Principal in Charge of Assurance Department at Decosimo Tom Eiseman presented "Back to the Future Part I & II - Plans for Private Company Reporting" at the 2013 Decosimo Accounting Forum hosted by the University of North Alabama on July 19.
1. A Global Reach with a Local Perspective
www.decosimo.com
UNIVERSITY OF NORTH ALABAMA
2013 ACCOUNTING SEMINAR
BACK TO THE FUTURE PART I & II –
PLANS FOR PRIVATE COMPANY REPORTING
Tom Eiseman | July 19, 2013
2. Private Company Council Activities
AICPA Financial Reporting Framework for Small- and
Medium-Sized Entities
OVERVIEW
3. Report on the Study on Establishment of Accounting Principles
- 1972
Differential Reporting and Disclosure Requirements
SFAS 21 – Suspension of reporting EPS and segment
information for nonpublic enterprises -1978
FASB establishes the Small Business Advisory Committee -
2004
Invitation to Comment – Enhancing the Financial Accounting
and Reporting Standard-Setting Process for Private Companies
- 2006
Private Company Financial Reporting Committee - 2007
Blue Ribbon Panel on Standard Setting for Private Companies -
2009
HISTORY
4. Issued report to Financial Accounting Foundation –
January 2011
Recommended a US GAAP model with exceptions
and modifications for private companies
Recommended a separate private company standard-
setting board under FAF
Blue-Ribbon Panel on Standard Setting
5. Established by FAF in 2012 to improve accounting
standard-setting process for private companies
Indentifies, deliberates and votes on proposed
alternatives within existing U.S. GAAP for private
companies, subject to FASB endorsement
Primary private company advisory body to FASB on
active FASB projects
Private Company Council
6. PCC agenda decision
Deliberation of staff analysis and vote
FASB endorsement
Exposure draft
PCC re-deliberates and votes
FASB final endorsement
FASB issues Accounting Standards Update
PCC Standard-Setting Process
7. Private Company Decision-Making Framework – A
Guide for Evaluating Financial Accounting and
Reporting For Private Companies
Framework for deciding whether and when to modify
U. S. GAAP for private companies
Exposure draft issued April 15, 2013 with comments
due June 21, 2013
PCC Decision-Making
8. Issues added to agenda
Accounting for Identifiable Assets in a Business
Combination and Subsequent Accounting for Goodwill
Applying Variable Interest Entity Guidance to
Common Control Leasing Arrangements
Accounting for Receive-Variable, Pay-Fixed Interest
Rate Swaps
Issues identified for pre-agenda research
Stock-Based Compensation
Development Stage Enterprises
Uncertain Tax Positions
PCC Agenda
9. Exposure draft issued July 1, 2013 with comments
due August 23, 2013
Applies to receive-variable, pay-fixed interest rate
swaps that meet certain criteria (plain-vanilla swaps)
Provides two alternative approaches
Combined instruments approach
Simplified hedge accounting
Interest Rate Swaps
10. Exposure draft issued July 1, 2013 with comments
due August 23, 2013
Amortize goodwill on straight-line basis over the
useful life of primary asset acquired in business
combination, not to exceed 10 years
Primary asset acquired is long-lived asset that is most
significant asset of the acquired entity
Goodwill tested for impairment only upon occurance
of triggering event
Impairment testing at entity-wide level
Impairment loss equals excess of entity carrying
value over its fair value
Accounting for Goodwill
11. Exposure draft issued July 1, 2013 with comments
due August 23, 2013
Intangible assets are only recognized separately
from goodwill when they arise from noncancellable
contractual rights or other legal rights
Assets arising from legal rights include registered
trade name, patents, and copyrighted materials
Assets arising from contractual rights include
customer contracts, purchase orders and royalty
agreements
Assets not recognized include customer lists,
customer relationships and unpatented technology
Identifiable Intangible Assets
12. To be discussed at PCC July 16, 2013 meeting
Applying Variable Interest Entity Guidance
to Common Control Leasing Arrangements
13. Released by AICPA June 10, 2013
Special purpose framework
Comprehensive, standalone reporting framework
Suitable criteria for general-use financial statements
Simplified principles
Addresses financial reporting issues and concerns
for SMEs
No effective date
Financial Reporting Framework for Small-
and Medium-Sized Entities
14. Formerly known as Other Comprehensive Basis of
Accounting (OCBOA)
Not intended to comply with U.S. Generally Accepted
Accounting Principles
Other special purpose frameworks include Tax
Basis, Cash Basis, and Regulatory Basis
Special Purpose Framework
15. Historical cost
Provides reporting options
Targeted disclosures
Accrual based
Blend of traditional accounting and accrual income
tax methods
Only includes financial reporting topics relevant to
SMEs
Simplified Principles
16. FRF for SMEs does not define an SME, but provides
a list of characteristics of typical entities that may
use this framework
AICPA has no authority to prevent or require the use
of this framework
Primarily up to management of the company and the
users of the financial statements
Independent CPAs required to determine the
acceptability of the financial reporting framework
applied in the preparation of financial statements
Who can use this reporting framework?
