Financial Reporting Framework for Small- and Medium-Sized Entities—An Overview

1. Financial Reporting Framework for Small- and Medium-Sized Entities—An Overview By Larry L. Perry, CPA CPA Firm Support Services, LLC CPA Firm Support Services, LLC

2. Learning Objectives • To understand the basic principles and concepts of the FRF for SMEs • To be aware of important differences between the FRF for SMEs and U.S. GAAP • To consider basic elements of financial statements and footnotes for the FRF for SMEs CPA Firm Support Services, LLC

3. A Non-Authoritative, Special-Purpose Framework • A combination of traditional accounting methods from special purpose frameworks such as the cash basis and the income tax basis. • A historical cost basis with some modifications for market values. • Specific, simplified footnote disclosures. • Uncomplicated, consistent and principles-based accounting. • A consolidation model that excludes variable interest entities. • Management and the users of financial statements decide if it fairly presents an entity’s financial position and results of operations. CPA Firm Support Services, LLC

4. Basic Financial Statement Titles • For the FRF for SMEs, common financial statement titles are: • Statement of Assets, Liabilities and Equity • Statement of Revenues and Expenses • Statement of Cash Flows • Notes to Financial Statements • Other descriptive titles may also be used. CPA Firm Support Services, LLC

5. Polling Question No. 1 • The FRF for SMEs is an authoritative, special-purpose framework that can be used by any reporting entity • A. True • B. False CPA Firm Support Services, LLC

6. Recognition Criteria • Items in financial statements are measured on a basis that can be estimated reasonably • It is probable that events creating items obtaining or giving up future economic benefits will actually occur, e.g., receivables and payables • Accrual method of accounting will be used • Revenues are recognized when they are earned (or partially earned for contracts in process) and there is reasonable assurance as to measurement and collectability • Gains are generally recognized when they are realized CPA Firm Support Services, LLC

7. More Recognition Criteria • Expenses are recognized when incurred and losses are recognized when they are probable and can be estimated • Expenses are recorded in the period transactions or events occur or by some allocation method, e.g., prepaid expenses, deferred charges, etc. • Costs and expenses are matched with related revenues, i.e., the matching concept • Economic benefits from certain assets are allocated over a period of time, e.g., depreciation and amortization • Expenses are recognized when the produce no future economic benefits or when they don’t qualify for recognition as an asset CPA Firm Support Services, LLC

8. Polling Question No. 2 • Which of the following are recognition criteria for this framework? • A. Revenues are recognized when they are earned • B. Gains are recognized when they are realized • C. Expenses are recognized when incurred • D. Losses are recognized when they are probable and estimatable • E. All the above CPA Firm Support Services, LLC

9. U.S. GAAP Inventories—FIFO, LIFO or average cost at the lower of cost or market (between the floor and ceiling of net realizable value). Goodwill—not amortized but tested for impairment. FRF for SMEs Inventories—lower of cost or the ceiling of net realizable value. Goodwill—amortized over 15 years or the federal income tax time period if different. No tests for impairment are required for long-lived assets. FRF for SMEs VS. U.S. GAAP—Part 1 CPA Firm Support Services, LLC

10. U.S. GAAP Intangible Assets—Indefinite lived assets tested for impairment; definite lived assets amortized and tested if recovery is threatened. Investments—Man-agement’s intentions guide classifications. Trading and AVS securities are valued at fair value. Unrealized changes for trading are included in operating income. AVS changes in comprehensive income. HTM securities are carried at amortized cost. FRF for SMEs Intangible Assets—All are assigned estimated useful lives; no tests for impairment are required. Development phase intangibles can be expensed or capitalized. Investments—Equity method is used when an entity has “significant influence” over investee. Cost method is required otherwise. Equity method investees follow the same method as the investor. AVS securities will be recorded at market values with changes included in income. FRF for SMEs VS. U.S. GAAP—Part 2 CPA Firm Support Services, LLC

11. U.S. GAAP Fair Value Accounting—Applies to non-financial assets and is an exist price based on various valuation techniques and input hierarchy. Derivatives—Generally measured at their fair values; hedge accounting is permitted. FRF for SMEs Market value term used instead of fair value. An arms-length transaction determines market value but application is limited to certain events or transactions. Derivatives—Disclosure only is required; recognition is upon settlement. Hedge accounting is not permitted. FRF for SMEs VS. U.S. GAAP—Part 3 CPA Firm Support Services, LLC

