Spring 2025

The evolution of generally accepted accounting principles (GAAP) has increasingly focused on enhancing transparency for the shareholders of public companies. While this is beneficial for large, publicly traded entities, many Main Street businesses often find themselves burdened by the complex standards that are neither relevant nor cost-effective for their operations. GAAP’s growing prescriptive requirements can lead to unnecessary complications in financial reporting that divert resources from core business activities.

Perhaps it is time to more carefully consider the Financial Reporting Framework for Small and Medium-Sized Entities (FRF for SMEs). This framework, introduced in 2013, is designed to provide nonpublic companies with a simplified reporting framework that relies on traditional accrual accounting and uses historical cost as the primary measurement basis. The FRF for SMEs allows for flexibility in accounting policy selection, enabling businesses to tailor their financial reporting to the needs of their financial statement users rather than conforming strictly to regulatory demands.

The framework is a self-contained document that is accessible and practical for small and medium-sized entities. Its conciseness facilitates better understanding and consistent application among preparers and users of financial statements.

There are no strict rules delineating which entities can or cannot adopt the framework. Yes, the FRF for SMEs offers numerous advantages, but there are a number of factors to be considered:

• Ownership and Management Structure – The entity is closely held and owner-managed.
• Regulatory Requirements – The entity lacks regulatory reporting obligations that necessitate GAAP-based financial statements.
• Profit Orientation – The entity operates as a for-profit business.
• Future Plans – There is no intention of going public in the foreseeable future.
• Industry Specifics – The entity does not operate in an industry requiring specialized guidance for complex transactions.
• Foreign Operations – The entity has no significant foreign operations.
• User Accessibility – Key users of the financial statements have direct access to owners and management.
• User Focus – Users are more interested in cash flows, liquidity, financial position strength, and interest coverage rather than comprehensive GAAP disclosures.

Before any decision is made to transition to FRF for SMEs, it is crucial to engage with key financial statement users (such as lenders, bonding companies, and oversight bodies) to ensure they accept the framework. These stakeholders may require some education to understand how FRF for SMEs differs from GAAP and how it meets their informational needs. The AICPA has resources (below) that can help inform those stakeholders. Additionally, existing debt agreements that mandate GAAP reporting should be reviewed and potentially modified to accommodate the alternative framework.

This special purpose framework differs from U.S. GAAP in several areas:

• FRF for SMEs revenue recognition guidance is less complex. For the sale of goods, revenue is recognized when the risk and rewards of ownership are transferred to the customer. For services, the percentage of completion or completed contract method can be applied. FASB’s Accounting Standards Update (ASU) No. 2014-09, Revenue from Contracts with Customers (Topic 606), requires the application of an intricate five-step process.
• FRF for SMEs contains lease accounting guidance similar to FASB 840, Leases. Companies classify leases as operating or capital leases. Operating leases do not require the recognition of lease assets and lease liabilities.
• FRF for SMEs does not require the adoption of a provision similar to FASB ASU No. 2016-13, Financial Instruments – Credit Losses (Topic 326), which amended the existing accounting standard for estimating future credit losses on financial instruments at the time the financial instrument is initially recorded. FRF for SMEs requires the recognition of bad debt expense when uncertainty about the collection of the financial asset arises subsequent to initial recognition.

In the year of adoption, the FRF for SMEs must be applied retrospectively to the earliest period presented. The transition requires specific disclosures, including the following:

• Changes in Opening Balances – A description of any adjustments from the most recently issued financial statements.
• Reasoning for Adoption – The rationale behind selecting FRF for SMEs.
• Differences from GAAP – An explanation of how the new framework differs from GAAP in significant accounting policies.

Moreover, financial statement titles should be modified to reflect the use of a special purpose framework, distinguishing them from GAAP-based statements.

For CPA firms beginning to report on FRF for SMEs financial statements, comprehensive education and training are essential to ensure accurate application and high-quality financial reporting. While less complex than GAAP, understanding its unique principles and disclosure requirements is critical.

The AICPA provides several valuable resources to support a transition:

• Frequently Asked Questions – Addresses common queries and clarifies key aspects of the framework.
• Learning and Implementation Plan – Guides firms through a structured approach to adoption.
• Illustrative Financial Statements – Offers examples that demonstrate proper financial statement presentation under the framework.
• For Peer Reviewers – AICPA’s peer review resources include an FRF for SMEs Financial Reporting and Disclosure Checklist that practitioners can utilize for the preparation of financial statements.

By enhancing proficiency in FRF for SMEs, CPA firms can expand their service offerings, cater to the specific needs of many of their clients, and differentiate themselves in a competitive market.

The FRF for SMEs presents a practical and efficient alternative for small and medium-sized entities seeking to simplify their financial reporting without compromising the quality of information provided to users. By adopting this framework, businesses can reduce the complexities associated with GAAP, focus on relevant financial data, and potentially lower compliance costs. We work with small and midsize businesses in Pennsylvania, including clients in the manufacturing, construction, and agriculture industries, and have successfully helped many adopt this financial reporting framework.

For CPA firms, embracing the FRF for SMEs requires a commitment to education and a degree of adaptation, but it offers the opportunity to better serve your clients and position yourself as a trusted adviser in the evolving landscape of financial reporting. 

Nicole Cradic, CPA, is a partner at Trout CPA in Mechanicsburg and serves on the PICPA Accounting and Auditing Steering Committee. She can be reached at ncradic@troutcpa.com.

Rebecca Walck, CPA, CIA, is a partner at Simon Lever LLC in Lancaster and serves on the PICPA Accounting and Auditing Steering Committee. She can be reached at rwalck@simonlever.com.

