MHM Executive Education Series:
New Accounting Framework Impacting
the AEC Industry
Presented by:
Mike Loritz and Matt Rybowicz
August 8, 2013
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Today’s Presenters
Mike Loritz, CPA Shareholder
913.234.1226 | [email protected]
Mike has 17 years of experience in public accounting with diversified financial companies and
other service based companies, including banking, broker/dealer, investment companies, and
other diversified companies ranging from audits of public entities in the Fortune 100 to small
private entities. He is a member of MHM's Professional Standards Group, providing
accounting knowledge leadership in the areas of derivative financial instruments, investment
securities, share-based compensation, fair value, revenue recognition and others.
Matt Rybowicz, CPA Senior Manager
913.234.1062 | [email protected]
Matt has more than 13 years of experience in public accounting and is currently a Senior
Manager in the Leawood, Kansas office. He plans, executes and directs external audits for a
variety of construction industry clients. Matt focuses on complex and/or specialized issues in
the construction industry, develops and maintains productive relationships with clients, and is a
part of the firm’s national construction audit methodology taskforce.
In addition to providing attest and accounting services to clients, Matt is actively involved in
local and national construction organizations and has presented at many local and national
events including the CICPAC annual member conference, National association of independent
sureties training and the Kansas City Builders Association Construction Management
Academy.
The information in this Executive Education Series
course 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.
Disclaimer
Today’s Agenda
1
2
3
5
AICPA FRF for SME’s - Background
Private Company Council – Activities
FRF for SME’s & Architecture, Engineering &
Construction
4 FRF for SME’s – Other Concepts
5 Disclosure considerations
FRF FOR SME’S -
BACKGROUND
Why was the Framework Developed?
Special Purpose Frameworks (OCBOA):
US GAAP Not Required GAAP not required and not the best solution for many
small- and medium-sized entities
IFRS for SMEs Lack of familiarity, higher learning curve, not US-centric,
form of GAAP
Other Special Purpose Frameworks
Tax or modified cash basis may be inappropriate or insufficient for some SMEs/users
FRF for SMEs Private Company Council
- Not GAAP - Special - GAAP
Purpose Framework - Modify GAAP for private
- Complementary to companies
efforts by FAF’s PCC -
AICPA fully supports the
work of the PCC, FAF and
FASB to address the
private company
environment
Framework is Separate from FAF and PCC
Approximately 200 pages
Self-contained
Excess narrative avoided
Avoidance of bright lines
Use of professional judgment
Principles-based, Standalone, Compact
Principles-
based
Standalone
Compact
Developed for smaller- to medium-sized, owner-managed,
for-profit entities where internal or external users have
direct access to the owner-manager and GAAP financial
statements are not required.
The AICPA has no authority to require the use of the FRF
for SMEs for any entity. Therefore:
Issued June 10, 2013 - The FRF for SMEs has no effective date
An owner-manager can decide to use the FRF for SMEs at any
time
An owner-manager should make that decision in conjunction
with those who may use the entity’s financial statements.
AICPA Framework for SMEs
Owners-Managers Depend on reliable financial statements to:
Confirm assessments of performance
Determine what they owe/own
Understand cash flows
Users External financial statement users who have direct access to management
Non-issuers No intent of going public
Who Is It Designed For?
- Entity does not operate in an industry that has highly specialized accounting guidance
- such as financial institutions and governmental entities
- The entity does not engage in overly complicated transactions
- The entity does not have significant foreign operations
- Financial statement users may have greater interest in cash flows, liquidity, statement of financial position strength and interest coverage
Characteristics of Typical Entities
Public Statements Critical of the Framework:
FAF President – Teresa Polley
National Association of State Boards of
Accountancy (see NASBA Tells Private Companies: Don’t
Use AICPA Financial Reporting Framework)
Institute of Management Accountants (IMA)
Risk Management Association (RMA)
Controversy
PRIVATE COMPANY COUNCIL
ACTIVITIES
The PCC has two principal responsibilities:
1. The PCC will determine whether exceptions or modifications to existing non-governmental U.S. Generally Accepted Accounting Principles (U.S. GAAP) are required to address the needs of users of private company financial statements.
