Question

Explain the proposed accounting framework for SMEs and discuss its goal.

Answer 1

Financial Reporting Framework for SMEs

The AICPA has issued its Financial Reporting Framework for Small- and Medium-Sized Entities. The FRF for SMEs™ accounting framework is designed for America's small business community. It delivers financial statements that provide useful, relevant information in a simplified, consistent, cost-effective way. The FRF for SMEs™ framework may be used when GAAP financial statements are not required.

Small and Medium-sized Entities [SMEs]” has different meanings in different territories. The definition in the context of the IFRS for SMEs is entities that do not have public accountability but that publish general purpose financial statements. Every entity has some form of accountability, if only to its owners and the local tax authorities. Public accountability is defined to cover entities with or seeking to have securities traded in a public market or that hold assets in a fiduciary capacity. The definition is therefore based on the nature of an entity rather than on its size.

An IFRS for SMEs has clear benefits for investors, lenders and those seeking to raise finance through the transparency afforded by a consistently applied, global set of financial reporting standards. Such benefits are not confined to the financial statements of entities with securities traded on public capital markets.

The Framework is also more principles based, so entities using the
Framework should expect to encounter situations where professional
judgment is necessary to select among measurement or disclosure
alternatives. As a result, two entities that enter into the same
transaction may choose to measure or disclose the transaction
differently depending on their judgment, and both treatments may be
considered appropriate for the transaction. The Framework does not
include industry-specific guidance.

Aims of the IFRS for Small and Medium-sized Entities [SMEs]:

First aim of the IFRS for SMEs is to provide a standard for entities in countries that have no national GAAP. IFRS for SMEs will provide an accounting framework in such countries for entities that are not of the size nor have the resources to adopt full IFRS.

Second aim is to provide countries that already have an established national GAAP with an alternative, IFRS-based set of standards that will be recognized and understood across different territories. This will ease transition to full IFRS for growing entities once they become publicly accountable.

The Scope

Any entity that publishes general purpose financial statements for external users and does not have public accountability can use the IFRS for SMEs. An entity has ‘public accountability’ if it files or is in the process of filing its financial statements with a securities commission or other regulatory organization for the purpose of issuing any class of instruments in a public market or if it holds assets in a fiduciary capacity for a broad group of outsiders. Banks, insurance entities, securities brokers and dealers and pension funds would be examples of entities that hold assets in a fiduciary capacity for a broad group of outsiders.