Private Company Reporting

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Overview

Private Company Council (PCC)

AICPA Financial Reporting Framework for Small and Medium Entities (FRF-SME’s)

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Private Company Council

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Overseen by the FAF Trustees

Replaces PCFRC

9 – 12 members including a chair

PCC Chair will not be affiliated with the FASB

3 year terms

Private Company Council

Meet at least 5 times a year with deliberative meetings open to the public

All FASB members expected to attend deliberative meetings

Mission - to identify, deliberate & vote on proposed alternatives within existing U.S. GAAP for private companies

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PCC Cont’d

PCC will determine whether exceptions or modifications to existing US GAAP for private companies are needed

PCC will serve as advisory body to FASB for private companies items under active consideration on the FASB technical agenda

PCC and FASB will work together to develop criteria for determining whether and when exceptions or modifications are warranted for private companies

PCC Responsibilities

1. Billy Atkinson, Chair (TX)

2. George Beckwith (NC)

3. Steven Brown (OR)

4. Jeffery Bryan (NC)

5. Mark Ellis (NY)

6. Thomas Groskopf (OH)

7. Neville Grusd (NY)

8. Carleton Olmanson (MN)

9. Diane Rubin (CA)

10.Lawrence Weinstock (NY)

PCC Members Appointed

Daryl Buck, FASB Liaison

PCC will determine its agenda by supermajority vote (2/3 of sitting members)

PCC using agreed criteria will conduct a review of existing GAAP and identify standards it will consider for possible exceptions

PCC will develop, deliberate and vote on exceptions to US GAAP (2/3 vote of PCC)

Deliberative Process

All recommendations of the PCC must be endorsed by the FASB before becoming GAAP

Once endorsed by simple majority of FASB, proposed modifications will be exposed for public comment

PCC will consider comments and take a final vote

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Process Cont’d

If approved, the final decision then will be submitted to the FASB for a final decision on endorsement

If FASB endorses final version, ASU would be drafted to create the alternative within GAAP Not a Special Purpose Framework (SPF) (OCBOA) Part of the Codification

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Methodology

If FASB does not endorse a proposed or final modification or exception, the FASB Chair will provide to the PCC Chair a written document describing the reason for the non-endorsement and possible changes to consider that could result in a FASB decision to endorse

FASB Power

What is a “private” company under GAAP?

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Definition of a Public Business Entity—An Addition to the Master Glossary

Defines public business entity

Issued December 23, 2013 – No effective date Term “Public Business Entity” was first used in ASU 2014-

02 and 2014-03

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ASU 2013-12

The definition excludes a not-for-profit entity within the scope of Topic 958 Public versus nonpublic distinction will no longer be made

between NFPs in future standard setting

Prospective Application – must comply with prior ASUs if considered public under them

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Definition Cont’d

It is required by the SEC to file or furnish financial statement

It is required by the Securities Exchange Act of 1934 to file or furnish financial statements with a regulatory agency, other than the SEC.

It is required to file or furnish financial statements with a regulatory agency in preparation for the sale of securities or for purposes of issuing securities.

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Definition of Public Entity

It has (or is a conduit bond obligor for) securities that are traded, quoted, or listed on an exchange or an over-the-counter market.

Its securities are not subject to contractual restrictions on transfer, and it is required to prepare U.S. GAAP financial statements (including footnotes) and make them publicly available on a periodic basis pursuant to a legal, contractual, or regulatory requirement.

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Definition of Public Entity, Cont’d

A Guide for Evaluating Financial Accounting and

Reporting for Private Companies

Issued December 23, 2013

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Private Company Decision Making Framework

Identifies five significant differential factors that make private companies different than public companies Number of primary users and their access to management Investment strategies of primary users Ownership and capital structure Accounting resources Learning about new financial reporting guidance

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Differential Factors

Identifies five areas in which financial accounting and reporting guidance might differ for private companies Recognition & Measurement Disclosures Display Effective Dates Transition Method

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Impact

Impact of PCC

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Inaugural Meeting on Dec 6, 2012

