📖 Overview
The FRF for SMEs™ is a special purpose framework developed by the American Institute of CPAs (AICPA) as an alternative to U.S. GAAP for privately held, owner-managed businesses. It is a principles-based, self-contained framework that combines traditional accounting methods with accrual basis, providing streamlined, relevant, and cost-effective financial reporting.
🎯 Scope
Intended for privately held, for-profit, owner-managed small and medium-sized entities (SMEs) that are not required to prepare financial statements in accordance with U.S. GAAP. The framework is designed for entities whose primary users of financial statements are owners, lenders, and creditors who need clear, reliable, and cost-effective information about cash flow, profitability, and assets.
⚙️ Key Principles
1. Principles-based: A simpler, more intuitive approach compared to rules-based U.S. GAAP.
2. Historical Cost: Uses historical cost as the primary measurement basis, avoiding complex fair value measurements.
3. Accrual Basis: Requires accrual accounting to provide a meaningful picture of profitability.
4. Reduced Complexity: Excludes complex GAAP topics such as deferred taxes, impairment of long-term assets, other comprehensive income (OCI), variable interest entities (VIEs), and consolidation of subsidiaries.
5. Tailored Disclosures: Targeted disclosure requirements that focus on what is relevant for users of private company financial statements.
📏 Measurement
Historical cost is the primary measurement basis. Fair value measurements are not required. Assets and liabilities are generally recorded at their original transaction price, with adjustments for depreciation, amortization, and write-downs for impairment.
✅ Recognition
Recognition follows traditional accounting principles. Revenue is recognized when earned and realizable (performance-based). Expenses are recognized when incurred (matching principle). The framework does not require recognition of deferred taxes or complex financial instrument accounting.
📊 Presentation
Financial statements under FRF for SMEs include: Statement of Financial Position, Statement of Operations (Income Statement), Statement of Cash Flows, Statement of Changes in Owner's Equity, and Notes to Financial Statements. The framework offers optionality in presentation format to allow tailoring to user needs.
📝 Disclosure Requirements
Disclosure requirements are concise and focused on what is most relevant for private company stakeholders. Disclosures typically include accounting policies, details of significant balances, related party transactions, commitments and contingencies, and information about debt covenants.
🔗 Related Standards
ASC 105 (GAAP Hierarchy), ASC 606 (Revenue), ASC 842 (Leases)