2. The PCC will serve as the primary advisory body to the Financial Accounting Standards Board (FASB) on the appropriate treatment for private companies for items under active consideration on the FASB’s technical agenda.
Private Company Council
The PCC will conduct a review of
existing U.S. GAAP and identify
standards that it will consider for
possible exceptions or modifications.
The PCC will develop, deliberate, and
vote on proposed exceptions or
modifications, which must be
approved by a two-thirds vote of all
PCC members (super majority).
PCC Agenda Setting and Due Process for
Existing U.S. GAAP
Proposed modifications or exceptions to U.S. GAAP approved by the
PCC will be provided to the FASB for a decision on endorsement. If
endorsed by a simple majority of FASB members, the proposed
modifications will be exposed for public comment.
PCC Issue No. 13-01A, Accounting for Identified
Intangible Assets in a Business Combination
The PCC is attempting to reduce the number of
intangible assets that are recognized.
Only intangible assets that arise from either a non
cancelable contract or legal right will be subject to
recognition.
Private companies will measure the value of an asset
that originates from a non cancelable contract by
considering only the contract’s remaining non
cancelable term.
Private Company Council
PCC Issue No. 13-01B, Accounting for Goodwill
Subsequent to a Business Combination
In a return to “the past”, goodwill will once again be amortized over
an estimated useful life, which cannot exceed ten years.
Goodwill will not longer be subject to an annual impairment test,
rather, a “triggering event” model will be used. Impairment testing
would be required when an event or circumstances occur that
indicate that it is more likely than not the fair value of the entity is
below its carrying value.
The goodwill impairment test will be performed at the entity level.
Private Company Council
PCC Issue No. 13-01B, Accounting for Goodwill
Subsequent to a Business Combination
The requirement to perform a hypothetical “purchase price
allocation” is removed. The amount of impairment
recognized is simply the difference between the fair value of
the entity and its carrying value.
Private Company Council
PCC Issue No. 13-02, Applying Variable Interest Entity Guidance to
Common Control Leasing Arrangements
Exempts private companies from applying consolidation guidance for
variable-interest entities (VIEs) under common control leasing arrangements.
Exemption requirements include Nonpublic entity and legal entity are under common control
Nonpublic entity has a lease arrangement with VIE
Substantially all of the entity’s business activities consist of leasing or supporting
leasing activities.
Required disclosures: Lease terms
“related party” rent expense
Future commitments
Outstanding debt and significant liabilities of related party lessor.
Key terms of debt arrangement
Key terms of explicit interest in leasing entity
Private Company Council
PCC Issue No. 13-03, Accounting for Certain Receivable-Variable,
Pay-Fixed Interest Rate Swaps
The intent is to simplify the accounting for certain derivative
transactions involving an interest rate swap where variable rate debt
is converted to fixed rate debt.
If certain criteria are met, the swap is combined with the
related debt instrument which effectively results in a fixed
rate borrowing.
Derivative accounting is not required.
A “simplified short-cut method” is also available that makes it
easier to apply hedge accounting. Certain criteria must be
met.
Private Company Council
FASB Endorsement
While the FASB did raise questions pertaining to the proposed
alternatives, it unanimously endorsed each of the accounting
alternatives approved by the PPC (Issue 13-01 and 13-03).
The proposed alternatives are expected to be exposed for public
comment where FASB’s questions may be addressed.
Subsequent to the public comment process, the PCC will
redeliberate the accounting alternatives.
PCC accounting alternatives will be subject to “final endorsement” by
the FASB.
Private Company Council
FRF FOR SME’S &
ARCHITECTURE, ENGINEERING &
CONSTRUCTION
F/S Concepts
General Principles of F/S Presentation & Acct Policies
Transition
Statement of Financial Position
Current assets/liabilities
Special Accounting for Certain Financial Assets & Liabilities
Statement of Operations
Statement of Cash Flows
Accounting Changes, Estimates, Errors
Equity, Debt & Other Investments
Risks and Uncertainties
Inventories
Intangible Assets
Property, Plant & Equipment
Long-Lived Assets & Disc Ops
Commitments
Contingencies
Equity
Revenue
Retirement and Other Postemployment Benefits
Income Taxes
Comprehensive and Relevant Framework
Subsidiaries
Consolidation and NCI
Joint Ventures
Leases
Related Party
Subsequent Events
Business Combinations
Push-Down Accounting
Nonmonetary Transactions
FX Translation
Glossary
Comprehensive and Relevant Framework (cont.)
