9/10/2015 f inancial reporting framework for small- and medium-sized entities: part 3b—accounting...

04/19/23 www.cpafirmsupport.com 1

Financial Reporting Framework for Small- and Medium-Sized Entities: Part 3B—Accounting for Certain Expenses

By Larry L. Perry, CPA

CPA Firm Support Services, LLC


Learning Objectives

To learn accounting and disclosure principles for: Leases Pension and post-employment benefit plans Income taxes Accounting changes Risks and uncertainties


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 (with some concepts similar to U.S. GAAP..

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.


Basic Issues for Financial Statements

The titles of these statements are not limited to a prescribed title. Some common options are:

Statement of Operations Statement of Revenues and Expenses Statement of Revenues, Expenses and Retained

Earnings Each statement should include this reference or other

descriptive wording under the statement title: (FRF for SMEs Basis).

As with other frameworks, a comparative format is considered the most meaningful but is not required. Single period financial statements will usually be the most appropriate in the first period of application.

Line item references to footnotes aren’t required but a reference on the bottom of the statement to the notes and an accountant’s report is required. Example: “See Independent Accountant’s Review Report and Notes to Financial Statements.”


Basic Lease Accounting Principles Criteria in lease agreements, anyone of which indicates

transfers of substantially all the risks and benefits of ownership, are: End of lease transfer of ownership to the lessee. Bargain purchase option that would cause the lessee to

purchase. A lease term to give lessee substantially all the economic

benefit of an asset—normally 75+% of remaining useful life.

The lessor has some assurance of recovering the cost and earning a return on an asset—when the present value of minimum lease payments is 90+% of asset value at inception of the lease.

Other criteria for lessors in addition to any one of the above are a credit risk similar to other receivables and identifiable non-reimbursable costs.


Lessee’s Accounting for Leases Capital leases

Accounted for as the acquisition of an asset and the creation of an obligation presented separately in the statement of financial position. Land and buildings may be separated.

The present value of minimum lease payments, excluding known or estimated executory costs, less than an asset’s market value, determines the recorded amounts.

The lessor’s interest rate implicit in the lease would be used if it can be obtained or calculated and is lower than the lessee’s incremental borrowing rate.

The asset should be amortized over it’s expected period of use or it’s economic life (if ownership transfers or there if a bargain purchase option).

Interest expense is calculated using the discount rate above. Rental expense for operating leases is accounted for on a

straight-line basis unless benefits are best presented otherwise


Disclosures for Lessees Disclosures for each major category of capitalized leased

assets include: Cost Accumulated amortization, including any write-downs of

asset values, and the amortization method Capitalized leased obligations disclosures include:

Interest rate Maturity date Outstanding balance and any collateral under the leases Interest expense disclosed separately or as part of interest

on long-term debt Payments for each of the next five years in accordance

with terms of the lease Operating leases disclosures should include future minimum

lease payments in the aggregate and for each of the five succeeding years. Short term leases of one year or less are excluded from this disclosure requirement.


Lessor’s Accounting for Direct Financing Leases

A direct financing lease, normally between a manufacturer or dealer and a lessee, generates financing income (the difference between the total net minimum lease payments and asset carrying amount).

The lessor’s investment is comprised of the net amount of: Minimum lease payments receivable, net of any executory

costs (insurance, maintenance and taxes) and any profit on the sale.

The unguaranteed residual value of the leased asset. Unearned finance income, net of any initial direct costs to

be allocated over the lease term. Any investment tax credits to be allocated over the lease

term.


Lessor’s Accounting for Sales-Type Leases

Leases are used to sell dealer’s and manufacturer’s products and include a profit or loss on sale and financing income. Sales revenue is determined by discounting the net

minimum lease payments using the interest rate implicit in the lease.

Cost of sales include the carrying amount of the leased asset reduced by the present value (same discount rate) of any unguaranteed residual.

Finance income is the difference between net minimum lease payments plus any unguaranteed residual (undiscounted) and the total of the present value of minimum lease payments.

Initial direct costs and profit or loss is recognized at the date of the transaction; unearned finance income is recognized at a constant rate of return over the lease term. Collectability should be reviewed annually.

Rental revenue from an operating lease should normally be recognized on a straight-line basis.


Pension and Post-retirement Benefit Plans

The FRF for SMEs generally requires cost-recognition in periods employees perform services for any arrangement that is a benefit plan, regardless of form or funding provisions.

The obligation meets the definition of a liability. Defined contribution plans (including multiemployer plans)—

pension cost is normally the periodic accrual basis contribution.

Deferred compensation contracts—only benefits attributable to current employment should be recognized; future benefits should be accrued at present value over the employee’s period of service.

Defined benefit plans—management can elect: A current contribution payable method, disclosing the

plan’s description, method of determining benefits, it’s funded status, contributions expected for future years, expected rate of return and the obligation discount rate.

An accrued benefit obligation method permits an entity to use immediate recognition or deferral and amortization approach.


Accounting for Income Taxes

Two options are available under the FRF for SMEs: The taxes payable method—assets or liabilities

are recognized to the extent of refundable or unpaid income taxes from the current and any prior years, calculated at currently applicable capital gain or ordinary income rates.

The deferred income taxes method—deferred tax assets and deferred tax liabilities are recognized for future deductible and taxable amounts.


Basic Principles of Deferred Income Taxes Method A current tax liability or asset for taxes payable or

refundable on tax returns A deferred tax liability or asset is recognized for

future tax effects of temporary differences and carryforwards

Measurement is based on enacted tax law Deferred tax assets that are not expected to be

realized are reduced by valuation allowances Temporary differences arise from book/tax

differences in income and from differences in basis See examples in text


Deferred Tax Assets and Liabilities

A deferred tax liability is recognized for temporary differences that will result in taxable amounts in future years Example—installment sale receivable

A deferred tax asset is recognized for temporary differences that will result in deductible amounts in future years and for carryforwards. Example—estimated expenses A valuation allowance is recognized if it is more likely

than not some or all of the deferred tax asset will not be realized.

See illustration in text


Disclosures for Income Taxes Payable Method The expense or benefit included in income or

loss before discontinued operations. A discussion of differences between current

period tax rates or expense and statutory rates.

Amount of unused tax loss carryforwards and tax credits.

Any portion of tax expense or benefit applying to transactions charged to equity.


Disclosures for the Deferred Income Taxes Method Current and deferred income tax expense or benefit

included in net income or loss before discontinued operations.

Any portion of tax expense or benefit applying to transaction charged to equity.

Any portion of unused tax losses, income tax reductions or deductible temporary differences not recognized as a deferred tax asset.

A discussion of differences between current period tax rates or expense and statutory rates.

Amount of unused tax loss carryforwards and tax credits.


Accounting Changes

Accounting policies should be consistent and only changed to conform with the FRF for SMEs or to produced more reliable and relevant financial information.

Accounting policy changes should be presented retrospectively for all periods presented and restating the opening balance of the appropriate equity classification in the period first presented.

Revisions of accounting estimates based on new information should be accounted for prospectively.

Prior period errors should be corrected by restating comparative amounts for all period presented and the opening balance of the earliest period presented.

See disclosures in text.


Risks and Uncertainties

Major products and services and the entity’s principal markets should be disclosed in Note A.

Other items that should be disclosed in footnotes include: Discussion of management’s use of estimates and that

the estimates are based on circumstances that exist at the date financial statements are available for issue and may change in the future. Examples in text.

Descriptions of concentrations and any risk of loss in the near-term future. Examples in text.


The End

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9/10/2015 f inancial reporting framework for small- and medium-sized entities: part 3b—accounting...

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