12. U.S. GAAP Lease Accounting—Lessee treats leases as capital leases or operating leases based on four criteria. Lessor treats leases as sales type, direct financing or operating based on four criteria. Income Tax Accounting—Deferred income tax method and evaluation and disclosure of uncertain tax positions is required. FRF for SMEs Lease Accounting—treatment for lessees and lessors is generally similar to U.S. GAAP. Income Tax Accounting—Management may elect either the income taxes payable method or the deferred income taxes method. Evaluation or accrual of uncertain tax positions is not required. FRF for SMEs VS. U.S. GAAP—Part 4 CPA Firm Support Services, LLC

13. U.S. GAAP Defined Benefit and Postretirement Benefits--A projected benefit obligation model that accounts for the aggregate of periodic pension costs and the overfunded and underfunded status is required. Comprehensive Income—Reported in a separate statement or combined with operating income in a single statement. FRF for SMEs Retirement and Postemployment Benefits—Management may elect a contribution payable method or an accrued benefit obligation method similar to U.S. GAAP. Comprehensive Income—No recognition of items of comprehensive income. FRF for SMEs VS. U.S. GAAP—Part 5 CPA Firm Support Services, LLC

14. U.S. GAAP Revenue Recognition—Revenue is recognized when earned or realized. For contracts, a percentage of completion or completed contract method is used. Stock-Based Compensation Methods—Accounted for at fair values either as a liability or equity amount based on manage-ment’s intentions. FRF for SMEs Revenue Recognition—Revenue is recognized based on performance and collectability. Ownership transfer accomplishes performance. Long-term contracts can use the percentage of completion method with consideration received indicating accomplishment of stages of performance. Stock-Based Compensation Methods—Disclosures only required. FRF for SMEs VS. U.S. GAAP—Part 6 CPA Firm Support Services, LLC

15. Polling Question No. 3 • The FRF for SMEs can save accounting and financial statement preparation time in these areas: • A. Income tax accounting using the income taxes payable method • B. No separate recognition of comprehensive income • C. Using a contributions payable method for various pension plans. • D. All the above • E. None of the above CPA Firm Support Services, LLC

16. U.S. GAAP Consolidation and Subsidiaries—A controlling financial interest (50+%) requires consolidation. For VIEs, investors with the power to significantly influence their operations are “primary beneficiaries” and required to consolidate the VIE. FRF for SMEs Consolidation and Subsidiaries—Management can elect either to consolidate 50+%-owned subsidiaries or use the equity method. When significant influence is not exercised over a subsidiary, the cost method is required. Equity and debt securities AVS should be recognized at market values with changes included in income. Income from investments should be presented separately or disclosed in footnotes. FRF for SMEs VS. U.S. GAAP—Part 7 CPA Firm Support Services, LLC

17. U.S. GAAP Business Combinations—The acquisition method of accounting is required. Acquisition date fair values are used for assets, liabilities, goodwill and non-controlling interests in an acquired entity. Push-Down Accounting—New basis accounting is not permitted. FRF for SMEs Business Combinations—Requires the acquisition method of accounting using acquisition date market values. Management can elect to account for intangibles separately or as part of goodwill. Push-Down Accounting—For more than 50% acquired entities, their assets and liabilities may be revalued to agree with values in consolidated statements. FRF for SMEs VS. U.S. GAAP—Part 8 CPA Firm Support Services, LLC

18. Financial Statements • Financial statements should include all information necessary for a fair presentation under this framework. Financial statements, in addition to notes and supporting schedules should include: • Statement of financial position • Statement of operations • Statement of changes in equity unless detailed in the notes or another statement • Statement of cash flows • Other descriptive titles of these statements may be used. CPA Firm Support Services, LLC

19. Deciding to Use the FRF for SMEs • Some basic questions • Are GAAP-based financial statements required by users? • Does the entity’s industry require complex accounting guidance not provided by non-GAAP frameworks? • Does the applicable financial reporting framework currently used by the entity meet the needs of financial statement users or would another framework be more appropriate? • Are there additional practical reasons that affect the decision to use a certain reporting framework like the FRF for SMEs? • See summary of time-saving opportunities in text. CPA Firm Support Services, LLC

20. Polling Question No. 4 • The FRF for SMEs may be the most appropriate framework if statement users don’t require GAAP or another framework • A. True • B. False CPA Firm Support Services, LLC

21. The End • What to do if you want more • Email Larry Perry: larry@cpafirmsupport.com with questions • Visit www.cpafirmsupport.com for webcast resources • Register for free email newsletter on CPA Firm Support website • Read Larry Perry’s weekly articles/blog, Today’s World of Audits, at www.accountingweb.com under the Bloggers Crew tab and A&A articles for small audit and other subjects • Watch for Larry Perry’s Performing Small Audits, Reviews and Compilations for Entities using the AICPA’s FRF for SMEs from Wiley & Sons in 2015 CPA Firm Support Services, LLC