A New Financial Reporting Option for Private Companies
In a significant development for the profession and millions of U.S. small businesses, the AICPA this month released the Financial Reporting Framework for Small and Medium-Sized Entities (FRF for SMEs). This streamlined option will allow CPAs to better meet the unique needs of private companies and strengthen their position as the trusted business advisor for Main Street businesses. While using this framework is voluntary and is not intended to replace GAAP, FRF for SMEs is a cost effective choice for owner-managed companies that don’t require GAAP financial statements but that do need financial statements that reliably report what they own, what they owe and their cash flow. It is best suited to companies that have few or no external stockholders and no immediate plans for mergers or acquisitions. Compared with existing cash or tax-basis special purpose frameworks (OCBOA), FRF for SMEs provides more robust information and greater comparability.
FRF for SMES is based on traditional accounting principles blended with accrual income tax methods, making it reliable and easy to apply consistently. It will be revised as needed, but frequent additions or revisions are not expected, which will make it stable yet nimble. Smaller firms and their clients should find it easy to understand and put to work.
A Great New Option for Small Business Clients
By James C. Metzler, CPA.CITP, CGMA
More than ever, private company clients are looking to their CPAs for the information they need to make decisions and plot future strategy. Now CPAs have the opportunity to be the first in the door with the Financial Reporting Framework for Small and Medium-Sized Entities, which is designed to offer clients just that, cutting out the costly and complicated details that aren’t relevant to them.
Whether you’re talking to prospective or current clients, pick up the phone or take them to lunch and review these talking points:
- Clients will avoid unnecessary costs. The FRF for SMEs will prevent clients from paying for unnecessary measurements and disclosures. This includes significant new proposed changes to lease accounting and anticipated revisions to revenue recognition. Clients will not have to deal with expensive valuations associated with fair value or lengthy footnotes that don’t apply to them. This will be music to prospects’ and clients’ ears. It will also provide a gateway for bringing in new clients or expanding services to existing clients. Let your clients and prospective clients know that CPAs have heard their frustrations over complex and expensive disclosures and designed another choice.
- Focus on what is in it for them. Our clients may not be as excited about changes in accounting standards as we are, so be sure to spell out how simpler financial statements will help them, by providing clearer information they can actually use in decision making. This is a great time to illustrate your deep knowledge of their businesses and discuss potential additional services that can help them achieve their goals.
- Provide reassurance. The FRF for SMEs was created by the CPA profession and has been subject to professional scrutiny and input from the public. Although strong marketplace acceptance is expected, there are concerns that bankers may not accept FRF for SMEs statements. Not to worry, though, because AICPA has launched a public awareness campaign aimed at private companies, as well as banks and other lenders, sureties, venture capitalists and any other relevant stakeholders, so that financial statements prepared following FRF for SMEs principles enjoy the same recognition and credibility as those prepared using GAAP or other OCBOA. Luckily, bankers and other lenders are often flexible in accommodating various financial frameworks for smaller entities and this new framework will be beneficial for them as well, by providing relevant information in a familiar way using traditional accounting principles and requiring little consolidation. This new framework is an excellent opportunity for you to differentiate yourself, gain new clients and become the expert in your market.
This new framework demonstrates that we get our clients--that we understand their specialized needs and how to address them. This is a great time to seize the chance to deepen your bonds with clients and develop new engagement opportunities.
You can prepare for client discussions by using the resources available to AICPA members, which can be found on the AICPA dedicated FRF for SMEs site.
James C. Metzler, CPA.CITP, CGMA, is AICPA vice president, small firm interests.
Giving Clients What They Really Need
By Cheryl K. Woods, CPA
I’m a true sole proprietor, and my clients are primarily small businesses or farms. Deferred taxes mean nothing to my clients or their banks. Under the Financial Reporting Framework for Small and Medium-Sized Entities, I won’t have to include deferred taxes in client financial statements when they’re not appropriate, which is why FRF for SMEs will improve my ability to review statements with my clients and give them a realistic picture of where they stand, which will in turn help them make confident business decisions. As their businesses grow stronger, it will present more opportunities for me to meet their expanding needs.
Today, much of what clients find in their financial statements doesn’t make sense to them, which makes it hard for them to see the value. FRF for SMEs will be a better option than OCBOA for many of my clients, and will offer me greater opportunities to have a meaningful discussion about their business and provide guidance that adds value. I already have a strong relationship with my clients, but this can only make it more satisfying for them and for me.
Cheryl K. Woods, CPA, is a sole practitioner in Centerville, Washington.