If you are a smaller-to-medium-sized, for-profit entity that needs reliable financial statements but does not need to comply with the comprehensive standards of Generally Accepted Accounting Principles (GAAP), the accounting profession has come to your rescue. Like a military unit formed to undertake a specific mission, the AICPA created a Financial Reporting Framework for Small and Medium-Sized Entities Task Force to solve this problem.
As a special purpose framework, statements can follow other comprehensive bases of accounting, rather than following GAAP. They include:
- cash basis
- modified cash basis
- tax basis
- regulatory basis
- contractual basis
- other non-GAAP bases of accounting that utilize a definite set of logical, reasonable criteria that is applied to all material items appearing in the financial statements
The framework is intended for owner-managers who rely on a set of financial statements to confirm their assessments of performance. An owner-managed entity is a closely held company in which the people who own a controlling ownership interest in the entity are substantially the same set of people who run the company. These entities typically do not have a qualified CPA on staff, leaving the owner-manager or bookkeepers to maintain the books and records.
This is good news for several of our firm’s clients who fall into this category who wrestle with the necessity of the seemingly endless compliances of preparing a financial statement according to GAAP. My colleagues and I are excited to be the bearer of good news to them. Now we can work with our clients to have a more meaningful (and less painful!) examination of their books and records.
The financial statements utilizing the Financial Reporting Framework for Small and Medium-Sized Entities normally include:
- Statement of Financial Position;
- Statement of Operations;
- Statement of Changes in Equity, and
- Statement of Cash Flows
Changes in equity can be shown on the statement of operations instead of a separate statement. The footnotes of the financial statement need to explain the framework being used and how it differs from GAAP.
More simplified, right?
Owner-managers and their CPA practitioners should consult with lenders and other key external users about the use of this framework. The framework appeals to lenders because it is reliable, it provides relevant information and it is simplified, so lenders have been flexible in accepting various financial frameworks for smaller entities. This framework is a cost-beneficial financial reporting option for the lenders’ customers.
If you think this may apply to you, give us a call to find out.