ASUs issued to date ASU 2014-02 ASU 2014-03 ASU 2014-07 ASU 2014-18

Impact

Intangibles—Goodwill and Other (Topic 350): Accounting for Goodwill

Allows for amortization of goodwill in lieu of annual impairment testing

Useful life - Up to 10 years

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ASU 2014-02

Option to evaluate goodwill at the company level or the reporting unit level

MUST be test for impairment if a triggering event occurs

All current disclosures will continue to be made Except - Tabular presentation of the changes in goodwill

will no longer be required

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Some Details

Effective - Annual periods beginning after 12/15/14

Interim periods within fiscal years beginning after 12/15/15

Early adoption permitted Including any financial statements not yet made available

for issuance

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Effective Date

Derivatives and Hedging (Topic 815): Accounting for Certain Receive-Variable, Pay-Fixed Interest Rate Swaps—Simplified Hedge Accounting Approach

Scope excludes all financial institutions

The swap and the loan would continue to be accounted for as two separate financial instruments

Assumed to be effective

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ASU 2014-03

Changes in the carrying amount of the swap are reported in other comprehensive income until settlement

Recorded at settlement value, in lieu of fair value

Option to use on a swap-by-swap basis Can be applied to existing or future swaps

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Details

Still required to document the hedging relationship, and the risk management objective and strategy Documentation can be completed up until the date when

the company’s annual financial statements are available to be issued

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Details Cont’d

The swap and the loan would need to be based on the same index and interest rate, and would need to be “plain vanilla”

The terms of the swap do not include a floor or cap on the variable interest rate, unless the borrowing has a comparable floor or cap

The settlement dates should be within a few days of each other, and the fair value at inception would need to be at or near zero

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Criteria to Qualify

The notional value of the swap should be equal to or less than the principal of the loan, and the term of the swap should be equal to or less than the loan

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Criteria to Qualify Cont’d

Effective - Annual periods beginning after 12/15/14

Interim periods within fiscal years beginning after 12/15/15

Early adoption permitted Including any financial statements not yet made available

for issuance

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Effective Date

Consolidation (Topic 810): Applying Variable Interest Entities Guidance to Common Control Leasing Arrangements

Allow private companies in the scope of the ASU to elect not to apply VIE guidance to a lessor entity

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ASU 2014-07

The private company lessee and the lessor legal entity are under common control

The private company lessee has a lease arrangement with the lessor legal entity

Substantially all activities between them are related to leasing activities

IF the lessee explicitly guarantees or provides collateral for any obligation of the lessor related to the asset leased the principal amount of the obligation at inception does not exceed the value of the asset leased 32

Criteria

Not required to provide the VIE disclosures about the lessor entity.

Disclose the amount and key terms of liabilities of the lessor that expose the lessee to providing financial support Amount of debt, interest rate, maturity, pledged collateral

and any guarantees associated with the debt. Qualitative description of circumstances that expose

lessee to providing financial support to the lessor (i.e. any commitments or contingencies).

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Disclosures

Applied RETROSPECTIVELY to all periods presented.

Effective for annual periods beginning after December 15, 2014

Early application is permitted, including for any periods not yet made available for issuance

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Effective Date

Business Combinations (Topic 805): Accounting for Identifiable Intangible Assets in a Business Combination

Exempts private companies from separately recognizing and measuring Non-competition agreements Customer-related intangible assets that are not capable of

being sold or licensed independently

Must adopt 2014-02 with ASU 2014-18

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ASU 2014-18

Effective: First transaction in fiscal years beginning after 12/15/15 Early adoption permitted for any FS not issued

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Effective Date

Proposed Accounting Standards Update—Intangibles—Goodwill and Other (Topic 350), Business Combinations (Topic 805), Consolidation (Topic 810), and Derivatives and Hedging (Topic 815): Effective Date and Transition Guidance (a proposal of the Private Company Council)

Issued- September 30, 2015

Comments Due - November 16, 2015

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Exposure Draft PCC-15-01

Response to concerns raised by private company stakeholders about the required assessment of preferability when electing a private company accounting alternative for the first time after its effective date

Transition provisions that would provide that private companies would be able to forgo a preferability assessment the first time they elect the accounting alternatives

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Details

The proposal would make the guidance in ASUs 2014-02, 2014-03, 2014-07, and 2014-18 effective immediately by removing their effective dates

The proposal would also extend the transition guidance in Updates 2014-02, 2014-03, 2014-07, and 2014-18 indefinitely

Proposed effective date - Immediately

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Details

Non-GAAP Alternative

Develop an “other comprehensive basis of accounting” financial reporting framework for some privately held small-and-medium-sized enterprises (SMEs)

Intended to be less complicated and less costly than U.S. GAAP for SMEs that do not need U.S. GAAP financial statements

