AICPA’s Special-Purpose Framework Proves Controversial

March 2013

MHMMessenger
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M AY E R H O F F M A N M C C A N N P. C . – A N I N D E P E N D E N T C PA F I R M

A publication of the Professional Standards Group
AICPA’s Special-Purpose Framework Proves Controversial

The AICPA wrote another important chapter in the AICPA describe the document as a “set of criteria”
history of the search for simpler accounting practices that can be used to determine the measurement,
when it issued an exposure draft of a proposed special- recognition, presentation, and disclosure of all material
purpose framework in November 2012. But this won’t items in financial statements that are not required
likely be the final chapter, since some aspects of the to be prepared according to US generally accepted
framework have proven controversial. Although the accounting principles (US GAAP).
comment letters expressed widespread support for
the notion of simpler accounting practices for smaller The differences between statements prepared
companies, the details are likely to continue to evolve according to GAAP and statements prepared using the
in response to the many concerns raised about the proposed framework can be summarized as follows:
proposed approach. This approach calls for the
AICPA to issue and maintain a non-authoritative, non- • GAAP. Generally accepted accounting principles
GAAP framework for use in special-purpose financial are suitable for preparing general-purpose financial
statements starting in late Spring 2013. The volume of statements. They include US GAAP issued by the
questions raised and the tone of the views expressed FASB, IFRS issued by the IASB, and IFRS for
clearly show this approach is considerably more Small and Medium-Sized Entities issued by the
controversial among accounting practitioners than IASB. Typically, GAAP is the required basis for
initially expected. financial statements prepared for use by external
users who lack the ability to prescribe the financial
This Messenger summarizes the basic approach and information they receive from the company.
the reasons for the controversy.
• Proposed framework. In contrast, the AICPA’s
The AICPA’s concept framework would be considered one of a number
of other comprehensive bases of accounting
Basically, the proposed framework is a document of (OCBOA) available to US companies for
about 250 pages. Its full title is “Proposed Financial special-purpose financial statements. Currently,
Reporting Framework for Small- and Medium-Sized companies typically prepare special-purpose
Entities.” Supplemental materials released by the OCBOA statements using a cash basis or using
the same principles used for income tax returns.

In addition to the framework, the AICPA plans to
issue implementation guidance containing examples,
illustrative financial statements, a disclosure checklist
and similar materials, as well as toolkits to help CPA

our roots run deep TM
firms introduce and explain the framework to clients
and financial statement users. The AICPA has not

© 2 0 1 3 M AY E R H O F F M A N M C C A N N P. C . 877-887-1090 • www.mhm-pc.com • All rights reserved.

MHMMessenger
yet decided whether the final framework and/or the who need easier-to-understand, useful financial
accompanying implementation guides and toolkits will statements that are based on a reliable,
be made available at no cost or for a fee. principles-based framework.

Reasons for the controversy • Concerns: Some accounting practitioners and state
societies of CPAs feel the AICPA is misinterpreting
The AICPA describes its proposed framework as one the market demands and its approach will cause
that is suitable for smaller- to medium-sized owner- confusion. Their views:
managed, for-profit entities that need reliable financial
statements for times when users have direct access • The demand is for a single set of authoritative
to the owner-manager and GAAP financial statements standards. A non-authoritative framework like
are not required. The goal was to develop a framework the one proposed by the AICPA would cause
based on a “blend of traditional accounting methods unnecessary confusion among practitioners
and accrual income tax methods.” To accomplish this and preparers.
goal, the framework makes a number of assumptions
about the needs of users and the desirability of key • The Financial Accounting Foundation’s
features. The controversy arises because there are recently-formed Private Company Council
different views about the validity of these assumptions (PCC) is better positioned to meet market-based
and how best to mitigate any adverse effects. demands by developing suitable modifications
and exceptions to authoritative GAAP.
Following are highlights of the four most controversial
issues. • Suggestions: To help mitigate the concerns about
confusion, many practitioners suggested different
1. Does an OCBOA framework respond names for the framework, and one firm suggested
effectively to marketplace demands? different titles for financial statements because
terms like “statement of financial position” are
The AICPA’s stated intent in developing the proposed indicative of financial statements prepared in
OCBOA framework is to respond to marketplace accordance with GAAP. The concerns about
demands. Below are the major assumptions, concerns marketplace needs are more difficult to mitigate.
and suggestions. The National Association of State Boards of
Accountancy took a strong position on this issue by
• Assumptions: The AICPA’s research indicates the urging the AICPA to table or withdraw its proposed
marketplace is demanding a financial reporting framework so the PCC can carry out its mission
framework that is more cost-effective than GAAP. alone and without confusion.
The Institute feels its framework will meet the
needs of two types of users: 2. Does a principles-based OCBOA framework
provide a cost-effective solution?
• Privately-owned small and medium-sized
entities that are looking for a more relevant, The AICPA has proposed the use of a principles-based
less complicated and cost-beneficial framework framework as a practical compromise between GAAP
for their financial reporting needs. and the unmet needs of some financial statement
users. The appendix highlights a number of areas in
• Bankers and other financial statement users which the OCBOA framework would depart from or be