The evolution of generally accepted accounting principles (GAAP) has increasingly focused on enhancing transparency for the shareholders of public companies. While this is beneficial for large, publicly traded entities, many Main Street businesses often find themselves burdened by the complex standards that are neither relevant nor cost-effective for their operations. GAAP’s growing prescriptive requirements can lead to unnecessary complications in financial reporting that divert resources from core business activities.

Perhaps it is time to more carefully consider the Financial Reporting Framework for Small and Medium-Sized Entities (FRF for SMEs). This framework, introduced in 2013, is designed to provide nonpublic companies with a simplified reporting framework that relies on traditional accrual accounting and uses historical cost as the primary measurement basis. The FRF for SMEs allows for flexibility in accounting policy selection, enabling businesses to tailor their financial reporting to the needs of their financial statement users rather than conforming strictly to regulatory demands.

The framework is a self-contained document that is accessible and practical for small and medium-sized entities. Its conciseness facilitates better understanding and consistent application among preparers and users of financial statements.

There are no strict rules delineating which entities can or cannot adopt the framework. Yes, the FRF for SMEs offers numerous advantages, but there are a number of factors to be considered:

• Ownership and Management Structure – The entity is closely held and owner-managed.
• Regulatory Requirements – The entity lacks regulatory reporting obligations that necessitate GAAP-based financial statements.
• Profit Orientation – The entity operates as a for-profit business.
• Future Plans – There is no intention of going public in the foreseeable future.
• Industry Specifics – The entity does not operate in an industry requiring specialized guidance for complex transactions.
• Foreign Operations – The entity has no significant foreign operations.
• User Accessibility – Key users of the financial statements have direct access to owners and management.
• User Focus – Users are more interested in cash flows, liquidity, financial position strength, and interest coverage rather than comprehensive GAAP disclosures.

Before any decision is made to transition to FRF for SMEs, it is crucial to engage with key financial statement users (such as lenders, bonding companies, and oversight bodies) to ensure they accept the framework. These stakeholders may require some education to understand how FRF for SMEs differs from GAAP and how it meets their informational needs. The AICPA has resources (below) that can help inform those stakeholders. Additionally, existing debt agreements that mandate GAAP reporting should be reviewed and potentially modified to accommodate the alternative framework.

This special purpose framework differs from U.S. GAAP in several areas:

• FRF for SMEs revenue recognition guidance is less complex. For the sale of goods, revenue is recognized when the risk and rewards of ownership are transferred to the customer. For services, the percentage of completion or completed contract method can be applied. FASB’s Accounting Standards Update (ASU) No. 2014-09, Revenue from Contracts with Customers (Topic 606), requires the application of an intricate five-step process.
• FRF for SMEs contains lease accounting guidance similar to FASB 840, Leases. Companies classify leases as operating or capital leases. Operating leases do not require the recognition of lease assets and lease liabilities.
• FRF for SMEs does not require the adoption of a provision similar to FASB ASU No. 2016-13, Financial Instruments – Credit Losses (Topic 326), which amended the existing accounting standard for estimating future credit losses on financial instruments at the time the financial instrument is initially recorded. FRF for SMEs requires the recognition of bad debt expense when uncertainty about the collection of the financial asset arises subsequent to initial recognition.

In the year of adoption, the FRF for SMEs must be applied retrospectively to the earliest period presented. The transition requires specific disclosures, including the following:

• Changes in Opening Balances – A description of any adjustments from the most recently issued financial statements.
• Reasoning for Adoption – The rationale behind selecting FRF for SMEs.
• Differences from GAAP – An explanation of how the new framework differs from GAAP in significant accounting policies.

Moreover, financial statement titles should be modified to reflect the use of a special purpose framework, distinguishing them from GAAP-based statements.

For CPA firms beginning to report on FRF for SMEs financial statements, comprehensive education and training are essential to ensure accurate application and high-quality financial reporting. While less complex than GAAP, understanding its unique principles and disclosure requirements is critical.

The AICPA provides several valuable resources to support a transition:

• Frequently Asked Questions – Addresses common queries and clarifies key aspects of the framework.
• Learning and Implementation Plan – Guides firms through a structured approach to adoption.
• Illustrative Financial Statements – Offers examples that demonstrate proper financial statement presentation under the framework.
• For Peer Reviewers – AICPA’s peer review resources include an FRF for SMEs Financial Reporting and Disclosure Checklist that practitioners can utilize for the preparation of financial statements.

By enhancing proficiency in FRF for SMEs, CPA firms can expand their service offerings, cater to the specific needs of many of their clients, and differentiate themselves in a competitive market.

The FRF for SMEs presents a practical and efficient alternative for small and medium-sized entities seeking to simplify their financial reporting without compromising the quality of information provided to users. By adopting this framework, businesses can reduce the complexities associated with GAAP, focus on relevant financial data, and potentially lower compliance costs. We work with small and midsize businesses in Pennsylvania, including clients in the manufacturing, construction, and agriculture industries, and have successfully helped many adopt this financial reporting framework.

For CPA firms, embracing the FRF for SMEs requires a commitment to education and a degree of adaptation, but it offers the opportunity to better serve your clients and position yourself as a trusted adviser in the evolving landscape of financial reporting. 

Nicole Cradic, CPA, is a partner at Trout CPA in Mechanicsburg and serves on the PICPA Accounting and Auditing Steering Committee. She can be reached at ncradic@troutcpa.com.

Rebecca Walck, CPA, CIA, is a partner at Simon Lever LLC in Lancaster and serves on the PICPA Accounting and Auditing Steering Committee. She can be reached at rwalck@simonlever.com.