
    • Tim Hilligoss
    • Wendy Reedy

Additional Resources

Additional news from Clayton & McKervey can be found below.

  • Subscribe to our email newsletter
  • View upcoming events
  • Contact us to let us know how we can help you
  • Main Content
  • Related Insights

AICPA Non-GAAP Financial Reporting Framework (FRF for SMEs)

Posted by Julie Killian on August 7, 2013

Julie Killian

On June 10, 2013, the AICPA released its Financial Reporting Framework for Small- and Medium-Sized Entities (FRF for SMEs). This is an optional, comprehensive basis of accounting for businesses that are not required to use US GAAP. In its own words, the AICPA describes the framework as “a cost-beneficial solution for management, owners, and others who require financial statements that are prepared in a consistent and reliable manner in accordance with a non-GAAP framework that has undergone public comment and professional  scrutiny.”

The framework was designed to respond to the unique financial reporting needs of small and medium sized entities. The current authoritative accounting literature, Generally Accepted Accounting  Principles (GAAP), has a very broad scope that does not distinguish between the simple transactions of small- and medium-sized entities and the complex transactions of large entities. The authoritative GAAP standards have been written in a way that makes them difficult to understand and cost prohibitive to apply to small and medium sized entities.

The Financial Accounting Foundation (FAF) is the oversight board for FASB.  In an effort to address the needs of small and medium sized entities, the FAF established the Private Company Council (PCC). The PCC is charged with determining whether exceptions or modifications to existing GAAP are needed to meet the needs of smaller privately held companies. The PCC’s actions, if approved by FASB, would actually amend existing GAAP. The AICPA fully supports the efforts of the PCC for GAAP reporting but has created the FRF for SMEs as an alternative when  GAAP is not required.

The framework does not define a small- and medium-sized entity but describes the target entities as having the following characteristics (this list in not all-inclusive and the criteria are not required to be met):

  • The entity is not required to prepare GAAP-based financial statements
  • The entity does not plan to go public in the foreseeable future
  • The entity is a for-profit entity
  • The owner of the entity is also involved in running the entity
  • There is no highly-specialized accounting guidance for the industry in which the entity operates
  • There are no overly complicated transactions
  • There are no significant foreign operations to report in the financial statements
  • Financial statement users have direct access to management

There are many differences between the new framework and US GAAP. The framework primarily uses historical cost basis, steering away from complicated fair value measurements. The principles in the framework are simplified, staying away from complex US GAAP accounting rules such as derivative/hedge accounting and stock based compensation. A partial overview of some key differences between US GAAP and the FRF for Small- and Medium-sized entities is as follows:

  • Reporting subsidiaries – FRF for SMEs allows the parent entity to choose to consolidate or use the equity method to account for subsidiaries. The guidance allows parent only financial statements and the concept of Variable Interest Entities isn’t recognized in the FRF for SMEs. US GAAP requires that all subsidiaries are consolidated if the parent has control over the entities. US GAAP also requires a reporting entity that is the primary beneficiary of a VIE to consolidate the VIE.
  • Goodwill amortization – When using the FRF for SMEs, goodwill is amortized over 15 years. US GAAP requires impairment testing of goodwill and no amortization.
  • Comprehensive Income – There is no concept of comprehensive income or items of other comprehensive income included in the FRF for SMEs. US GAAP requires certain items to be classified as other comprehensive income and displayed as such in the financial statements.
  • Leases – The FRF for SME’s accounting for leases is similar to how an entity would account for leases for tax purposes. The framework states that if a lease transfers substantially all of the benefits of risk and ownership to the lessee, the lease is a capital lease, otherwise it is an operating lease. US GAAP applies more stringent tests to determine proper lease classification.
  • Income tax accounting – Using the FRF for SMEs, the entity can elect to use the taxes payable method or the deferred income taxes method and there is no evaluation or accrual of uncertain tax positions. US GAAP only permits the deferred income tax method and uncertainty in income taxes must be considered in accounting for income taxes.

