Presentation by:

Patrick Mulherin, CPA

Cory Cuffley, CPA, MAC

Financial Reporting Framework for Small- and Medium-Sized Entities

(FRF for SMEs™ )

• 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

• 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

2013 American Institute of CPAs ©

• 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?

• 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?

• 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

Comparisons

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

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

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

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

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

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

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

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

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

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

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

Additional Resources

• Additional information available at aicpa.org/FRF-SMEs Patrick Mulherin, CPA

pmulherin@sek.com

Cory Cuffley, CPA, MAC ccuffley@sek.com

Questions?