Outline of “small gaap” visible in the distance and it is not a mirage

The general shape of the Financial Reporting Framework for Small-and Medium-sized Entities appears in a FAQ from the AICPA: AICPA’s Other Comprehensive Basis of Accounting (“OCBOA”) Project – 2012.

The Financial Reporting Framework will be referred to as FRF. The AICPA describes it as

…a standalone, self-contained other comprehensive basis of accounting intended for use by privately held small-to medium-sized entities (SMEs) in preparing their financial statements

The FRF will be developed during 2012. The AICPA expects to issue it in the first half of 2013. It will not have an effective date, so SMEs can adopt it when they wish.

What will be the advantage of FRF for SMEs?

The FAQ says:

The FRF for SMEs will be a less complicated and less costly system of accounting for SMEs that do not need U.S. GAAP financial statements. The Framework will be a cost beneficial solution for owner-managers and others who need financial statements that are prepared in a consistent and reliable manner in accordance with a framework that has undergone public comment and professional scrutiny.

Who is the FRF designed for?

The FRF for SMEs is being developed for smaller- to medium-sized, owner-managed, for-profit entities that need reliable financial statements where internal or external users have direct access to the owner-manager and GAAP financial statements are not required.

FRF is not designed for NPO’s, but they will not be prohibited from using them. That tells me the FRF will probably not address the specific reporting issues for nonprofits, which would make it problematic to report NPO financial statements on that basis.

On the other hand, let’s picture a small, fee-based NPO that has a very simple financial structure. If an NPO does not have investments, any significant restricted contributions, endowments, funding from grant agencies, or a constituency concerned about the functional allocation, then FRF might fit.

Setting aside IFRS and IFRS for SMEs, the shape of financial reporting models in the future is starting to look like this, going from most complex to least:

  • GAAP – will continue to be the gold standard
  • GAAP – slightly modified by the Private Company Council
  • Financial Reporting Framework – for small and medium owner-managed businesses
  • OCBOA – cash or modified cash basis, income tax basis

Maybe, just maybe, the dream of “small GAAP” is soon to be realized.

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