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Insight presentation - Financial Reporting Framework for Small- & Medium-Sized Entities

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Financial Reporting Framework for Small and medium-sized entities. AICPA financial statements for privately held firms. AICPA has announced a new financial reporting framework which makes more sense …

Financial Reporting Framework for Small and medium-sized entities. AICPA financial statements for privately held firms. AICPA has announced a new financial reporting framework which makes more sense for small entities than GAAP statements.

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  • 1. Financial Reporting Framework for Small- and Medium-Sized Entities (FRF for SMEs™ ) Presentation by: Patrick Mulherin, CPA Cory Cuffley, CPA, MAC
  • 2. Outline • Overview of Financial Reporting environment • Why the need for a new reporting framework? • Who can use it? • Features/Characteristics • Comparisons of the FRF for SMEs to Tax and GAAP basis • Additional resources • Questions
  • 3. Financial Reporting Environment • Small- and medium-sized entities make up a large portion of business in the United States • The AICPA estimates there to be about 20 million SMEs in the United States • Multiple frameworks available for use • Major changes coming with certain aspects of financial reporting • Lease accounting
  • 4. 2013 American Institute of CPAs ©
  • 5. Why the need? • Generally Accepted Accounting Principles (GAAP) basis financial statements may not be necessary • • Special reporting frameworks such as tax or modified cash, may not be sufficient for users • • GAAP basis statements tend to be very detailed and unnecessary depending on the client’s situation FRF for SMEs™ is a lot closer to GAAP than the other Special Purpose Frameworks The AICPA recognized this need, which led them to develop this tailored framework. • Self contained, Special Purpose Framework (SPF)
  • 6. Who can use the framework? • Small, owner-managed, for profit businesses • No Industry specific guidance • Users have access to owners/management of the companies • No standard definition of a small- and medium-sized entity • When GAAP reporting is not required. • No contractual or regulatory reporting requirements • Incorporated or unincorporated • Non-issuers with no intent on going public
  • 7. Features/Characteristics • Actual framework, constructed by CPAs and business professionals from around the country. • Accrual Based • • • Blend of traditional methods and accrual income tax methods Fewer book to tax adjustments Potentially Cost effective • • • Cost saving recognized if the situation permits Includes comprehensive information that is also relevant Tailored • • Fits the needs of the small- and medium-sized market No one Precluded from using
  • 8. Comparisons
  • 9. FRF for SMEs™ vs. U.S. GAAP FRF for SMEs™ • Intangibles • All intangibles are amortized over their estimated useful lives. U.S. GAAP • Intangibles • Intangibles amortized over useful lives and evaluated for impairment upon triggering event. • Indefinite-lived intangibles (Goodwill) evaluated for impairment annually.
  • 10. FRF for SMEs™ vs. U.S. GAAP FRF for SMEs™ • Revenue U.S. GAAP • Revenue • Broad, principle-based • Specific criteria for recognition • No industry-specific guidance • Industry-specific guidance • Percentage of Completion and Completed Contract methods. • Percentage of Completion and Completed Contract methods.
  • 11. FRF for SMEs™ vs. U.S. GAAP FRF for SMEs™ • Variable Interest Entities (VIEs) U.S. GAAP • Variable Interest Entities (VIEs) • No concept of VIEs • Yearly analysis of potential VIEs • No consolidation of VIEs • Potential consolidation requirement even w/no equity ownership
  • 12. FRF for SMEs™ vs. U.S. GAAP FRF for SMEs™ • Fair Value U.S. GAAP • Fair Value • Uses term “Market Value” • Uses term “Fair Market Value” • Limited circumstances in which Market Value is required (business combinations, heldfor-sale securities, etc.) • Detailed framework for measuring; including F.V. hierarchy • Standardized disclosures. • Significantly less required disclosures
  • 13. FRF for SMEs™ vs. U.S. GAAP FRF for SMEs™ • Income Taxes • • Policy choice to account for income taxes using the taxes payable method or deferred income taxes method No evaluation or accrual of uncertain tax positions U.S. GAAP • Income Taxes • Must account for income taxes using the deferred income taxes method • Must evaluate and accrue uncertain tax positions
  • 14. FRF for SMEs™ vs. Tax Basis FRF for SMEs™ • Installment Sales • • • Revenue recognized at time of sale, even if cash is collected in installments Sales Returns • Tax Basis Allowed to recognize an allowance for probable returns Installment Sales • • Revenue is recognized when sale price is fixed and all events have occurred Sales Returns • No allowance • Returns only allowed when they occur
  • 15. FRF for SMEs™ vs. Tax Basis FRF for SMEs™ • Long-term contracts • Can choose between Percentage of Completion or CompletedContract Method Tax Basis • Long-term contracts • Generally, entities must use Percentage of Completion method • Completed-Contract method allowed in certain circumstances
  • 16. FRF for SMEs™ vs. Tax Basis FRF for SMEs™ • Receivables • Allowed to recognize an allowance for bad debts Tax Basis • Receivables • Not permitted to recognize an allowance • Must use specific charge-off method • Only after all collection efforts have been exhausted and deemed worthless • No intention of pursuing collections in the future
  • 17. FRF for SMEs™ vs. Tax Basis FRF for SMEs™ • Inventories Tax Basis • Inventories • Measured at lower of cost or net realizable value • Measured at lower of cost or market value • Losses recorded when probable and estimable. Similar to an allowance • Losses allowed only when offered for sale at lower prices or is actually sold/discarded
  • 18. FRF for SMEs™ vs. Tax Basis FRF for SMEs™ • Prepaid Expenses • Recognized as an asset and amortized to expense • Tax Basis • Prepaid Expenses • Expenses paid in a year are only deductible in year in which it applies Similar to U.S. GAAP • Not required to capitalize if period of rights or benefits is under 12 months long
  • 19. FRF for SMEs™ vs. Tax Basis FRF for SMEs™ • Property, Plant & Equipment • Depreciation calculated on the cost less expected residual value • Does not recognize Section 179 and Bonus depreciation deductions • Property, Plant & Equipment Assets contributed by owner are valued at Market Value • Tax Basis • Most PP&E depreciated under Modified Accelerated Cost Recovery System (MACRS), causing more rapid depreciation than FRF for SMEs™ • Additional Section 179 and Bonus depreciation deductions available • Assets Contributed by owner are valued at the owner’s tax basis
  • 20. Additional Resources • Additional information available at aicpa.org/FRF-SMEs Patrick Mulherin, CPA pmulherin@sek.com Cory Cuffley, CPA, MAC ccuffley@sek.com
  • 21. Questions?