FRF for SMEs Blends Traditional Accounting Principles with Accrual Methods 

If you are an owner of a small- to medium-sized business and you are looking for financial statements that provide useful, relevant information in a simplified, consistent, cost-effective way, then Financial Reporting Framework (FRF) for SMEs may be for you.

There are a number of financial reporting frameworks, and FRF for SMEs is a new framework. It was developed by a working group of CPA professionals and the staff of the American Institute of CPAs, who have years of experience serving small businesses. Other financial reporting frameworks include GAAP (Generally Accepted Accounting Principles), GAAS (Generally Accepted Auditing Standards), cash, and income tax.

In a nutshell, the FRF for SMEs is drawn from a blend of traditional accounting principles and accrual income tax methods of accounting. It uses historical cost as its primary measurement basis.

FRF for SMEs provides management with a suitable degree of options when choosing accounting policies to better meet the needs of the business owner and management. It is a cost-beneficial solution for management, owners and others who require financials that are prepared in a consistent and reliable manner in accordance with a non-GAAP framework.

FRF for SMEs has the following attributes:

• Objectivity
• Measurability
• Completeness
• Relevance

The types of business entities for whom FRF for SMEs may apply are:

• The entity does not have a regulatory (SEC) reporting requirement.
• There is no intention of taking the entity public.
• The entity is for-profit.
• It is likely to be owner-managed.
• Management/owners rely on a set of financial statements to confirm their assessments of performance, cash flows and of what they own and what they owe.
• It does not operate in an industry in which it is involved in transactions that require highly specialized accounting guidance (financial institutions and governments).
• The entity does not engage in overly complex transactions.
• It does not have significant foreign operations.
• Key users, such as a banker, have direct access to management.
• Users have greater interest in cash flows, liquidity and statement of financial position strength and interest coverage.
• The entity’s financials support applications for bank financing when the banker does not base a lending decision solely on the financial statements but also on available collateral and other factors.

If you are having difficulty in fully understanding your financial statements due to the complexity of the GAAP rules or you may be unable to present a GAAP financial due to too many departures, then FRF for SMEs may be something for you to consider using. If you wish to explore this option, contact me or your adviser in the accounting department.