New Reporting Framework Will Eliminate “Noise” for Bankers, Other Financial Statement Users

In my almost 20 years in the banking industry, I’ve come across dozens of owners and managers of small private companies who cringe when it comes time to prepare financial statements. That’s because for many of them, the process is complicated, time consuming and costly. Moreover, a number of rules they are required to follow do not deliver financial information relevant to their businesses. These small- and medium-sized entities have been in need of a financial reporting option that is tailored to their circumstances and produces financial statements and information that their bankers can use and rely upon. Now, finally, that financial reporting framework is being made a reality.

One of my most rewarding professional experiences has been serving on the task force that is developing the new Financial Reporting Framework for Small- and Medium-Sized Entities. What’s a SME? No standard definition exists, but the acronym is self explanatory – small and medium size entities, which happen to make up about 20 million for-profit companies in the United States.

The planned FRF for SMEs is not intended for everyone, like those who are required to use GAAP. But for those looking for a reliable and more cost-beneficial framework that incorporates comprehensive accounting principles, has undergone professional scrutiny and was developed by those in the CPA profession, this framework will come as welcome relief. It will allow owner-managers to prepare financial statements that help them confirm their assessments of performance, what they own and what they owe and help them better understand their cash flows. And, importantly, the FRF for SMEs produces relevant financial statements, cutting out the “noise” that often clutters financial statements and can distract a banker and other users from the salient information.

From my experience as a banker, the new framework will be most appropriate for small- and mid-sized privately owned companies without complex financial statements, ownership that is not expected to change in the near term and those with lower levels of credit exposure. It will also be particularly valuable in situations in which the user of the financial statement has direct access to the organization’s owner or manager. Use of the framework will be voluntary, and it is not meant to replace U.S. GAAP. In fact, the AICPA’s project to develop a framework for smaller private entities which would be used as an other comprehensive basis of accounting (i.e., a non-GAAP accounting framework) has the encouragement of the Financial Accounting Foundation, which oversees the Financial Accounting Standards Board. Quite simply, the new framework provides an alternative that is sorely needed in the marketplace.

Bankers and other lenders are often flexible in accommodating various financial frameworks for smaller entities. I know that in my own case, we will welcome the new framework because it will provide us with relevant information in a familiar way using traditional accounting principles. It will, for example, use historical cost as its measurement basis rather than fair value, and it will not require consolidation of what are known as variable interest entities.

Furthermore, I find the FRF for SMEs very appealing because it will be a reliable, comprehensive and consistently applied framework that has been developed by the AICPA and will save my customers money. When making lending decisions related to smaller businesses, I need financial statements that will help me focus on cash flow and contain only relevant information. I believe the FRF for SMEs will provide financial statements that will do just that.

The task force expects the framework to be finalized later this spring. I’m personally interested in hearing what other bankers and CPAs think about the new opportunity, so in addition to weighing in on the exposure draft by the Jan. 30 comment deadline, I also welcome comments to this blog.

Theresa Bible, SVP - Credit Manager, Enterprise Bank & Trust. Theresa works in the St. Louis office of Enterprise Bank & Trust, which focuses on serving privately held businesses and their owners.

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