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less prescriptive than US GAAP. Below are the major • The costs associated with educating users will
assumptions, concerns and suggestions regarding also likely be significant because the AICPA’s
this approach. framework is based partly on GAAP and
partly on income tax reporting. The former is
• Assumptions: The use of a principles-based designed to faithfully portray the economics of
framework is seen as a cost-effective solution transactions while the latter has very different
because: objectives, and the resulting differences may
not be readily apparent to some users without
• It is simpler, easier to learn, and less prescriptive significant education and training.
than US GAAP. In effect, this means the
framework permits more options, requires • Suggestions: To temper these practical concerns
fewer disclosures and involves more judgment. with respect for the AICPA and its good intentions,
practitioners made a number of suggestions,
• It provides more benefits than tax-basis or including the following:
cash-basis statements because it is more
robust than the existing OCBOA frameworks. • The AICPA should reconsider some policy
elections and issue guidance on how to handle
• Concerns: Some accounting practitioners and areas that are missing from the framework,
state societies of CPAs have a different view of the such as “follow GAAP as closely as possible.”
costs and benefits. Their thoughts:
• More research and information are needed
• The accounting policy elections and gaps in the to evaluate the costs and benefits for all the
framework will reduce the benefits by creating participants in the financial reporting process.
diversity in practice and impairing the credibility To help firms with this analysis, the AICPA
of the financial statements. They will also add should provide additional information for public
to the costs because significant transactions comment, including a comparison with US
will fall outside the scope of the framework, and GAAP and/or IFRS for SMEs and a draft of the
preparers, users and practitioners will likely implementation guidance.
need to devote additional time to effectively
address the accounting for the outlying 3. Should the framework be driven by CPA firms
transactions. and be available to all companies?

• The costs associated with learning time will The proposal calls for CPA firms to play a major role in
likely be significant. Practitioners find it time- gaining acceptance for the framework by explaining it
consuming to review the proposed materials to the entities and users for whom it would be beneficial.
and respond to exposure drafts, and the Below are the related assumptions, concerns, and
new framework would add another layer to suggestions regarding this approach.
accounting firms’ training and quality control
efforts. Some firms feel the added efforts will • Assumptions: The framework will work best by
also have an opportunity cost because they leveraging the expertise of CPA practitioners and
will detract from time spent on keeping up with allowing them to determine which companies will
changes in GAAP and the activities of the PCC. benefit from the use of the framework.

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• The AICPA plans to call upon CPA firms to take additional training and changes to underwriting
the lead in persuading suitable companies and systems, and these costs would likely be
lenders to use this framework, and it plans passed along to companies preparing OCBOA
to issue toolkits to help them do so after the statements. Another surety company said the
framework is finalized. usefulness of the framework would be limited
to certain entities that are on the low end of the
• No entities would be precluded from using risk spectrum where extensive disclosures are
the framework. But the framework will not necessary; others would need to provide
contain language cautioning readers that GAAP statements or make disclosures that are
it is not appropriate for some companies, not required by the framework.
including those that hope to go public, and it
is not recommended for use by not-for-profit • Suggestions: Some practitioners suggested the
organizations When evaluating potential use AICPA should conduct more research into the
by lenders, the Institute made the assumption types of companies that would benefit from the
that the framework would be useful in framework and issue more restrictive guidance.
supporting applications by smaller entities For example, this type of OCBOA might be limited
for bank financing when the banker does not to statements used only by management.
base a lending decision solely on the financial
statements. 4. Should the framework be rolled out quickly
and revisited in three or four years?
• Concerns: Both practitioners and users of financial
statements expressed concerns that the framework The AICPA has designed the model to be helpful to
does not contain language that severely restricts small companies and practitioners who do not have time
its use. Their letters explained that the framework to keep up with a rapid level of change in accounting
will not provide a benefit over GAAP in many standards. Here are the major assumptions, concerns,
cases, especially to lenders and others who wish and suggestions in this regard.
to compare the financial statements of private
companies. Their thoughts: • Assumptions: The framework needs to be
developed quickly and changed infrequently.
• Many clients of CPA firms will not benefit from a
non-GAAP framework because they are small • The framework can best be developed quickly
businesses whose owners often pursue exit by modeling it after the approach taken by
strategies that involve going public or being the International Accounting Standards Board
purchased by a public company. when it issued International Financial Reporting
Standards for Small and Medium-sized Entities
• Lenders and surety bond underwriters will get (IFRS for SMEs).
little benefit from a non-GAAP framework. A
survey by a construction industry association • Small companies and practitioners will spend
found most surety bond underwriters are less time keeping up with changes in accounting
aware of the proposed framework but generally standards because the framework will not
prefer GAAP financial statements. One surety change much for the next 3 to 4 years.
company said use of the AICPA’s framework
would likely result in increased costs due to • Concerns: Some practitioners feel the quick roll-