The objective of the new framework is to provide owner-managers comprehensive, reliable and understandable financial information to make informed business decisions and to provide the lending community and others  financial statements that provide the information to make sound business and credit decisions. There are millions of small businesses in the United States that struggle with the complex accounting standards approved by the FASB that are costly for small businesses to implement and difficult to understand. This framework may provide a good reporting alternative for these businesses.

Additional resources and information  are available at aicpa.org/FRF-SMEs.

 

Our team is always ready to help.

Please contact us for more information.

Julie Killian

Shareholder, Advisory & Assurance

Contact Julie   |   Read Julie's bio

related news

How to Calculate R&D Tax Credits

As we’ve seen in the first two installments of this series, business owners often miss out on the R&D tax credit opportunity and the bottom-line infusion it can provide. Many…

Read full story

Doing Business in Mexico: What to Expect this Year

Without a doubt, this year will be interesting for Mexico. To start, it’s an election year and we all know what that means…a lot of uncertainty. As the global pandemic…

Read full story

What Expenses Qualify for R&D Tax Credits?

The R&D tax credit is one of the most overlooked opportunities to boost your bottom line. Many business owners fail to claim it under the mistaken belief that they’re not…

Read full story

Clayton & McKervey Launches The Sound of Automation Podcast

Media Contact: Denise Asker, dasker@claytonmckervey.com; 248.936.9488 Southfield, Mich.—February 17, 2021—Clayton & McKervey, a certified public accounting and business advisory firm helping growth-driven companies compete in the global marketplace, is excited…

Read full story

Misconceptions About the Research & Experimentation Tax Credit

As companies put more emphasis on Industry 4.0 and business processes become more automated and accessible, the opportunities for Research & Experimentation tax credits increase. The Research and Experimentation (R&E)…

Read full story

Categories

Jump directly to the topics that matter to you most.

  • A&E Professional Services
  • About Us
  • Advisory & Assurance
  • Business Owners
  • C&M Press Releases
  • Careers
  • China Consulting
  • Clayton & McKervey
  • Client Accounting Services
  • Consulting
  • COVID-19
  • Data Analytics
  • Estate Planning
  • Expanding Outside the U.S.
  • Expanding to the U.S.
  • From the President
  • Industrial Automation
  • International
  • Manufacturing & Distribution
  • Mexico Consulting
  • Podcasts
  • Private Client Services
  • Tax & Tax Credits
  • Transaction Services
  • Videos

Authors

Read news direct from our managers and stakeholders.

  • Ben Smith
  • Beth Butchart
  • Bryan Powrozek
  • Carlos Calderon
  • Casey Haggerty
  • Clayton & McKervey
  • Dave Van Damme
  • Denise Asker
  • Eric Lin
  • Jim Biehl
  • Julie Killian
  • Kevin Johns
  • Margaret Amsden
  • Miroslav Georgiev
  • Nina Wang
  • Rob Dutkiewicz
  • Ruben Ramirez
  • Sarah Russell
  • Sue Tuson
  • Tarah Ablett
  • Teresa Gordon
  • Tim Finerty
  • Tim Hilligoss
  • Wendy Reedy

Additional Resources

Additional news from Clayton & McKervey can be found below.

  • Subscribe to our email newsletter
  • View upcoming events
  • Contact us to let us know how we can help you

Website

  • COVID-19
  • Insights
  • Who We Help
  • Services
  • Events
  • Careers
  • About Us
  • Contact Us
  • Subscribe

Location

+1 248.208.8860
2000 Town Center
Suite 1800
Southfield, MI
48075 | USA

Connect

  • Events
  • Newsletter
  • Client Login

Social

  • LinkedIn
  • Facebook
  • Twitter
  • Glassdoor
  • YouTube
  • Instagram

Awards

DFP Top Work Places Best & Brightest
Prime Global

Tax | Accounting | Assurance | Consulting | Highly technical and accessible team of CPAs helping growth driven, closely held, middle market companies compete in the global marketplace. Michigan-based accountants and advisors focused on helping business owners in the United States and throughout Europe and China.

Privacy Policy Disclaimer

© 2021 Clayton & McKervey