Is GAAP the Right Accounting Framework for Your Company?
Does your company struggle to keep up with the latest GAAP accounting guidance? Do you find that cost associated with staying in compliance with GAAP exceeds the benefits you and your financial statement users receive? There is an alternative to GAAP, issued by the American Institute of Certified Public Accountants (AICPA), called the Financial Reporting Framework for Small and Medium Size Entities (FRF for SMEs).
According to the AICPA, “The framework draws upon a blend of traditional accounting principles and accrual income tax methods of accounting. It utilizes historical cost as its primary measurement basis. In addition, it provides management with a suitable degree of optionality when choosing accounting policies to better meet the needs of the end users.”
“This framework was designed to be used by private companies that want robust financial statements without having to stay current on the latest accounting guidance, which is generally more relevant for large public companies and can add unnecessary complexity to the financial statements of a small business. This framework focuses on the operating performance of a business, what it owns, and what it owes, which is the information most business owners and lenders want to see in a set of financial statements.,” commented MHCS Manager Mike Vankat, CPA.
Who can use FRF for SMEs?
The AICPA intentionally did not develop a dollar value criteria in defining a small or medium-sized entity, but in general, the framework is meant for private for-profit businesses whose owners are involved in managing the company.
In addition, the following characteristics should be present:
- The entity does not have a regulatory requirement to report GAAP-based financial statements.
- A majority of the owners and management have no intention of taking the company public.
- The entity does not operate in an industry that requires highly specialized accounting guidance, like a financial institution or government entity.
- The entity does not engage in overly complicated transactions and does not have significant foreign operations.
- Financial statement access by key users also has direct access to management. These users also have a greater interest in cash flows, liquidity, statement of financial position strength, and interest coverage.
- Financial statements support bank financing applications that do not require lending decisions based on financial statements alone, but consider available collateral and other mechanisms not directly related to its financial statements.
What method does it use?
FRF for SMEs includes several principles for the preparation of financial statements, which are based on the accrual method of accounting. This method includes the reporting of payables and receivables, and net income is the total of all transactions.
It is tailored to SME's unique needs, such as avoiding complex fair-value measurements and requiring less complex accounting for derivatives, stock compensation, and leases. There are also targeted disclosure requirements that provide relevant information to the users.
With the new accounting standards for leases effective for fiscal years ending December 31, 2022, now the time to assess whether GAAP is right for you is now. We can help you discuss the use of FRF for SMEs with your bank, bonding company, or other financial statement user. Give us a call today!