17. No regulatory reporting requirements that require GAAP-
based financial statements
No intention of going public
The entity is for-profit
The entity may be owner-managed
Entity is not in industry that requires highly-specialized
accounting guidance
The entity does not engage in overly complicated
transactions
The entity does not have significant foreign operations
Key financial statement users have direct access to the
entity’s management
Characteristics of SME
18. AICPA included banker on the FRF for SME task
force
Discussed FRF for SMEs with financial institution
officials and regulators
AICPA is conducting outreach to bankers through
banking associations, roundtables and conference
sessions
AICPA provides toolkit for financial statement users
on website
Bankers accept tax-basis and cash basis financial
statements
Financial Institution Acceptance
19. Framework has undergone public comment and
professional scrutiny
Relevant information
Intuitive and understandable
Consistency
Avoids excess narrative
Cost effective
Benefits for financial statement users
20. National Association of State Boards of Accountancy
Institute of Management Accountants
FAF
AICPA
Controversy
21. Statement of financial position
Statement of operations
Statement of changes in equity
Changes may also be disclosed in the notes or as
part of another financial statement
Statement of cash flows
Required when both a statement of financial position
and statement of operation are prepared
Presentation of only a single financial statement is
allowed
FRF for SMEs Financial Statements
22. Uses the term “market value” – the amount of
consideration that would be agreed upon in an arm’s
length transaction between knowledgeable, willing
parties who are under no compulsion to act
Market value measurement used in limited
circumstances – business combinations, certain
nonmonetary transactions and securities that are
held for sale
Less disclosure required when compared to GAAP
Fair Value
23. Requires management assessment of whether the
going concern basis of accounting is appropriate
Material uncertainties related to continuation as a
going concern must be disclosed along with
management’s plans to deal with these uncertainties
Currently there is no requirement in U.S. GAAP that
management disclose uncertainties related to the
ability to continue as a going concern. This will
probably change as a result of a current FASB
project
Going concern
24. No assessment of impairment for long-lived assets
Depreciated or amortized cost approach is followed
Assets no longer used are written off
GAAP requires testing for impairment upon a
triggering event for all long-lived assets and
annually for goodwill and indefinite-lived intangible
assets
Current PCC exposure draft will simplify impairment
testing for private companies
Impairment
25. No concept of comprehensive income or items of
comprehensive income
Other comprehensive income
26. Framework does not contain industry-specific
guidance
FRF for SMEs is not suitable for entities in industries
that requires highly-specialized accounting guidance
Revenue recognition is based on broad principles-
based model
Industry specific guidance
27. Policy choice to either consolidate subsidiaries or
account for subsidiaries using the equity method
Subsidiary defined as an entity in which another
entity owns more than 50 percent of the outstanding
residual equity interests
No concept of variable interest entities
Consolidation
28. Policy choice to account for income taxes using
either the taxes payable method or the deferred
income taxes method
No evaluation or accrual of uncertain tax positions
Income taxes
29. Similar to current GAAP accounting for leases
Lessee classifies leases as either operating or capital
leases
Lessor accounts for leases as sales type, direct
financing or operating
Classification based on specific criteria
Lease accounting in FRF for SMEs very different
than recent FASB exposure draft on leases
Leases
30. Interest costs related to certain items of inventories,
internally-generated intangible assets and PP&E can
be expensed or capitalized
Interest Costs
31. Assets and liabilities may be comprehensively
revalued by means of push-down accounting when
an acquirer gains control of an entity
Allows push-down accounting when more than 50%
of the outstanding residual equity interests in the
entity have been acquired
GAAP push-down accounting generally requires
acquisition of 80% of the acquired entity
Under both GAAP and the FRF for SMEs, push-down
accounting is optional
Push-Down Accounting
32. All intangible assets are considered to have a finite
useful life and are amortized over the estimated
useful life
Intangible assets are recorded only when controlled,
generally through contractual or other legal rights
Policy decision is made to expense or capitalize
expenditures for intangible assets in the
development stage
Policy decision is made to expense start-up costs or
capitalize and amortize over 15 years
Intangible assets
33. Amortized over the same period as that used for
federal income tax purposes or, if not amortized for
federal income tax purposes, then a period of 15
years
No impairment testing