Released June 2013

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AICPA Alternative

AICPA FRF - SMEs

Non-GAAP

Special Purpose Framework

Is developed specifically for private small businesses

No standard definition of SME

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Chapters 1. Financial Statement Concepts 2. General Principles of Financial Statement

Presentation and Accounting Policies 3. Transition 4. Statement of Financial Position 5. Current Assets and Current Liabilities 6. Special Accounting Considerations for Certain

Financial Assets and Liabilities 7. Statement of Operations 8. Statement of Cash Flows 9. Accounting Changes, Changes in Accounting

Estimates, & Correction of Errors 10. Risks and Uncertainties 11. Equity, Debt, and Other Investments 12. Inventories 13. Intangible Assets 14. Property, Plant, and Equipment 15. Disposal of Long-Lived Assets and

Discontinued Operations

16. Commitments 17. Contingencies 18. Equity 19. Revenue 20. Retirement and Other Postemployment

Benefits 21. Income Taxes 22. Subsidiaries 23. Consolidated Financial Statements and

Non-controlling Interests 24. Interests in Joint Ventures 25. Leases 26. Related Party Transactions 27. Subsequent Events 28. Business Combinations 29. New Basis (Push-Down) Accounting 30. Nonmonetary Transactions 31. Foreign Currency Translation

Owner-managed – closely held

For-profit

No regulatory reporting requirements that essentially require GAAP-based financial statements

No intention of going public

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What is a SME?

Not in an industry that requires highly-specialized accounting guidance, such as financial institutions and governmental entities

Does not have overly complicated transactions

Does not have significant foreign operations

Key users of the financials have direct access to the entity’s management

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What is a SME? Cont’d

Use of the framework is purely optional

The FRF-SME is not authoritative

Management will represent that they are reporting on a special purpose framework

No effective date

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Authority and Effective Date

The framework will be stable. Frequent changes to the framework are not expected.

Fewer book-to-tax adjustments.

Historical cost is the primary measurement basis Avoids complicated fair value measurements.

Management can choose many accounting policy options Example - current taxes payable method or the deferred

tax method 47

Description

Only relevant principles are included and the accounting is simplified. Accounting for long-lived assets follows an amortized /

depreciated cost approach. No other comprehensive income (OCI) No variable interest entities (VIEs) No complicated accounting for stock compensation and

derivatives No hedge accounting

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Summary

Disclosures are targeted to small business issues

Disclosures are streamlined to avoid excess detail, complexity, and extraneous information

If a user requires additional information, management can tailor the nature and extent of disclosures to suit those needs 49

Disclosures

Basic Financial Statements

FRF for SMEs The basic financial statements

comprise: Balance sheet Income statement Statement of changes in

equity • May be presented in the

notes to the financial statements

Statement of cash flows.

U.S. GAAP A full set of general purpose

financial statements must include: reporting comprehensive

income either in a single continuous financial statement or in two separate but consecutive financial statements.

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Measurement Bases FRF for SMEs The main measurement basis

is historical cost Other measurement bases

used are: replacement cost realizable value present value market value

Fair value, as defined by U.S. GAAP, is not used

U.S. GAAP The main measurement bases

are historical cost and fair value

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Going Concern

FRF for SMEs Requires management

assessment of whether the going concern basis is appropriate

Requires disclosure of material uncertainties relating to events or conditions probable of having a severe impact on the entity’s ability to realize its assets and discharge its liabilities in the ordinary course of business and plans to deal with adverse effects

US GAAP Not originally part of GAAP ASU 2014-15 now includes

managements assessment of going concern

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Derivatives & Hedging

FRF for SMEs Derivatives are not recognized

in the financial statements, although disclosure is required of the notional principal amounts of derivative instruments, their nature and terms, the entity's objectives for holding such instruments, and the settlement amount as of the balance sheet date.

No guidance on hedging transactions.

U.S. GAAP Derivatives representing rights

or obligations are recognized on the balance sheet at fair value, with changes in fair value, for non-hedging derivatives, recognized in current earnings.

Accounting for the hedging instrument and the hedged item depends on whether the hedge qualifies as a fair value or cash flow hedge

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Intangibles

FRF for SMEs All non-goodwill intangible

assets are considered to have finite useful lives and, thus, all intangible assets are amortized over their estimated, useful lives.

Silent regarding impairment.

