National Office Resources

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1 Center for Plain English Accounting AICPA s National A&A Resource Center Available Exclusively to PCPS Members The Financial Reporting Framework for SMEs 1 National Office Resources for PCPS Member Firms The Center for Plain English Accounting is available exclusively to PCPS member firms The CPEA provides expertise and resources in a straight-forward and clear style The CPEA assists member firms in understanding and implementing accounting, auditing, review, and compilation standards through the sharing of technical advice and guidance Additional information can be found on the AICPA web site at 2 1

2 Services & Benefits of the CPEA Monthly technical reports covering a variety of A&A topics Written answers to written technical inquiries One seat at each of eight NASBA-certified two-hour webinars per year on hot A&A issues for a total of sixteen CPE credits annually Alerts and special reports covering recently issued guidance and hot topics Access to an annual eight-hour (split between two days) NASBA-certified webinar Online access to a valuable reference library of past reports Special VIP access to educational sessions and roundtables created just for CPEA members at select AICPA conferences 3 Questions about Membership? Please the CPEA at CPEA@aicpa.org Can also contact our staff directly: Susanne Richards- Srichards@aicpa.org Kristy Illuzzi- Killuzzi@aicpa.org Bob Durak- Rdurak@aicpa.org To be added as a CPEA member and receive our alerts, communications, and access to the website, please visit the Join CPEA section of Please contact the CPEA before reproducing any of our materials or sharing them outside the CPEA 4 2

3 Implementing FRF for SMEs AICPA.ORG/FRF-SMES 5 Session Objectives Understand FRF for SMEs and its history Learn best practices for implementing FRF for SMEs Learn lessons from reallife implementation stories 6 3

4 FRF for SMEs Released June 2013 Background & Context 7 Current SPF Reporting Environment Special Purpose Frameworks (OCBOA): U.S. GAAP Not Required U.S. GAAP not required for many small- and medium-sized entities IFRS for SMEs Lack of familiarity, higher learning curve, not UScentric, form of U.S. GAAP Other Special Purpose Frameworks Tax or modified cash basis may be inappropriate or insufficient for some SMEs/users 8 4

5 Another Option... a framework to deliver tailored financial reporting for America s small business community a framework with streamlined, common-sense requirements based on traditional and proven accounting methods a framework to provide robust, meaningful financial reports to business owners, lenders, insurers and others without needless complexity 9 An Additional Non-GAAP Framework 10 5

6 Separate from FASB and PCC FRF for SMEs Not U.S. GAAP - Special Purpose Framework Complementary to efforts by FASB/PCC Private Company Council U.S. GAAP Modify U.S. GAAP for private companies AICPA fully supports the work of the FASB/PCC to address the private company environment 11 Who Could Use It? For use when U.S. GAAP-based financial statements are not needed Small and medium-sized entities Owner-managed/for-profit Can be used by any industry group Incorporated and unincorporated 12 6

7 Who Is It For? Owner-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 13 Features Standalone framework Concise Suitable criteria for general-use financial statements Accrual based Blend of traditional accounting and accrual income tax methods Fewer adjustments from book to tax 14 7

8 Features Excess narrative avoided Avoids prescriptive rules Use of professional judgment Intuitive and understandable Stable yet nimble 15 Key Principles 16 8

9 Historical Cost Framework primarily uses historical cost basis, steering away from complicated fair value measurements Most relevant and reliable measurement basis for small business financial reporting needs Well-suited as a metric for evaluating an entity s cash flow Objective, verifiable, straight-forward 17 Historical Cost Directly relates to the experience and past decisions of an entity Sound basis for financial forecasts Best measurement basis to help evaluate the performance of a small business. Stands the test of time 18 9

10 Optionality in Certain Accounting Policies Answers the varying informational needs of different financial statement users Financial reporting that is truly representative of the underlying economics of a small business Optionality nothing new to accountants make choices today 19 Primary Accounting Policy Options Income tax accounting taxes payable method or deferred income taxes method Subsidiary accounting consolidate or equity method Long-term contracts percentage of completion method or the completed contract method 20 10

11 Targeted Disclosures Only targeted disclosures in the financial statements Stakeholders receive the pertinent, understandable information they need Avoid excess narrative or irrelevant noise in the financial reports 21 Comparison of FRF for SMEs to U.S. GAAP Fair Value FRF for SMEs Uses the term market value consideration that would be agreed upon in an arm s length transaction Market value used only in very limited circumstances Business combinations Certain nonmonetary transactions Marketable securities held for sale U.S. GAAP Fair value is an exit price Greater use of fair value measurements Provides an overall framework to measuring fair value Standardized disclosure requirements for fair value measurements Nonpublic entities are exempt from certain fair value disclosures 22 11

12 Comparison of FRF for SMEs to U.S. GAAP Income Taxes FRF for SMEs Policy choice to account for income taxes using either the taxes payable method or the deferred income taxes method No evaluation or accrual of uncertain tax positions U.S. GAAP Deferred income tax method is used Uncertain income tax positions must be evaluated and accrual made if certain conditions are met 23 Comparison of FRF for SMEs to U.S. GAAP Comprehensive Income FRF for SMEs No concept of comprehensive income or items of other comprehensive income U.S. GAAP Certain items are classified as other comprehensive income (OCI) and displayed as such 24 12