Does not include:
Earnings per share guidance
Segment reporting
Other comprehensive income
Interim reporting
Stock compensation
Many of the complex issues
associated with debt/equity
Comprehensive and Relevant Framework
Chapter 1
Introduces the financial statement concepts
Similar to the FASB Concept Statements
Discusses concepts including the following:
Measurement
Materiality
Recognition
Qualitative Characteristics
Understandability
Relevance
Reliability
Comparability
Financial Statement Concepts
Chapter 2
Establishes specifics of financial statements and comparative
information
Provides guidance on the disclosure of accounting policies
Requires an entity to state prominently in the notes to the
financial statements that the FRF for SME’s is the basis for the
presentation
General Principles
Chapter 3 - Transition
Requires an entity to prepare an opening statement of financial
position at the date of transition to the FRF for SMEs framework
Requires an entity to:
Recognize all assets and liabilities whose recognition is required
Not recognize items as assets or liabilities if the framework does not permit
recognition
Reclassify items that it recognized previously as one type of asset, liability, or
component of equity but are now recognized as a different type of asset, liability,
or component of equity under the framework
Apply the framework when measuring all recognized assets and liabilities
Requires certain disclosures including the amount of each charge or
credit to equity at the date of transition
Transition
Less than 20% ownership
Presumed investor does not have significant influence
Greater than 20% ownership
Rebuttable presumption that significant influence exists
If significant influence exists = equity method
Equity method accounting is similar to the existing
GAAP guidance
However, allows the reversal of previously recognized
impairments
Equity Method Investments (Investments)
No Concept of Variable Interest Entities (VIEs)
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 qualifies as an investment.
Either equity method or cost basis
Subsidiaries & Consolidation
Recognition and Presentation
Does not require consolidation
An entity should make an accounting policy choice to
either:
a. Consolidate its subsidiaries or
b. Account for its subsidiaries using the equity method
Parent-only (unconsolidated)
financial statements are permitted.
Subsidiaries & Consolidation
Closely aligned with
requirements of U.S. Income
Tax Code
Criteria for capitalizing a
lease for tax purposes
generally matches criteria in
FRF for SMEs
Evaluation of capital vs.
operating leases are the
same as US GAAP Retains “rules” based approach
Lease Accounting
Lease Accounting
25.08 A lease that transfers
substantially all the benefits
and risks of ownership
related to the leased
property from the lessor to
the lessee should be
accounted for as a capital
lease by the lessee and as a
sales-type of direct financing
lease by the lessor
25.09 A lease in which the
benefits and risks of
ownership related to the
leased property are
substantially retained by the
lessor should be accounted
for as an operating lease by
the lessee and lessor
In the case of rendering of services and long-
term contracts and modifications to those
contracts, performance should be determined
using either the percentage of completion
method or the completed contract method,
whichever relates the revenue to the work
accomplished.
Very limited discussion of multiple element
deliverables
Limited, but similar, guidance on gross vs.
net reporting of revenues
Revenue
Percentage of Completion Method
Used when performance consists of the execution of more than one act, and revenue would be recognized proportionately by reference to the performance of each act.
Determination using a rational and consistent basis
Sales values
Associated costs
Extent of progress
Number of acts
Practical Expedient Services are provided by an indeterminate number of acts of a
specific period of time, revenue should be recognized on a straight-line basis over the period, unless there is evidence that some other method better reflects the pattern of performance.
Long-term contracts
Percentage of Completion Method
Measurement
Amount of work accomplished
Measures of performance that are reasonably determinable
Relate as directly as possible to the activities critical to the completion of the contract
Measures
Output measures
Units produced
Project milestones
Input measures
Cost
Labor hours
Machine use
Amounts billed are not an appropriate basis unless they reflect the work accomplished
Long-term contracts
Completed Contract Method
Used when the entity cannot reasonably estimate the
extent of progress toward completion.
If both of the following conditions are met:
Completed contract method is used for income tax reporting
purposes
The financial position and results of operations…would not
vary materially from those resulting from the use of the
percentage of completion method (for example, in
circumstances in which an entity has primarily short-term
contracts).
