This week the American Institute of Certified Public Accountants announced a new financial reporting “framework” (pdf) for small and midsize entities. If you like acronyms, and the folks who created the framework do, that’s the AICPA’s FRF for SMEs. If you’re curious about the finer points of the new framework, or how it relates to the Financial Accounting Foundation’s Private Company Council (FAF’s PCC), and its work with the Financial Accounting Standards Board (FASB) to fine-tune the Generally Accepted Accounting Practices (GAAP) for private companies—here’s one place to start.
If you’ve had it with the acronyms and just want a better sense of what the news means for small business owners, here are the basics: The framework is intended to provide a simpler way to create financial statements for small businesses. It’s not designed to help small businesses file taxes; rather, it gives management and other interested parties, such as banks or potential investors, a better way to describe a company’s finances. Better how? According to AICPA (sorry) Director Bob Durak, better means a simpler and more cost-effective approach than the framework used by public companies, with greater certainty and consistency than the accounting practices many small businesses currently use. Edited excerpts of my conversation with Durak follow.
What’s the purpose of creating the new framework? What does it do?
The goal is to produce more reliable financial statements—for business owners, for their lenders, for their surety bonding companies (if they’re construction companies). Right now the main non-GAAP reporting options are the tax basis and the cash basis of accounting. We developed this framework which is more comprehensive than the other two and which has the ability to be more consistently applied.
The framework includes guidance on most relevant topics that a typical small business would encounter. We set down what the underlying concepts and principles are. There’s nothing like that in cash or tax basis accounting—no set framework or guiding document. If small business A and small business B are using the new framework, I can feel assured that there’s consistency in their financial statements.
“Small and medium-size entities” is a loosely defined category. What kinds of companies did you create the new framework for?
The AICPA didn’t create a definition of small business based on total assets or revenue. We listed characteristics [that] a good candidate for the framework would possess. First off: entities that don’t require GAAP-based reports or financial statements. Typically, that means a private, for-profit company, usually one that’s owner-managed. Next: The people who use their financial statements—a banker, for instance—are people with access to management; they can pick up the phone or write an e-mail and reach management.
Who isn’t the framework for?
It’s probably not for industries with highly specialized accounting needs: financial institutions or government entities. It’s not intended for nonprofits, either. It’s not for companies looking to go public in the near term. There’s a certain [number] of companies that don’t need financial statements. If all you need is tax returns, and that works fine, God bless you, stick with that.