Simplified Accounting for Small and Medium Business

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July 3, 2018
2018 Tax Filing Season
January 9, 2019

Financial Reporting Framework for Small and Medium Entities (FRF for SME)

Generally accepted accounting principles (GAAP) has evolved into a valuation tool that is directed primarily at Wall Street. FRF for SME is an important and complimentary method of reporting that is complimentary to the Financial Accounting Standards Board (FASB) efforts to modify GAAP for private companies. FRF for SME is directed at Main Street entities.

Since its introduction in 2013, this reporting framework continues to gain support and acceptance. An opinion in the American Bankers Association Banking Journal expressed confidence in the FRF-SME. Some CPA firms have been able to convert a substantial percentage of their financial statement clients to the FRF-SME.

Accounting standards issued by the FASB and IFRS are considered general purpose accounting frameworks that are GAAP. The FRF-SME is considered a special purpose accounting framework, or other comprehensive basis of accounting such as tax and cash basis.

The objective of FRF-SME is for owner/managers to assess performance and track whats owned and owed by the entity. It strives to be more relevant and less costly than preparing and reporting on GAAP financial statements.

FRF-SME is appropriate when lenders and sureties have access to management and obtain collateral and personal guarantees. Additionally, the entity should not have plans for a public offering.

FRF-SME consists of about 200 pages covering 31 topics and includes concepts, principles and specific treatment for balance sheet and income statements accounts.

Comparison to GAAP

FRF for SME is similar to GAAP before fair value emphasis. Historical costs are emphasized instead of fair values.

Revenue is recognized based on performance, measurement and collectability.

Understandability is emphasized.

The primary qualities of FASB financial statements are relevance and faithful representation (free from error; complete; neutral). Subordinate qualities are comparability; verifiability; timeliness and understandability.

The primary qualities of FRF-SME financial statements are relevance; reliability; and comparability.

Conservatism is not allowed by the FASB but is an appropriate response to uncertainty in FRF-SME.

The Main Differences from GAAP

Consolidations and VIE (variable interest entities) – Option to use equity method instead

Defined benefit pension accounting – Option to record based on contributions paid

Income taxes – Deferred taxes not required

Leases – Fewer capitalizations than the new FASB rules (generally follows tax rules)

Revenues – Simpler recognition rule rather than the new complex FASB rules

Fair value calculations – Mostly use cost basis with fewer fair value calculations

Goodwill valuation – Amortization used rather that annual valuations

Other comprehensive income – Eliminated

Who Benefits from FRF-SME Who Benefits from FASB standards
Management to make resource allocations. Investors and creditors without direct management access.
Financial statement users to project future cash flows. Investors and creditors to value securities.
Financial statement users to evaluate past predictions. Investors and creditors to evaluate past predictions.
Lenders in assessing entity performance. Entities planning public offerings.

Audit, Review and Compilation of Financial Statements

Financial statements are subject to the same audit, review and compilation standards whether they are prepared in accordance with GAAP or FRF-SMER.

The report language is slightly modified.

There is no effect on the auditors or accountants’ procedures.

Likely less expensive than GAAP financial statements in many instances.

Summary

FRF-SME is relatively understandable and lower cost.

FRF-SME are designed for the owner-manager.

FRF-SME is a reporting method that deserves to be considered for entities and their creditors when tax or cash method financial statements are not adequate, and GAAP financial statements are overly complex given the size and nature of the issuer.

The Weaver Company CPA provides income tax, financial and accounting expertise for exclusive clients throughout the United States from our location in Redlands, California. We partner with select owners and decision makers of small to mid-sized business, as well as successful individuals.

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