MHM Webinar Slides: What Private Companies Need to Know about the AICPA's Proposed Framework

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There continues to be a focus on providing a less-complex accounting framework for private companies. In response, the AICPA has developed a proposed Financial Reporting Framework for Small and Medium-Sized Entities (FRF for SMEs) as a potential alternative basis of accounting for entities that are not required to produce GAAP-based financial statements. This project, if finalized as proposed, could have a significant impact on the accounting framework used by small private entities with a limited number of users.

In this free webinar, subject matter experts from Mayer Hoffman McCann P.C. will discuss the potential application of the FRF for SME’s as well as some of the more significant differences between the AICPA framework and US GAAP and how it may impact your business.
What you’ll learn

Please join us for this course that will focus on the application of the AICPA's FRF for SMEs, including:

Discuss the background and reasons for the AICPA project
Discuss the potential implementation of the framework
Discuss some of the more significant differences between the framework and US GAAP

Published in: Economy & Finance, Business
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MHM Webinar Slides: What Private Companies Need to Know about the AICPA's Proposed Framework

  1. 1. MHM Executive Education Series:What Private Companies Need to Knowabout the AICPA’s Proposed FrameworkPresented by:Mike Loritz, Keith PeterkaApril 18, 2013
  2. 2. ‹#› To view this webinar in full screen mode, click on viewoptions in the upper right hand corner. Click the Support tab for technical assistance. If you have a question during the presentation, please usethe Q&A feature at the bottom of your screen.#MHMWebinarBefore We Get Started…
  3. 3. ‹#› This webinar is eligiblefor CPE credit. To receivecredit, you will need toanswer periodic pollingquestions throughout thewebinar. External participants willreceive their CPEcertificate via emailimmediately following thewebinar.#MHMWebinarCPE Credit
  4. 4. Mike Loritz, CPAShareholder913.234.1226 | mloritz@cbiz.comMike has 17 years of experience in public accounting with diversified financialcompanies and other service based companies, including banking, broker/dealer,investment companies, and other diversified companies ranging from audits ofpublic entities in the Fortune 100 to small private entities. He is a member ofMHMs Professional Standards Group, providing accounting knowledgeleadership in the areas of derivative financial instruments, investment securities,share-based compensation, fair value, revenue recognition and others.‹#›#MHMWebinarToday’s PresentersKeith Peterka, CPAShareholder610.866.2274 | kpeterka@cbiz.comWith more than 18 years of experience in public accounting, Keith performsnational firm responsibilities for IFRS, fair value accounting and auditing, revenuerecognition and business combinations. He is a member of the MHM SECtaskforce in charge of updating the Firm’s SEC Audit Methodology. Additionally,he is a subject matter expert for IFRS, SEC reporting and fair value accounting inMHM’s Professional Standards Group. He also is a member on the IFRSFoundations Small & Medium-sized Entities (SMEs) Implementation Group.
  5. 5. ‹#›#MHMWebinarToday’s Agenda1234Point/Counterpoint – What is the issue?Private Company Financial Reporting –Background & StatusAICPA Financial Reporting Framework for SMEs –FRF for SMEsSignificant Concepts & Differences with GAAP
  6. 6. WHAT IS THE ISSUE?
  7. 7. The Standard-Setting Dilemma 15,000 issuers vs. 28.5 millionprivate companies but GAAPdriven by public companyinvestor issues. Small businesses employmore than half of all privatesector workers. Private companies and theirfinancial statement usersgenerally have informationneeds different from publiccompanies.
  8. 8. Not Just a US Problem Canadian AccountingStandards Board decided onesize does not fit all andpublished AccountingStandards for PrivateEnterprises in Dec. 2009. UK Accounting StandardsBoard proposing three-tiersystem of financial reporting. Germany has become the firstmajor country to have twostandard setters.
  9. 9. Not Just a US Problem Council on Accounting forUnlisted Companiesformed in Japan todetermine if changesshould be made tostandard-setting processfor unlisted companies IFRS for SMEs – beingused in many areas of theworld and beingconsidered in some others
  10. 10. What US Constituents Say about GAAP forPrivate Company Financial Reporting Too many GAAP-specificrequirements not useful orrelevant for privatecompanies’ financialstatement users Greater FASB emphasis onequity/public companyinvestors Most important problem:relevance Increased complexity isburdensome, time-consuming
  11. 11. Private companiesincurring significantunnecessary costfor financialstatementpreparation andaudit, review orcompilationservices.Privatecompanies areincreasinglytaking GAAPexceptions.What This Means for GAAP in Practice TodayCurrent system isnot attuned to theneeds of privatecompany financialstatementpreparers andusers
  12. 12. PRIVATE COMPANYFINANCIAL REPORTING –BACKGROUND & STATUS
