insight presentation - financial reporting framework for small- & medium-sized entities
DESCRIPTION
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.TRANSCRIPT
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Presentation by:
Patrick Mulherin, CPA
Cory Cuffley, CPA, MAC
Financial Reporting Framework for Small- and Medium-Sized Entities
(FRF for SMEs™ )
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• 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
Outline
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• 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
Financial Reporting Environment
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2013 American Institute of CPAs ©
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• Generally Accepted Accounting Principles (GAAP) basis financial statements may not be necessary• GAAP basis statements tend to be very detailed and unnecessary depending
on the client’s situation
• Special reporting frameworks such as tax or modified cash, may not be sufficient for users• 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)
Why the need?
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• 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
Who can use the framework?
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• 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
Features/Characteristics
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Comparisons
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U.S. GAAP
• Intangibles
• Intangibles amortized over useful lives and evaluated for impairment upon triggering event.
• Indefinite-lived intangibles (Goodwill) evaluated for impairment annually.
FRF for SMEs™
• Intangibles
• All intangibles are amortized over their estimated useful lives.
FRF for SMEs™ vs. U.S. GAAP
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U.S. GAAP
• Revenue
• Specific criteria for recognition
• Industry-specific guidance
• Percentage of Completion and Completed Contract methods.
FRF for SMEs™
• Revenue
• Broad, principle-based
• No industry-specific guidance
• Percentage of Completion and Completed Contract methods.
FRF for SMEs™ vs. U.S. GAAP
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U.S. GAAP
• Variable Interest Entities (VIEs)
• Yearly analysis of potential VIEs
• Potential consolidation requirement even w/no equity ownership
FRF for SMEs™
• Variable Interest Entities (VIEs)
• No concept of VIEs
• No consolidation of VIEs
FRF for SMEs™ vs. U.S. GAAP
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U.S. GAAP
• Fair Value
• Uses term “Fair Market Value”
• Detailed framework for measuring; including F.V. hierarchy
• Standardized disclosures.
FRF for SMEs™
• Fair Value
• Uses term “Market Value”
• Limited circumstances in which Market Value is required (business combinations, held-for-sale securities, etc.)
• Significantly less required disclosures
FRF for SMEs™ vs. U.S. GAAP
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U.S. GAAP
• Income Taxes
• Must account for income taxes using the deferred income taxes method
• Must evaluate and accrue uncertain tax positions
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
FRF for SMEs™ vs. U.S. GAAP
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Tax Basis
• 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
FRF for SMEs™
• Installment Sales
• Revenue recognized at time of sale, even if cash is collected in installments
• Sales Returns
• Allowed to recognize an allowance for probable returns
FRF for SMEs™ vs. Tax Basis
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Tax Basis
• Long-term contracts
• Generally, entities must use Percentage of Completion method
• Completed-Contract method allowed in certain circumstances
FRF for SMEs™
• Long-term contracts
• Can choose between Percentage of Completion or Completed-Contract Method
FRF for SMEs™ vs. Tax Basis
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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
FRF for SMEs™
• Receivables
• Allowed to recognize an allowance for bad debts
FRF for SMEs™ vs. Tax Basis
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Tax Basis
• Inventories
• Measured at lower of cost or market value
• Losses allowed only when offered for sale at lower prices or is actually sold/discarded
FRF for SMEs™
• Inventories
• Measured at lower of cost or net realizable value
• Losses recorded when probable and estimable. Similar to an allowance
FRF for SMEs™ vs. Tax Basis
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Tax Basis
• Prepaid Expenses
• Expenses paid in a year are only deductible in year in which it applies
• Not required to capitalize if period of rights or benefits is under 12 months long
FRF for SMEs™
• Prepaid Expenses
• Recognized as an asset and amortized to expense
• Similar to U.S. GAAP
FRF for SMEs™ vs. Tax Basis
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Tax Basis
• Property, Plant & Equipment
• 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
FRF for SMEs™
• Property, Plant & Equipment
• Depreciation calculated on the cost less expected residual value
• Assets contributed by owner are valued at Market Value
• Does not recognize Section 179 and Bonus depreciation deductions
FRF for SMEs™ vs. Tax Basis
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Additional Resources
• Additional information available at aicpa.org/FRF-SMEs Patrick Mulherin, CPA
Cory Cuffley, CPA, MAC [email protected]
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Questions?