What Does the New Financial Reporting Framework Mean for You?

June 21st, 2013 by

Business financial statements have always been tricky for small business owners. When your company is very small, it can seem nearly impossible to use GAAP accounting – that is “generally accepted accounting principles”, which are the standards that larger companies must obey. Small business owners now have a new alternative. On June 10th, the American Institute of Certified Public Accountants (AICPA) announced a new financial reporting framework, or FRF, for small businesses. You can find it here (PDF).

This new framework is designed to make it easier for small businesses to keep accurate financial statements in a number of ways. However, there are a few things you should know before you make the switch to the new FRF.

Moving Away from GAAP

The new FRF takes small business owners away from GAAP, which is required of larger businesses. Of course, even prior to the implementation of the new FRF, there were accepted alternatives for tracking and reporting finances. For example, cash-based accounting or even tax-based accounting could be used as alternatives. The new framework is designed to give small business owners a consistent way to report their financial information, but without all the complexities of GAAP.

Who Can Use It?

In a recent interview in Businessweek, AICPA Director Bob Durak explained that the new framework isn’t right for every business, even if it’s an SME. He points out,

“The AICPA didn’t create a definition of small business based on total assets or revenue. We listed characteristics [that] a good candidate for the framework would possess. First off: entities that don’t require GAAP-based reports or financial statements. Typically, that means a private, for-profit company, usually one that’s owner-managed. Next: The people who use their financial statements—a banker, for instance—are people with access to management; they can pick up the phone or write an e-mail and reach management.”

He also explains that companies with very specialized financial reporting needs should not use the new framework.

Comparing Apples to Apples

One of the most exciting benefits of the new FRF is the ability for companies to compare their finances quickly and easily. Because standards are laid out in the framework for which types of accounting items fall where, and how they should be dealt with, companies can feel reasonably certain that they can make comparisons between themselves and another company. As Durek explains, “The framework includes guidance on most relevant topics that a typical small business would encounter. We set down what the underlying concepts and principles are.”

You’ll Still Need an Accounting Professional

Of course, the new FRF doesn’t relieve the need for small businesses to hire accounting professionals. In fact, the AICPA will be educating CPAs around the country in the new framework to ensure that they’re prepared to work within it. Accounting firms in Pittsburgh and beyond can still help you prepare accurate financial reports, regardless of the system used to prepare them.

A Word of Caution If You’re Going Public

While the new FRF is great for smaller, owner-operated businesses, if you’re planning to take your company public, beware. Publically traded companies need to adhere to GAAP, and you’ll need to redo at least two years of past financial statements if you make the switch.