  13. 13. Key Events for Standard Setting forPrivate CompaniesPrivate Company Financial Reporting Committee (PCFRC)In 2006, the FASB created the PCFRC in an effort to furtherimprove its ability to incorporate the views of private companyconstituents in its standard-setting process.The mission of the PCFRC was to provide recommendationsto the FASB on issues related to standard setting for privatecompanies and to focus on how standard setting affects day-to-day technical activities at private companies.
  14. 14. Key Events For Standard-setting For Private CompaniesIn 2009 the FAF Board of Trustees undertook a nationwide“listening tour.”–Many constituents continued to be concerned about thecost and complexity of standards for private companies andnot-for-profit organizations and were not satisfied with theresults of the collaboration between the FASB and thePCFRC.A major issue cited by constituents was that the FASB andthe PCFRC did not develop and agree upon a framework forconsidering exceptions or modifications to U.S. GAAP forprivate companies.Financial Accounting Foundation — Listening Tour
  15. 15. Key Events for Standard-Setting for PrivateCompaniesBlue -Ribbon Panel on StandardSetting for Private CompaniesThe FAF Trustees collaborated withthe American Institute of CertifiedPublic Accountants (AICPA) and theNational Association of State Boardsof Accountancy (NASBA) to create theBlue-Ribbon Panel on StandardSetting for Private Companies.The panel was charged with studyingthe needs of users of private companyfinancial statements and makingrecommendations about how thestandard setting process can bestmeet those needs.
  16. 16. Private Company CouncilThe PCC has two principal responsibilities:1. The PCC will determine whether exceptions ormodifications to existing non-governmental U.S. GenerallyAccepted Accounting Principles (U.S. GAAP) are requiredto address the needs of users of private company financialstatements.2. The PCC will serve as the primary advisory body to theFinancial Accounting Standards Board (FASB) on theappropriate treatment for private companies for items underactive consideration on the FASB’s technical agenda.
  17. 17.  The PCC will conduct a review ofexisting U.S. GAAP and identifystandards that it will consider forpossible exceptions or modifications.The PCC will develop, deliberate, andvote on proposed exceptions ormodifications, which must beapproved by a two-thirds vote of allPCC members (super majority).PCC Agenda Setting and Due Process forExisting U.S. GAAP Proposed modifications or exceptions to U.S. GAAP approved by thePCC will be provided to the FASB for a decision on endorsement. Ifendorsed by a simple majority of FASB members, the proposedmodifications will be exposed for public comment.
  18. 18. AICPA FINANCIAL REPORTINGFRAMEWORK FOR SMES —FRF FOR SMES
  19. 19. AICPA Framework for SMEs A less complicated and less costly system of accounting for SMEsthat are not required to produce U.S. GAAP-based financialstatements. A cost-beneficial solution for owner-managers and others who needfinancial statements that are prepared in a consistent and reliablemanner in accordance with a framework that has undergone publiccomment and professional scrutiny. Principles based framework is intended to be responsive to theissues and concerns stakeholders currently encounter whenpreparing financial statements for SMEs.
  20. 20. AICPA Framework for SMEs The FRF for SMEs draws upon a blend of traditionalmethods of accounting with some accrual income taxmethods. The framework is being developed by a working group ofCPA professionals and AICPA staff with experience servingsmaller-to-medium-sized private entities. Comments received during the open comment period weremixed while users expressed both support as well ascertain concerns in the Framework Implementation concerns Auditibility concerns NASBA recommended that the AICPA drop the project
  21. 21. Learning CenterS lide No. 37Who are FRF or SMEs for?Small and medium-sized entitiesOwner-managed/for-profitMany industry groupsIncorporated and unincorporatedNo entity precluded
  22. 22. Learning Center S lide No. 38Who are FRF or SMEs for? Owners Owner-managers in need of reliable financial statements Confirm assessments of performance What they owe/own Understand cash flow Users External financial statement users who have direct access tomanagement Non-Issuers No intent of going public Not intended for non-profits
  23. 23. Not AuthoritativeThe FRF-SME will not be approved, disapproved or otherwiseacted upon by any senior technical committee of the AICPAand will have no official or authoritative status.
  24. 24. 5 61234Features of FRF for SMEs1) Traditional accountingmethods with accrualincome tax methods2) Reduced adjustmentsfrom book to tax3) Relevant4) Simplified/straight-forward principles5) Stable yet nimble6) Reduced disclosures
  25. 25.  Approximately 250 pages Self-contained Excess narrative avoided Avoidance of bright lines Use of professional judgmentPrinciples-based, Standalone, CompactPrinciples-basedStandaloneCompact
