AICPA Proposes New Financial Reporting Framework for Small and Midsize Companies: Continuing His Series of Interviews with Accounting Industry Leaders, Dev Strischek Talks to the AICPA's Robert Durak about the Proposed Financial Reporting Framework for Small and Medium-Sized Entities
Strischek, Dev, The RMA Journal
Robert Durak, CPA, has been with the AICPA since 1995. He is the director of private company financial reporting. Previously, Durak was the AlCPA's director of Accounting and Auditing Publications. Before joining the AICPA, he was a manager at Deloitte & Touche in the firm's auditing practice in New Jersey.
Strischek: Most of The RMA Journal's readers are aware of the AICPA for CPA certification and FASB for generally accepted accounting principles. How would you describe the roles of the AICPA and FASB in establishing and maintaining accounting frameworks and principles?
Durak: Well, first I would like to thank you for giving me this opportunity to talk about the AICPAs Financial Reporting Framework for Small and Medium-Sized Entities (FRF for SMEs). I expect there will be plenty of smaller businesses that will be looking at the framework and choosing to use it when preparing their financial statements, so it is crucial for bankers and other lenders to understand what the framework is all about.
Let's start by defining the term financial reporting framework. It is a set of criteria used to determine measurement, recognition, presentation, and disclosure of all material items appearing in the financial statements. Financial reporting frameworks consist of two groups: generally accepted accounting principles (GAAP), and special-purpose frameworks (SPFs). SPFs used to be referred to by their better known name of "other comprehensive basis of accounting" (OCBOA) until a recent terminology change. So instead of using the term OCBOA, I will use the term SPF
GAAP is set by the Financial Accounting Standards Board (FASB) in the United States. The International Accounting Standards Board (IASB) sets GAAP internationally (International Financial Reporting Standards, or IFRS). The IASB has also issued international GAAP for small and medium-sized entities, which is known as IFRS for SMEs. Getting back to the U.S., the Governmental Accounting Standards Board (GASB) sets GAAP here for state and local governmental entities, and the Federal Accounting Standards Advisory Board (FASAB) sets GAAP for federal governmental entities.
The other category of financial reporting frameworks, SPFs, consists of the cash basis, tax basis, regulatory basis, contractual basis, or a basis of accounting that uses a definite set of logical, reasonable criteria that is applied to all material items appearing in financial statements. So we have GAAP and we have SPFs. This is nothing new. For quite some time, many smaller businesses have determined that financial statements prepared by applying a SPF, like the tax basis, more appropriately suit their needs rather than GAAP
Now, what does the AICPA do? The AICPA is the world's largest member association representing the accounting profession, with nearly 386,000 members. The AICPA sets ethical standards for the profession and U.S. auditing standards for private companies, nonprofit organizations, and federal, state, and local governments. It develops and grades the Uniform CPA Examination and offers specialty credentials for CPAs.
A key part of the AICPA's mission is to provide its members with technical and professional leadership. We place particular emphasis on supporting private companies and smaller CPA firms. To that end, we have always provided guidance on SPFs, like the cash basis and tax basis, to help CPAs apply those frameworks. So along those same lines, we have developed the FRF for SMEs in response to a strong marketplace demand for a more cost-beneficial, less complicated financial reporting option when GAAP-based financial statements are not required. The FRF for SMEs is a non-GAAP framework and fits in the SPF category
Strischek: How do private companies' owner-managers benefit from adopting the FRF for SMEs?
Durak: The FRF for SMEs is designed specifically to suit the needs of small and medium-sized entities and their stakeholders. …