Are Your Financial Statements Telling the Right Story?
You made it through the adoption of the much-anticipated U.S. GAAP changes to the revenue recognition standard and thought things would get back to normal. Then the pandemic hit, and nothing was normal. As you slowly recover from the pandemic and focus on related HR and OSHA issues, there is a new and significant U.S. GAAP accounting standard that is supposed to be in place by January 1, 2022 for December 31, 2022 financial statement reporting dates. The new lease standard under ASC 842 for U.S. GAAP (effective for fiscal year-end beginning after December 15, 2021) is the next big project that should be on your radar. This standard may be very time consuming and require significant resources if you have a lot of leases or service contracts that may have leases embedded in them. The new standard requires calculation and recording of a right of use asset and a corresponding liability for most leases whether operating or capital in nature.
Alternative Solution to U.S. GAAP – FRF for SMEs
If you like your financial statements the way they are, and they provide the information your stakeholders need, you may wish to consider an alternative solution to U.S. GAAP, the Financial Reporting Framework for Small and Medium Sized Entities (FRF for SMEs). FRF for SMEs was developed by the AICPA in June 2013 to provide a standardized framework with a comprehensive, integrated set of financial statements. Under this reporting framework, the new lease standard will not need to be adopted. The FRF for SMEs calls for recording leases in a manner like the traditional U.S. GAAP standard. The FRF-SMEs provides a comprehensive yet concise financial picture with a simple reporting framework that is based on traditional and proven accounting principles. The framework does not change frequently and is intended to provide information to users of the financial statements about what a company owns and owes, their cash flow and informative disclosures.
U.S. GAAP vs. FRF for SMEs
You may wonder when you should use FRF for SMEs over U.S. GAAP. It all comes down to the users of the financial statements.
Small or Medium-Sized Entities
If you are a small or medium-sized privately held entity, and you are reporting to a domestic bank, parent company, or other stakeholders, FRF for SMEs might be right for you. FRF for SMEs is a reporting framework developed by the AICPA; therefore, only domestic financial statement users might be familiar with this reporting framework and find it acceptable. We have helped many clients successfully adopt the FRF for SME while educating bankers and other stakeholders about the framework so that it is accepted for financial reporting requirements. This is an effective solution for those companies that do not need U.S. GAAP financial statements or have constraints on adopting the new standards under U.S. GAAP.
Foreign Parent Companies
If you are reporting to a foreign parent that uses another set of GAAP standards or even International Financial Reporting Standards (“IFRS”), you will likely use the foreign parent’s GAAP standards or IFRS for SMES, and FRF for SMEs may not be right for you.