In 2013, the AICPA released the Financial Reporting Frame-work for Small and Medium-Sized Entities (or FRF for SMEs). This is a simplified non-GAAP accounting frame-work that SMEs can use to present financial statement information to their stakeholders, including bank lenders.
FRF for SMEs is one of several different Other Comprehensive Basis of Accounting (OCBOAs) that small and mid-sized private companies can use for reporting financial information. According to the AICPA, it is more robust than other OCBOAs (like cash and tax basis reporting) but much less complex than full-blown GAAP, which many SMEs don’t need.
There is no standard definition of “small and medium sized entities” but there are some general characteristics of typical entities that may utilize the FRF for SMEs accounting framework. The characteristics listed are not all-inclusive and they are not a list of required characteristics, the list noted below are general characteristics you could find in a business utilizing the FRF for SMEs framework:
- The entity does not have regulatory reporting requirements that require it to use GAAP-based financial statements.
- A majority of the owners and management of the entity have no intention of going public.
- The entity does not operate in an industry in which the entity is involved in highly-specialized accounting transactions.
- Key users of the entity’s financial statements have direct access to the entity’s management.
- The entity’s financial statements support applications for bank financing but the lending decision is not solely being made on the financial statements but also on available collateral or other evaluation mechanisms not directly related to financial statements.
The general idea of FRF for SMEs is that the framework draws from a blend of traditional accounting principles and accrual income tax methods of accounting. FRF for SMEs utilized historical cost as its primary measurement basis.
As a commercial lender, you should be prepared for borrowers who will begin presenting financial information to you using the FRF for SMEs accounting framework (if they have not already). According to the AICPA, lenders can request that specific financial information be included in the financial statements of borrowers using FRF for SMEs.
In addition, you should be proactive in making borrowers aware of FRF for SMEs if they aren’t currently using it. This simplified accounting framework can save borrowers significant money and help improve their financial reporting.
By being proactive, you can build a competitive advantage for your bank as a trusted business advisor borrowers can count on for valuable advice and assistance to help them run their businesses better.
If you would like more information the FRF for SMEs is fully documented. The link to the full document can be downloaded by visiting http://www.aicpa.org. You can also contact us if you have more questions about FRF for SMEs and how it applies to your borrowers.