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it needs to follow GAAP or some alter-
nate framework. Basically, the entity
can follow an alternate framework if
the responses to the following two
questions are both negative:
1) Does a reporting requirement for
GAAP financial statements exist
for the entity?
2) Is the entity in an industry with in-
dustry-specific accounting stan-
dards that require specialized ac-
counting guidance?
The second part of the decision tool
hasfourchecklistsforfinancialframe-
work assessment. These are:
Overall Considerations
Considerations Related to GAAP
Considerations Related to the
Cash/ModifiedCashandTaxBasis
of Accounting
Considerations Related to the FRF
for SMEs Accounting Framework.
Overall Considerations Overall con-
siderations have general guidelines for
management to evaluate in making
its decision regarding an accounting
framework. For many small business-
es, lending agreements are the primary
reason for the preparation of GAAP
statements. Larger loans usually require
reviewed or audited GAAP financial
statements and this will continue to be
the case in the short term until lending
institutions become comfortable with
alternate frameworks as they make
their lending decisions. Bonding com-
panies will also likely continue to require
at least reviewed GAAP-based state-
ments for their purposes as they have
done for many decades. Other items
included in overall considerations are
legal agreements such as shareholder
agreements, buyout agreements, etc.,
which may require the entity to follow
GAAPinitsfinancialreporting.
Considerations Related to GAAP
This checklist outlines those circum-
stances that would normally require
the entity to issue GAAP financial
statements. These include plans for
the entity to go public, engaging in
significant foreign operations, or the
entity may have complex transac-
tions that require the use of GAAP. The
company may have partners who re-
quire the preparation of GAAP-based
statements or may compete for credit
with entities that prepare GAAP-based
statements. Further, the entity may be
in an industry with industry-specific
accounting rules that are GAAP based.
Or, the entity may have plans to sell in
the future to a public company or entity
that follows GAAP. Again, debt terms
and bonding requirements may also
requirethatGAAPfinancialstatements
be prepared.
Conditions Related to IFRS or IFRS
for SMEs This framework may be
followed by an entity that has a foreign
parent or subsidiary that engages in
foreign transactions, has foreign inves-
tors, or may have plans to expand op-
erations overseas.
Considerations Related to Cash/
Modified Cash and Tax Bases of Ac-
counting These frameworks can be
used if financial statement users find
(continued)