FRF for SMEsPosted: November 5, 2012
I mentioned the new Financial Reporting Framework for Small and Medium Enterprises (FRF for SMEs) in last week’s blog. This week I would like to dive a little deeper into the subject and talk about how FRF for SMEs will differ from U.S. GAAP as promulgated by the FASB. The FRF for SMEs is designed to be a comprehensive basis of accounting like cash basis or tax basis so it will qualify for OCBOA (Other Comprehensive Basis of Accounting) Reporting. That means a CPA will be able to provide clients financial statements and a report (depending on the engagement agreed to with the client) and users will know exactly what they are getting.
Let’s start with some simple examples of what FRF for SMEs will contain.
- No impairment testing for goodwill. Instead, like in yesteryear, goodwill will be amortized. In this case the time period will 10 years or the same period that is used for federal tax purposes.
- No VIE Consolidation. One of the biggest complaints of SME financial statement users is the requirement to consolidate related by irrelevant enterprises. FRF for SMEs will not require their consolidation and will allow standalone entity financial statements of the relevant entity to the user.
- Lease accounting will be closely aligned with how leases are treated for tax purposes. SMEs won’t have to worry about whatever the FASB and IASB decide to come up with to complicate the accounting for leases.
- Simplified hedge a derivative accounting. Let’s face it, most SMEs don’t enter into anything strange and if they do they are usually plain vanilla currency or interest rate swaps. The accounting will coincide with the simplicity of the business operating model.
- No OCI – Most SMEs don’t do things that result in OCI anyway and it rarely has anything to do with real assets or cash flow so it won’t be required for FRF for SMEs.
The full FRF for SMEs will be about 200 pages (that’s less than the revenue recognition ED being debated currently by the FASB) and really comes down to lots of traditional things like the matching principle, conservatism and basic accrual accounting. I think one of my fellow Council members from Texas described it best when he said “It sounds a lot like GAAP before the FASB got involved.” Who knows maybe all those baby boomers nearing retirement will have an opportunity for a second career teaching all of the young CPAs the basics of plain old accrual accounting!