Long-term contracts
Contract-Related Claims
Recognition…only if it is probable that the claims will result in additional contract revenue and if amounts can be reliably estimated, as evidenced by satisfying the following conditions:
There is a legal basis for the claims.
Additional costs are caused by circumstances that were unforeseen at the contract date and are not the result of contractor performance deficiencies.
Costs associated with the claims are identifiable or otherwise determinable and are reasonable in view of the work performed
Evidence supporting the claims is objective and verifiable.
Long-term contracts
Contract-Related Claims
If the foregoing requirements are met, revenue from
contract-related claims should be recorded only to the
extent that contract costs relating to the claims have
been incurred. Cost attributable to claims should be
treated as costs of contract performance as incurred.
A practice such as recording revenues from claims
only when the amounts have been received or
awarded may be used.
Long-term contracts
Sureties, and loan agreements still require U.S. GAAP
financial statements
State DOT and state licensing board requirements
ESOP considerations
Future changes accounting changes (i.e. Leases,
revenue recognition) could drive companies to revisit
framework.
Other AEC Considerations
FRF FOR SME’S – OTHER
CONCEPTS
Depreciation should be recognized in a rational and
systematic manner appropriate to the nature of the item
with a limited life and its use by the entity. Depreciation
recognized is the greater of:
the cost, less salvage value over the life of the asset or
the cost, less residual value over the useful life of the asset
Allows for the subsequent reversal of impairments
Analysis is still performed using undiscounted cash flows
Asset group concept is the same as GAAP
Allows capitalization of finance costs
Property, Plant & Equipment — Depreciation
Straight-line method
Constant charge as a function over time
Variable charge method
An increasing charge method may be used when an entity
can obtain a constant rate of return on the investment in the
asset.
A decreasing charge method may be appropriate when the
operating efficiency of the asset declines over time.
PP&E – Different Depreciation Methods
Goodwill is not tested for impairment.
Goodwill should be amortized:
the same period as that used for federal income tax
purposes or
if not amortized for federal income tax purposes then a
period of 10 years.
Goodwill
Assets acquired and liabilities assumed are measured at their acquisition date market values. Certain exceptions exist.
An entity should make an accounting policy election to account for an intangible asset acquired either separately from goodwill or by not recognizing the intangible assets separately from goodwill (subsuming into goodwill the value of the intangible asset)
All intangible assets are considered to have a finite useful life and are amortized over that estimated useful life
Business Combinations
Accounting Policy Election
An entity should make a policy election to account for defined benefit plans
Current contribution payable method
One of the accrued benefit obligation methods
Current Contribution Payable Method
Only the contribution attributable to the current year is expensed
Accrued Benefit Obligation Methods
Immediate recognition approach
Deferral and amortization approach
Defined Benefit Plans
Accounting Policy Election
An entity should make an accounting policy election to account for income taxes using either
the taxes payable method or
the deferred income taxes method
Taxes Payable Method
Under the taxes payable method, only current income tax assets and liabilities are recognized
Current income taxes, to the extent unpaid or refundable, should be recognized as a liability or asset
The liability for current income taxes included in the balance sheet is the cost (benefit) or current income taxes for current and prior periods less amounts already paid in respect of these income taxes
Income Taxes
Certain Financial Assets and Liabilities
At each reporting date,
an entity should
measure: a. Investments in equity
instruments at cost, less
any reduction for
impairment,
b. All other financial assets at
amortized cost; and
c. Financial liabilities at
amortized cost
• An entity should
measure investments in
equity instruments held
for sale at market
value.
• Changes in market
value should be
recognized in net
income in the period
incurred.
• Impairments may be
reversed.
Derivatives
Recognize net cash paid or received at settlement
Disclosures
Face or contract amount (or notional principal amount if there is
no face or contract amount)
The nature and terms — including a discussion of the credit and
market risk of those instruments
A description of the entity’s objectives for holding the derivatives
The cash requirements of those instruments
Financial Instruments
Learning Center Slide No. 68
DISCLOSURE CONSIDERATIONS
Significant accounting policies (Note 1)
Changes in accounting policies
Nature of operations
Use of management estimates
Significant estimates
Changes in accounting estimates if material
Concentrations
Operating cycle if longer than 1 year
Details about any reclassification from previously issued comparative statements
Corrections of errors
Disclosures – Consistent with GAAP
Policy in determining the composition of cash and cash
equivalents.