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out and lack of updating could be weaknesses Next Steps
rather than strengths. Their views:
The AICPA will need to consider the concerns
• The framework leaves many questions expressed in the letters. In summary, the common
unanswered because it was developed by themes are that a non-authoritative, non-GAAP
an AICPA Task Force based on input and framework is not the best way to meet the demands of
assumptions that are not transparent to others. today’s marketplace and that the OCBOA framework
proposed by the AICPA would cause confusion,
• Although the OCBOA framework is intended be inappropriate for many smaller companies and
to be updated only every three or four years, unacceptable to many lenders, and result in greater
GAAP will change more frequently, and updated costs and fewer benefits than initially contemplated.
comparisons of the AICPA’s framework with Many suggestions were made to help the AICPA revise
GAAP will be important for preparers, users, the model, and further outreach may be forthcoming
and practitioners. before the AICPA makes a final decision about how
to proceed with the framework. If not, then the AICPA
• Suggestions: Many practitioners suggested the may go ahead with its original timeline which calls
framework should be updated more often and a for issuance of the final framework in the first half of
more robust “due process” should be put in place 2013, concurrently with a turnkey toolkit (to help CPA
to develop and maintain the framework. firms explain the framework to clients and users) and
an implementation volume with illustrative financial
• The process should include an extension of time statements, checklists, and application examples.
to review and comment on the initial proposal,
as well as the implementation guidance and In the meantime, the ED and webcast are available on
toolkits. the AICPA’s website at http://apps.aicpa.org/pcfr/.

• More information should be made available For more information
about the level of outreach already conducted
by the Task Force in developing the framework. MHM’s Professional Standards Group will monitor
progress on the AICPA’s OCBOA framework. We
• The AICPA should consider establishing a more provided our input to the AICPA in our comment letter.
rigorous “due process” that would include such
techniques as publication of comprehensive If you have any specific questions, comments or
rules of procedures and processes, holding concerns, please share them with Ernie Baugh or Keith
public hearings, commissioning “fatal flaw” Peterka of MHM’s Professional Standards Group or
reviews, establishing future funding and your MHM service professional. You can reach Ernie
staffing plans, making the guidance available at ebaugh@mhm-pc.com or 423-870-0511, and you
to the public free of charge, and establishing can reach Keith at kpeterka@cbiz.com or 610-862-
oversight by an appropriate AICPA Committee, 2744.
such as the Technical Issues Committee.

The information in this MHM Messenger is a brief summary and may not include all the details relevant to your situation.
Please contact your MHM service provider to further discuss the impact on your financial statements.

5

MHM Messenger 6-13 Appendix: Significant Differences with US GAAP

Below are some areas in which the criteria prescribed in the framework differ from current US GAAP.

Measurement basis. Historical cost is the primary measurement criteria. Only held-for-sale equity
securities are measured at fair value.

Inventories. Inventories are measured at the lower of cost or market, with market defined as net realizable
value. The cost of inventories is calculated using the first-in, first-out (FIFO), last-in, first-out (LIFO), or
weighted average cost formula.

Property, plant and equipment. Permitted depreciation methods include a straight-line method, a variable
charge method that reflects service as a function of usage, and other methods that may be appropriate in
certain situations. The amount of depreciation that should be charged to income is the greater of (a) the
cost, less salvage value over the life of the asset, or (b) the cost, less residual value over the useful life of
the asset.

Goodwill. Goodwill is amortized. The period of amortization is generally the same period as that used for
federal income tax purposes, or a period of ten years if the goodwill is not amortized for federal income tax
purposes.

Revenue. For services and long-term contracts, performance is determined using either the percentage
of completion method or the completed contract method, whichever relates the revenue to the work
accomplished.

Leases. Lease accounting for financial reporting is aligned with lease accounting for federal income tax
purposes. The criteria for capitalizing a lease are the same for book and tax purposes.

Accounting for income taxes. Companies would have the flexibility to make an accounting policy election
to use either: (a) the taxes payable method, or (b) the deferred income taxes method. Under the taxes
payable method, only current income tax assets and liabilities are recognized. If a portion of current income
taxes is unpaid, it is recognized as a liability; if a portion is refundable, it is recognized as an asset. The
liability for current income taxes on the balance sheet is the cost or benefit of current income taxes for
current and prior periods less amounts already paid for these income taxes.

Subsidiaries and consolidation: The OCBOA framework would not use the concept of variable interest
entities. Instead, the framework would spell out that consolidation is not appropriate when an entity has a
limited right and ability to determine or influence the strategic policies of another entity but does not control
it. A holding of an interest in an entity that is not a subsidiary would qualify as an investment. Companies
would have the flexibility to make an accounting policy election to either: (a) consolidate their subsidiaries,
or (b) account for their subsidiaries using the equity method.


AICPA’s Special-Purpose Framework Proves Controversial

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AICPA’s Special-Purpose Framework Proves Controversial