In June 2013, the American Institute of Certified Public Accountants (“AICPA”) released another alternative accounting framework that may be used by small and medium-sized privately held businesses that do not require financial statements prepared in accordance with U.S. Generally Accepted Accounting Principles (“GAAP”). This new framework, referred to as the Financial Reporting Framework (“FRF”), draws upon a blend of traditional accounting principles and the accrual income tax method of accounting. According to the AICPA, it provides management with a suitable degree of optionality when choosing accounting policies to better meet the needs of the end users of the financial statements.
The FRF is designed for entities that do not have the regulatory reporting requirements that require it to use GAAP-based financial statements. Also, the FRF is well-suited for entities that are managed by owners that have no intention of going public. The FRF does not cover complex accounting issues such as foreign operations and derivatives. Users of financial statements based on FRF usually have greater interest in cash flows, liquidity, statement of financial position strength and interest coverage.
Controversies in Using FRF
There are several controversies surrounding the use of FRF. Opponents of FRF argue that we don’t need another “OCBOA” (Other Comprehensive Basis of Accounting) financial statement considering that in 2012 the Financial Accounting Standards Board created the Private Company Council (“PCC”). PCC is tasked with tackling the issue on how to modify and simplify existing U.S. GAAP to address the needs of private company financial statements. The proposed simplified accounting principles are sometimes referred to as “Mini GAAP”. Mini GAAP has gained so much traction during the past few months that in June 2013, The National Association of State Boards of Accountancy (“NASBA”) has advised private companies not to use FRF. NASBA believes that the PCC is making significant progress and NASBA is troubled that the AICPA is proposing a non-authoritative financial reporting model that would weaken the reporting by private companies.
The AICPA, which supports the work of the PCC, defends its position by pointing out that FRF is a cost-beneficial solution for management, owners and others and will further improve upon existing OCBOA frameworks. The AICPA points to the fact that the recently published 200-page FRF guide (FRF for SMEs) eliminates several ambiguities with the existing OCBOA framework.
Martini, Iosue and Akpovi will continue to monitor these issues for future developments. Please contact Martini, Iosue & Akpovi by phone at (818) 789-1179 if you have questions or want more information.
http://www.accountingtoday.com/Financial Reporting Framework for Small and Medium-Sized Entities issued by the AICPA
http://nasba.org/(NASBA Stands Behind GAAP for Private Companies: Opposes Non-Authoritative Frameworks)