  26. 26. AICPA Framework for SMEsDeveloped for smaller- to medium-sized, owner-managed,for-profit entities where internal or external users have directaccess to the owner-manager and GAAP financialstatements are not required.The AICPA has no authority to require the use of the FRF forSMEs for any entity. Therefore: The FRF for SMEs will have no effective date An owner-manager can decide to use the FRF for SMEs once it isreleased. An owner-manager should make that decision in conjunctionwith those who may use the entity’s financial statements.
  27. 27.  Concepts & Principles Transition Risks and Uncertainties Accounting Changes,Estimates, Errors Measurement Uncertainty Current assets/liabilities Statement of Income Balance Sheet Statement of Cash Flows Business Combinations Subsidiaries Consolidation and NCI Joint Ventures Push-Down Accounting FX Translation Nonmonetary Transactions Inventories Investments Property, Plant & Equipment Intangible Assets Leases Equity Subsequent EventsComprehensive and Relevant Framework
  28. 28.  Commitments Contingencies Revenue Retirement and OtherPostemployment Benefits Income Taxes Long-Lived Assets & DiscOps Related Party Financial Instruments andLong Term DebtComprehensive and Relevant Framework (cont.)
  29. 29. Does not include: Earnings per share guidance Segment reporting Other comprehensive income Interim reporting Stock compensation Many of the complex issuesassociated with debt/equityComprehensive and Relevant Framework
  30. 30. SIGNIFICANT CONCEPTS &DIFFERENCES
  31. 31.  Chapter 1 introduces the financial statement concepts Similar to the FASB Concept Statements Discusses concepts including the following: Benefit vs Cost Materiality Measurement Qualitative Characteristics Understandability Relevance Reliability ComparabilityFinancial Statement Concepts
  32. 32.  Historical cost is the measurement basis primarilyutilized Departs from increased use of fair value for manyinstruments required by GAAP Only equity securities held-for-sale measured at fairvalueReduction in Fair Value Measurements
  33. 33.  Inventories are measured at the lower of cost ormarket, with market defined as net realizable value. Market is defined differently than US GAAP The cost of inventories should be assigned by usingthe first-in, first-out (FIFO), last-in, first-out (LIFO), orweighted average cost formula. No disclosure of the difference between FIFO and LIFOpools or inventory basis differences for entities which utilizeLIFO is required Allows for previously recorded inventory impairmentlosses to be reversedInventories
  34. 34.  Less than 20% ownership Presumed investor does not have significant influence Greater than 20% ownership Rebuttable presumption that significant influence exists If significant influence exists = equity method Equity method accounting is similar to the existingGAAP guidance However, allows the reversal of previously recognizedimpairmentsEquity Method Investments (Investments)
  35. 35. No Concept of Variable Interest Entities (VIEs) Consolidation is not appropriate when an entity has alimited right and ability to determine or influence thestrategic policies of another entity but does not controlit. A holding of an interest in an entity that is not asubsidiary qualifies as an investment. Either equity method or cost basisSubsidiaries & Consolidation
  36. 36. Recognition and Presentation Does not require consolidation An entity should make an accounting policy choice toeither:a. Consolidate its subsidiaries orb. Account for its subsidiaries using the equity methodParent-only (unconsolidated)financial statements are permitted.Subsidiaries & Consolidation
  37. 37.  Depreciation should be recognized in a rational andsystematic manner appropriate to the nature of the itemwith a limited life and its use by the entity. Depreciationrecognized is the greater of: the cost, less salvage value over the life of the asset or the cost, less residual value over the useful life of the asset Allows for the subsequent reversal of impairments Analysis is still performed using undiscounted cash flows Asset group concept is the same as GAAP Allows capitalization of finance costsProperty, Plant & Equipment — Depreciation
  38. 38.  Straight-line method Constant charge as a function over time Variable charge method An increasing charge method may be used when an entitycan obtain a constant rate of return on the investment in theasset. A decreasing charge method may be appropriate when theoperating efficiency of the asset declines over time.PP&E – Different Depreciation Methods
  39. 39.  Goodwill is not tested for impairment. Goodwill should be amortized: the same period as that used for federal income taxpurposes or if not amortized for federal income tax purposes then aperiod of 10 years.Goodwill
  40. 40.  Closely aligned withrequirements of U.S. IncomeTax Code Criteria for capitalizing alease for tax purposesgenerally matches criteria inFRF for SMEs Evaluation of capital vs.operating leases are thesame as US GAAP Retains “rules” based approachLease Accounting
  41. 41. Lease Accounting22.09 A lease that transferssubstantially all the benefitsand risks of ownershiprelated to the leasedproperty from the lessor tothe lessee should beaccounted for as a capitallease by the lessee and as asales-type of direct financinglease by the lessor22.10 A lease in which thebenefits and risks ofownership related to theleased property aresubstantially retained by thelessor should be accountedfor as an operating lease bythe lessee and lessor