Restrictions on cash
Details regarding business combinations and disposals
of business units
Investing or financing transactions that do not require
the use of cash presented either on the face of the
statement of cash flows or notes to the financial
statements.
Information regarding each material business
combination.
Disclosures – Consistent with GAAP
Consolidation policies
Basis of accounting for joint ventures along with
additional information.
Basis used to account for investments
Nonmonetary exchanges
Inventory accounting policies including classifications.
Cost of each major category of property and
equipment, total accumulated depreciation,
depreciation methods, life, and depreciation charged to
income
Contingency gains and losses
Disclosures – Consistent with GAAP
Intangible asset carrying amount by major asset class,
aggregate amortization expense, amortization method
and life
Policy for accounting for start-up costs.
Capital lease information including payments
estimated in each of the next 5 years
Operating lease minimum lease payments for each of
the five succeeding years
Subsequent events
Commitments
Defined contribution plans
Disclosures – Consistent with GAAP
Deferred compensation plans
Guarantees
Revenue recognition policies and components
Income tax – if deferred method is elected
Related party transactions
Disclosures – Consistent with GAAP
Multi-employer plans –
Name and description of plan
If withdrawal is probable or reasonably possible, whether it
would give rise to an obligation
Cost recognized in the period
Taxes payable method policy
Stock issued to employees in lieu of cash
compensation (measurement and disclosure)
Disclosures – Not Consistent with GAAP
Financial statements are prepared in accordance with
FRF for SMEs
Primary differences between FRF for SMEs and GAAP
Does not require quantification – very broad discussion
The accompanying financial statements have been prepared in
accordance with the Financial Reporting Framework for Small- and
Medium-Sized Entities issued by the American Institute of Certified
Public Accountants. This framework, unlike accounting principles
generally accepted in the United States of America, generally does
not make use of fair value accounting provides more flexibility in the
areas of accounting for income taxes and consolidations etc.
Disclosures – Additional Items
In the year of adoption of FRF for SMEs –
If prior year financial statements are restated and presented-
Amount of each change or credit to equity
Explanations of material adjustments to the statement of cash flows
Any election to use the exemption for retrospective application
Derecognition of financial assets and liabilities
Estimates
Non-controlling entities
Basis used to account for unconsolidated subsidiaries along with additional information
Disclosures – Additional Items
Substantially the same as GAAP based financial
statements
Supplementary information permitted
Contract schedules
Cost of goods sold schedules
General and administrative expense
Presentation
Accounting Policies (Chapter 2)
The accompanying financial statements have been prepared in accordance with the Financial Reporting Framework for Small- and Medium-Sized Entities issued by the American Institute of Certified Public Accountants. This special purpose framework, unlike generally accepted accounting principles (GAAP) in the United States of America, does not require the recognition of deferred taxes. We have chosen the option to recognize only current income tax assets and liabilities.
Other primary differences would be described as necessary.
Disclosures – Accounting Policies
Questions?
Today’s Presenters
Mike Loritz, CPA Shareholder
913.234.1226 | [email protected]
Mike has 17 years of experience in public accounting with diversified financial companies and
other service based companies, including banking, broker/dealer, investment companies, and
other diversified companies ranging from audits of public entities in the Fortune 100 to small
private entities. He is a member of MHM's Professional Standards Group, providing
accounting knowledge leadership in the areas of derivative financial instruments, investment
securities, share-based compensation, fair value, revenue recognition and others.
Matt Rybowicz, CPA Senior Manager
913.234.1062 | [email protected]
Matt has more than 13 years of experience in public accounting and is currently a Senior
Manager in the Leawood, Kansas office. He plans, executes and directs external audits for a
variety of construction industry clients. Matt focuses on complex and/or specialized issues in
the construction industry, develops and maintains productive relationships with clients, and is a
part of the firm’s national construction audit methodology taskforce.
In addition to providing attest and accounting services to clients, Matt is actively involved in
local and national construction organizations and has presented at many local and national
events including the CICPAC annual member conference, National association of independent
sureties training and the Kansas City Builders Association Construction Management
Academy.
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