GAAP does not allow for amortization and requires
annual impairment testing
PCC exposure draft allows goodwill to be amortized
over a period up to 10 years and simplifies
impairment testing for private companies
Goodwill
34. Broad, principle-based guidance on revenue
recognition
Revenue should be recognized when performance is
achieved and ultimate collection is reasonably
assured
For goods: Performance is achieved when the entity
transfers the risks and rewards associated with the
goods to a customer
For services: Performance should be determined
using either the percentage of completion or
completed contract method
Revenue Recognition
35. Historical cost approach
Investor that is able to exercise significant influence
over an investee that is not a subsidiary follows the
equity method
Market value measurement required only for
investments being held for sale
Investment held for sale are securities that
management is currently attempting to sell
Changes in market value are included in net income
Investments, Financial Assets and Liabilities
36. Disclosure approach
Face or contract amount
Discussion of the credit and mark risk and cash
requirements
Description of objectives
Net settlement amount
Recognition at settlement (cash basis)
No hedge accounting
Derivatives
38. Policy choice to account for plans using either a
current contribution payable method or one of the
accrued benefit obligation methods
Under either method, disclosures are significantly
reduced compared to disclosures required by GAAP
Defined Benefit Plans
39. Policy choice is made to account for an intangible
asset acquired in a business combination either by
separately recognizing the intangible asset as an
identifiable asset or by including the value of the
intangible asset in goodwill
Intangible assets are recorded only when controlled,
generally through contractual or other legal rights
Business Combinations
40. Prepare an opening statement of financial position in
accordance with the FRF for SMEs at the date of
transition to the FRF for SMEs framework
Recognize adjustments to convert from GAAP or the
previous special reporting framework directly in
equity in the opening balance sheet
Disclose the amount of each adjustment at the date
of transition resulting from the adoption of the FRF
for SMEs
Transition
41. Reporting is same as currently followed for other
special purpose frameworks
Accountants’ report identifies special purpose
framework used
Example review report – last paragraph
Based on our review, we are not aware of any material
modifications that should be made to the accompanying
financial statements in order for them to be in conformity with
Financial Reporting Framework for Small-and Medium-Sized
Entities, as described in Note 1.
Reporting by CPAs
42. AICPA website – aicpa.org/FRF-SMEs
Financial Reporting Framework for Small-and
Medium-Sized Entities
Toolkit for CPAs and CPA Firms
Introduction to the FRF for SMEs
Illustrative Financial Statements
Illustrations of the Application of Certain Principles
and Criteria
Comparison of the FRF for SMEs to Other Bases of
Accounting
Resources
43. Toolkit for CPAs and CPA Firms
Article template that can be included in client
communications
Frequently Asked Questions
PowerPoint Presentation
Presentation and Disclosure Checklist
Social media blurbs and tweets
Cover letter to inform clients about availability of FRF
for SMEs
Resources - continued
44. Toolkit for Small Businesses
Introduction to the FRF for SMEs
Illustrative Financial Statements
Illustrations of the Application of Certain Principles and
Criteria
Template for a letter to stakeholders expressing interest in
using FRF for SMEs
Comparison of the FRF for SMEs to Other Bases of
Accounting
Frequently Asked Questions
PowerPoint Presentation
Presentation and Disclosure Checklist
Resources - continued
45. Toolkit for Financial Statement Users
Introduction to the FRF for SMEs
Illustrative Financial Statements
Comparison of the FRF for SMEs to Other Bases of
Accounting
Frequently Asked Questions
PowerPoint Presentation
Presentation and Disclosure Checklist
Resources- continued
46. Learn more about the FRF for SMEs
Identify candidates for FRF for SMEs
Communicate with clients about FRF for SMEs
Help client understand benefits and whether this is a
good fit for their business
Assist client in communicating with bankers and
other users about FRF for SMEs
Assist client in preparing opening balance sheet
Next Step - CPAs
47. Learn more about FRF for SMEs
Contact CPA and discuss benefits for your business
Discuss FRF for SMEs with financial statement users
Prepare opening balance sheet
Next Steps - Businesses
49. TOM EISEMAN, CPA
Director of Assurance Practice| tomeiseman@decosimo.com
Tom Eiseman leads Decosimo’s assurance practice and
has approximately 35 years of accounting experience.
Tom has experience with clients in a variety of industries,
including manufacturing, distribution, securities brokers and
dealers, investment companies, oil and gas exploration,
restaurants, broadcasting and not-for-profit entities. He has been
involved with initial public offerings and periodic SEC filings for
over 30 years. His experience includes clients with extensive
international operations.