  42. 42. Revenue27.04 Revenue fromsales and servicetransaction s should berecognized when therequirements regardingperformance…aresatisfied, provided thatat the time ofperformance, ultimatecollection is reasonablyassured.RecognitionThe seller of the goodshas transferred to thebuyer the significantrisks and rewards ofownership…Reasonable assuranceexists regarding themeasurement of theconsideration…Performance
  43. 43.  In the case of rendering of services and long-term contracts and modifications to thosecontracts, performance should be determinedusing either the percentage of completionmethod or the completed contract method,whichever relates the revenue to the workaccomplished. Very limited discussion of multiple elementdeliverables Limited, but similar, guidance on gross vs netreporting of revenuesRevenue
  44. 44. Accounting Policy Election An entity should make a policy election to account fordefined benefit plans Current contribution payable method One of the accrued benefit obligation methodsCurrent Contribution Payable Method Only the contribution attributable to the current year isexpensedAccrued Benefit Obligation Methods More to comeDefined Benefit Plans
  45. 45. Accounting Policy Election An entity should make an accounting policy election to accountfor income taxes using either the taxes payable method or the deferred income taxes methodTaxes Payable Method Under the taxes payable method, only current income tax assetsand liabilities are recognized Current income taxes, to the extent unpaid or refundable, shouldbe recognized as a liability or asset The liability for current income taxes included in the balancesheet is the cost (benefit) or current income taxes for current andprior periods less amounts already paid in respect of theseincome taxesIncome Taxes
  46. 46. Financial Instruments & L-T DebtAt each reporting date,an entity shouldmeasure:a. Investments in equityinstruments at cost, lessany reduction forimpairment,b. All other financial assets atamortized cost; andc. Financial liabilities atamortized cost• An entity shouldmeasure investments inequity instruments heldfor sale at fair value.• Changes in fair valueshould be recognized innet income in the periodincurred.• Impairments may bereversed.
  47. 47. Derivatives Accounting is unclear – Cash basis? Much more broad definition Disclosures Face or contract amount (or notional principal amount if there isno face or contract amount) The nature and terms — including a discussion of the credit andmarket risk of those instruments The cash requirements of those instrumentsIn addition, an entity should provide a description ofthe entity’s objectives for holding derivativefinancial instruments.Financial Instruments
  48. 48.  When preparing financial statements, managementshould make an assessment of whether the goingconcern basis of accounting is appropriate. Management should take into account all known andavailable information about the future, which is limited totwelve months from the balance sheet date. If applicable, the entity should disclose thoseuncertainties along with its plans for dealing with theadverse effects of the conditions and events.Going Concern Assessment
  49. 49. Comment periodended January 30,20132.Your text here3.Your text hereRemaining TimetableAICPA staff/task forceaddress comments/inputreceivedFinal FRF for SMEsreleased first half of2013
  50. 50. ‹#›#MHMWebinarQuestions?
  51. 51. ‹#› Join us for these related EES courses: July 25: Is a Simpler Accounting Framework in the Futurefor Private Companies August 22: Private Company Framework - ComparingAICPA vs. IFRS Standards Read these related MHM Messengers 6-13: AICPAs Special-Purpose Framework ProvesControversial 5-13: Progress on Standard-Setting for Private Companies#MHMWebinarIf You Enjoyed This Webinar…
  52. 52. Mike Loritz, CPAShareholder913.234.1226 | mloritz@cbiz.comMike has 17 years of experience in public accounting with diversified financialcompanies and other service based companies, including banking, broker/dealer,investment companies, and other diversified companies ranging from audits ofpublic entities in the Fortune 100 to small private entities. He is a member ofMHMs Professional Standards Group, providing accounting knowledgeleadership in the areas of derivative financial instruments, investment securities,share-based compensation, fair value, revenue recognition and others.‹#›#MHMWebinarToday’s PresentersKeith Peterka, CPAShareholder610.866.2274 | kpeterka@cbiz.comWith more than 18 years of experience in public accounting, Keith performsnational firm responsibilities for IFRS, fair value accounting and auditing, revenuerecognition and business combinations. He is a member of the MHM SECtaskforce in charge of updating the Firm’s SEC Audit Methodology. Additionally,he is a subject matter expert for IFRS, SEC reporting and fair value accounting inMHM’s Professional Standards Group. He also is a member on the IFRSFoundations Small & Medium-sized Entities (SMEs) Implementation Group.
  53. 53. ‹#›#MHMWebinarConnect with Mayer Hoffman McCannlinkedin.com/company/mayer-hoffman-mccann-p.c.@mhm_pcyoutube.com/mayerhoffmanmccanngplus.to/mhmpcblog.mhm-pc.comslideshare.net/mhmpcfacebook.com/mhmpc

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