New Accounting Rules Could Simplify Small Business Financial Reporting

Earlier this month, the American Institute of CPAs (AICPA) introduced a new framework of standards that accounting leaders say could reduce costs and streamline financial reporting for small businesses.

The AICPA’s Financial Reporting Framework (FRF) for small- and medium-sized entities (SMEs) is a new accounting option for preparing streamlined, relevant financial statements for privately held, owner-managed businesses that are not required to use Generally Accepted Accounting Principles (GAAP) like many large U.S. companies.

“The FRF for SMEs has been developed to provide consistent and simpler financial statements for small- and medium-sized entities where GAAP is not required,” said Barry Melancon, president and CEO of the AICPA. “Some private businesses, typically smaller or those with less complex business models, will see the AICPA’s framework as an effective alternative to other existing financial reporting options.”

WHAT IT DOES
The Financial Reporting Framework (FRF) would allow small businesses to prepare financial statements that clearly and concisely report what a business owns, what it owes and its cash flow.

The new framework uses only historical cost as a basis for valuing assets and liabilities, not current market value. It also doesn’t include more-complex accounting, such as off-balance-sheet entities, derivatives or hedging. The process has more practical and less complicated goodwill accounting, too.

The reports could satisfy lenders, insurers and regulators who need to determine the creditworthiness of businesses.

“I think this new accounting framework is exactly what business owners, CPAs and community bankers have been looking for as a viable and reliable alternative to the options already available,” said Richard Caturano, chairman of the AICPA Board of Directors.

The new accounting framework was developed by a working group of experts from the CPA profession. It has also undergone public comment and professional scrutiny, and incorporates significant feedback from CPAs, bankers and other relevant stakeholders, the AICPA said.

“The FRF for SMEs is not GAAP and it is not intended to become GAAP. It is another comprehensive basis of accounting with a framework around it for enhanced financial reporting,” said Melancon.

The new framework, if eventually accepted, would be optional for companies who might choose to adopt it. The AICPA does not have any authority to compel companies to do so.

You can read about some hypothetical examples from the Journal of Accountancy at this link.