13 Comparison of FRF for SMEs to U.S. GAAP Impairment FRF for SMEs No assessment of impairments for longlived assets A depreciated or amortized cost approach is followed and assets no longer used are written off U.S. GAAP Long lived assets are tested for impairment upon a triggering event Indefinite lived intangible assets are subject to an impairment test annually 25 Comparison of FRF for SMEs to U.S. GAAP Leases FRF for SMEs Traditional accounting approach blended with some accrual income tax accounting methods Lessee classifies leases as either operating or capital leases Lessor accounts for leases as sales type, direct financing, or operating U.S. GAAP Lessee classifies leases as either operating or capital leases Lessor accounts for leases as sales type, direct financing, or operating Project underway to revamp lease model 26 13

14 Comparison of FRF for SMEs to U.S. GAAP Revenue Recognition FRF for SMEs Broad, principle based guidance Revenue should be recognized when performance is achieved and ultimate collection is reasonably assured U.S. GAAP New standard just issued New standard will recognize revenue when control of goods or services has passed to a customer For many companies, new standard will mean big changes Long list of things that may be reported differently 27 FRF for SMEs in Action 28 14

15 CPAs Are Putting FRF for SMEs To Use Firms assessing client base Using tools and resources available on AICPA website Taking steps to implement, and actually converting clients Otherwise risk losing business or missing opportunities 29 Identifying Candidates Entities Using U.S. GAAP Currently taking U.S. GAAP departures No outside requirement for U.S. GAAP Non-issuers Not highly specialized accounting guidance 30 15

16 Identifying Candidates Entities Using Tax-Basis Accounting Significant use of accelerated depreciation Debt with outside parties 31 Identifying Candidates Entities Using Cash Basis Accounting Difficult to convert Expanding operations and seeking financing 32 16

17 Identified Now What? Prepared financial information to compare current reporting framework to FRF for SMEs Meeting to discuss with client ensure understanding Easier Made sense Discuss cost concerns 33 Identified Now What? Set up meeting with users of financial statements Present comparison of current financial statements to those prepared under FRF for SMEs Explain needs are being met User s needs Business entity s needs helps them run their business Potential cost savings 34 17

18 Acceptance Hurdles Modify debt covenants Lack of user s understanding that they still can get a compilation, review, or audit report 35 Finding Success 36 18

19 Hearing from CPAs CPA in Ohio converted clients save a lot on disclosures; financials are more relevant CPA in FL influenced local BofA branch to accept FRF for SMEs on behalf of a client CPA in AK met with client starting new construction company; bonding agency agreed to use FRF for SMEs CPA in WA We met with 18 banks They appreciated the framework s comprehensiveness and relevant disclosures 37 Case Study CPA Perspective 80-person CPA firm in Wisconsin began using FRF for SMEs when first introduced Large number of small, private company clients No controller Day-to-day transactions are handled by a bookkeeper or the owner Some difficulty following the more intricate GAAP requirements FRF for SMEs seemed a great fit for clientele Moved about a quarter of its existing GAAP-based and income-tax-basis clients to FRF for SMEs Response from both clients and financial statement users has been very positive 38 19

20 Case Study CPA Perspective Tip for Success - Target the right client GAAP-based financial statements that take departures The only thing that would change was the report, not the results. Income-tax-basis clients Majority of these clients saw a significant improvement in their equity position Use of accelerated methods, specifically bonus depreciation and Internal Revenue Code Section 179, did not reflect an appropriate value of the assets and artificially lowered the equity. Overall, the framework helped these clients show a much stronger asset and owner equity base, which appealed to both the client and their banker 39 Case Study CPA Perspective Tip for Success Reach out to bankers One-on-one meetings with bankers and presentations to lender groups Illustrate what the framework would mean for financial statement users - Prepare both the traditional basis of accounting statement that the client and banker had been using and a statement following the FRF for SMEs, presenting them side by side and explaining the differences Tip for Success Bring staff up to speed Lunch-and-learns that focus on the differences among the FRF for SMEs, GAAP and income-tax-basis financial reporting 40 20

21 Experiences with Bankers & Other Users CPAs introducing FRF for SMEs and educating state bank organizations FRF for SMEs treated as OCBOA Mostly positive responses Bankers want to see what they are getting Use tools sample financial statements and comparison charts 41 Banking Regulators/Acceptance Discussed FRF for SMEs with regulators/exam chiefs Bankers accept OCBOA today/flexible with smaller businesses Exam chiefs will treat FRF for SMEs as another OCBOA 42 21

22 A new effort to streamline financial reporting could help credit officers make small-business loans without studying a mountain of footnoteladen documents. -American Banker, 1/27/14 The framework could help our bank land small-business customers Banker from MO Case Study Banker Perspective Community banker - Sr. Vice President, Loan Review, in Baton Rouge Loans up to $10 million are made Attended local CPA firm presentation Learned about FRF for SMEs and became interested Concluded that FRF for SMES could be a good match for the bank and its customers Appealing to me because it is a simple, straightforward solution that essentially offers everything I m currently receiving from clients Bank frequently accepts GAAP-based financial statements with exceptions from customers 44 22

23 Case Study Banker Perspective Brought in local CPA firm to educate the banking staff Learn about the FRF for SMEs How do financial statements compare to what bankers are used to seeing? When is the FRF for SMEs suitable? Addressed Concerns and explained advantages Utilized AICPA Resources 45 Introducing the FRF for SMEs to Clients and Bankers Stronger Bonds Gives firms an opportunity to meet small companies unique needs and differentiate their services in the market Deepens ties with clients, other CPAs and lenders in the community Demonstrates an overall understanding of the financial issues that concern small business and how to address them Gives the firm a chance to emphasize the importance of the client/banker relationship and allowing for an invaluable interaction 46 23

24 FRF for SMEs Toolkits Slid e Resources: Client-Facing Materials And more. Slid e 24

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