U.S. GAAP Non-goodwill intangibles are

separated into those having finite useful lives,

and thus subject to amortization, or

determined to have indefinite useful lives, and, thus, not subject to periodic amortization.

Subject to impairment testing.

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Goodwill

FRF for SMEs Goodwill is deemed to have a

finite life and amortized generally over the same period used for income tax purposes or, if not amortized for tax purposes, over a period of 15 years.

Intangible assets acquired in a business combination can be separately recognized or included in goodwill

U.S. GAAP Goodwill is not amortized but is

subject to impairment testing at the reporting unit level.

PCC Alternative – amortize up to 10 years

Identifiable intangibles are separately recognized

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Stock Compensation

FRF for SMEs No compensation expense is

recognized when stock or other equity instruments are issued to employees in lieu of cash, although disclosure is required of the principal terms of any employee stock-based compensation plan.

U.S. GAAP Generally, entities are required

to measure the cost of employee services received in exchange for an award of equity instruments based on the grant-date fair value of the award.

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Revenue

FRF for SMEs Generally, the conditions for

recognizing revenue are consistent with current GAAP

Isn’t changing to reflect updated for ASU 2014-09

US GAAP Revenue is recognized when

persuasive evidence of an arrangement exists;

delivery has occurred or services have been rendered;

the price is fixed or determinable; and

collection is reasonably assured

ASU 2014-09 changes to a principles based approach

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Retirement Benefits

FRF for SMEs An entity is allowed to make an

accounting policy choice to account for defined benefit plans using either the "current contribution

payable" method an "accrued benefit

obligation" method, which requires recognition of a liability representing the actuarial present value of benefits attributed to employee services rendered to date

US GAAP For a defined benefit plan, the

funded status of a single-employer benefit plan, measured as the difference between the fair value of plan assets and the projected benefit obligation, is recognized in the balance sheet as an asset or liability

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Income Taxes

FRF for SMEs An accounting policy choice

could be made to account for income taxes under either the "taxes payable"

method, only current income tax assets and income tax liabilities are recognized,

the "deferred" method, recognition is required of a deferred tax liability or asset representing deferred income tax outflows or inflows.

U.S. GAAP No choice exists (i.e., only the

deferred method is acceptable).

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Consolidation

FRF for SMEs An accounting policy choice

could be made by a parent company either to Consolidate its

subsidiaries, or Account for its subsidiaries

under the equity method.

Control of a subsidiary under the FRF for SMEs is based entirely on the ownership of more than 50% of the subsidiary's equity interests

US GAAP All subsidiaries are required to

be consolidated with its parent, except when control of a subsidiary does not rest with the majority owners.

A primary beneficiary is required to consolidate a variable interest entity because a controlling financial interest in such entity has been achieved by way of arrangements not involving voting interests

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Leases

FRF for SMEs Similar to current U.S. GAAP

Will not mirror Exposure Draft and will not be updated to mirror exposure draft

Accounting sale-leaseback transactions is also broadly similar to current U.S. GAAP

• Will not mirror Exposure Draft and will not be updated to mirror exposure draft

US GAAP Distinction between capital

leases and operating for lessee

Distinction among sales-type, direct financing, and operating leases for lessor

Current ED changes current GAAP and eliminates most operating leases

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Financial statements prepared under the FRF for SMEs can be Audited Reviewed Compiled

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Can I get a “clean” opinion?

Independent Accountant’s Review Report Board of Directors Uncle Cherry, Inc. ↓ [last paragraph]

Based on our review, we are not aware of any material modifications that should be made to the accompanying financial statements in order for them to be in conformity with Financial Reporting Framework for Small- and Medium-Sized Entities™, as described in Note 1.

[Signature of accounting firm or accountant, as appropriate] [Date]

Sample standard Review report

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.

Sample Basis of Presentation Note

Requires an entity to prepare an opening statement of financial position at the date of transition

Allows management to elect certain exemptions to the principle that the opening statement of financial position should comply with the framework

Requires certain disclosures including the amount of each charge or credit to equity at the date of transition

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Transition

FRF-SME An Introduction to the FRF-SME’s Comparison of FRF for SMEs to Other Bases of

Accounting Illustrative Financial Statements Illustrations of the Application of Certain Principles and

Criteria Presentation & Disclosure Checklist FAQs Flyer Sample letters 66

Resources Available

Private Company Reporting

Melisa Galasso mgalasso@cbh.com

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