An Alternative to GAAP for Small and Medium-Sized Entities

Brian J. Sharkey, Director, Audit & Accounting

What if there was an alternative to generally Accepted Accounting Principles (GAAP) that allowed you to amortize goodwill, did not require you to record deferred taxes, and had no concept of variable interest entities (VIE)? What if this alternative framework permitted a choice of certain options for your accounting policies? Would you be interested?

In July 2013, the AICPA released the Financial Reporting Framework for Small and Medium-Sized Entities (FRF for SMEs). FRF for SMEs is another special purpose framework, such as cash-basis or tax-basis financial statement, and is referred to as another comprehensive basis of accounting (OCBOA). FRF for SMEs draws upon many traditional accounting principles, which under GAAP have become increasingly complex. Although FRF for SMEs has many similarities to GAAP, there are some distinct differences:

  • No concept of Variable Interest Entities
  • Simplified reporting and disclosure of pension plans
  • No concept of other comprehensive income
  • Option to record deferred income taxes or just current income taxes
  • No impairment testing of long-lived assets
  • No recognition of stock- based compensation to employee

The framework is not for every business. It is geared toward owner-operated companies that do not need the additional disclosures and reporting requirements typically provided by GAAP.

Also, it is designed for privately-held companies that have no intentions of going public and do not engage in complex transactions or have significant foreign operations. It is not available for not-for- profit organizations.

A foreseeable challenge to the use of FRF for SMEs will be its impact on the lending community. Financial statements prepared in accordance with GAAP are required as a condition of many lending agreements. In order for a company to use FRF for SMEs, bank agreements will need to be rewritten or amended to allow for the new framework.

Renewal time may present a good opportunity to discuss your use of the new framework with your lender. However, keep in mind that lenders have become accustomed to GAAP over time and a significant change like this will require proper due diligence. Before any lender will be willing to accept FRF for SME financial  statements, they will need to become comfortable with its rules and understand how it differs from  GAAP.

If FRF for SMEs interests you, it may be beneficial to have a conversation with your accounting service provider to learn how the framework could impact your company’s financial statements.

Depending on the nature and complexities of your operations, it could create significant change. On the other hand, the framework may have little or no impact on your financial statements and, in some cases, would only simplify financial statement disclosures. Connecting your accountant with your lender may also assist with traversing the two frameworks and determining how it may impact the credit and underwriting of any impacted debt arrangements.

As with anything new, it will take some time for FRF for SMEs to become more widely used. The framework may not be right for every company and it will require a certain level of understanding before implementation. However, FRF for SMEs can be a viable alternative to GAAP and can offer simpler disclosures, fewer requirements, and additional accounting policy options.

Brian J. Sharkey can be reached at Email or 215.441.4600.

Related: