Private Company Financial Reporting
Private Company Council
Purpose of the PCC
• Work jointly with FASB to mutually agree whether and when alternatives from GAAP are warranted for private companies.
• Serves as primary advisory body to FASB on appropriate treatment for private companies for items under consideration on FASBs agenda
Update No. 2014-02—Intangibles—Goodwilland Other
A consensus from PCC
Not applicable to NFP, public entities, and most EBPs
Alternative treatment (election)
Implementation of Election
• Goodwill amortized over period not to exceed 10 years
• Testing of impairment at entity or reporting unit level
• “triggering event”
• Option of performing qualitative assessment to see if it is more likely than not that impairment exists
• If impaired/2-step test
Income Statement
Income from continuing operations
Amortization of goodwill xxxxx
Goodwill impairment loss xxx
Net income from continuing operations xxxxx
(Discontinued Operations Goodwill reported separately)
Balance Sheet
Assets
.
.
Goodwill (net) xxxx
Total Assets xxxxx
Effective Date
• If elected, applied prospectively for goodwill existing at beginning of adoption period and new goodwill recognized in annual periods beginning after December 15, 2014 and interim periods within annual periods beginning after December 15, 2015
• Early adoption/election is permitted
Disclosures
• Info about Goodwill in total/major business line/fresh start event/weighted average amortization period
• Gross amounts/accumulated amortization/accumulated impairment loss
• Info about impairment loss
Update 2014-03—Derivatives & Hedging
• Election allows privately held companies to have an alternative treatment, less expensive, avoid FV
• Applies to specific receive variable/pay fixed interest rate swaps (in essence allows entity to treat variable rate interest as fixed through swap)
• Excludes NFP, public companies, most EBPs, and financial institutions
Election
• Allows entity to measure the swap at settlement value rather than FV at each balance sheet date
• Ignore the nonperformance risk in valuation
• Assumption is that the hedge protects private business
6 Conditions Needed to Elect
• Variable rate of interest on swap & debt have same basis
• Terms on swap have no floor or cap (“plain vanilla swap”)
• Repricing and settlement dates are near same
• Swap fair value at inception is near zero
• Notional amount of swap and debt are same
• All interest payments are being hedged
Effective Date
• Simplified hedge accounting approach—annual periods beginning after 12/15/2014
• Interim periods within annual periods beginning after 12/15/2015
• Early adoption is permitted
• Adoption using modified retrospective or full retrospective approach
Update 2014-07—Consolidation
• Variable Interest Entity (VIE)—common control lease arrangement
• Allows lessee to ignore VIE accounting rules if entity is a privately owned company
Conditions Required for Election
1. Lessee and lessor under common control2. Formal lease contract exists3. Substantially all economic activity between 2
entities is related to lease4. If lessee provides any guarantees or collateral
for lessor obligations, the amount is not in excess of value of leased asset(s)
Disclosures/Subsequent Events
• If any of those conditions cease to exist, VIE accounting applies and must consolidate entities for reporting purposes
• Under election, must disclose:• >lessor liability information
relating to exposure to any financial support from lessee
• >discussion of any circumstances that would require lessee to provide financial support to lessor
Effective Date(s)
• If elected, this accounting alternative treatment should be applied retrospectively to all periods presented. Effective for annual periods beginning after 12/15/2014:
• Interim periods, within annual periods beginning after 12/15/2015
• Early application permitted
PCC Issue 13-01A - Accounting for Identifiable Intangible Assets in a Business Combination
• Endorsed by FASB in November 2014 with expected issuance in December 2014
• No recognition of:• Noncompetition agreements• Customer related intangibles that cannot be sold or
licensed independently from other assets
• Will require the adoption of 2014-02 Goodwill
• Prospective adoption for periods beginning after December 15, 2014 with early adoption permitted
Update 2014-15— Going Concern
• Management’s responsibility related to going concern evaluation
• Evaluation about ability to continue from 1 year from date the statements are issued
• Provides required disclosure information
• Effective annual periods after December 15, 2016
ImplementingFRF for SMEs
Session Objective(s):
• Understand FRF for SMEs and its history
• Learn best practices for implementing FRF for SMEs
• Learn lessons from real-life implementation stories
FRF for SMEsReleased June 2013
Background & Context
Current SPF reporting environment:
US GAAP Not RequiredGAAP not required for many small- and medium-sized entities
IFRS for SMEsLack of familiarity, higher learning curve, not US-centric, form of GAAP
Other Special Purpose FrameworksTax or modified cash basis may be inappropriate or insufficient for some SMEs/users
Special Purpose Frameworks (OCBOA):
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
An additional non-GAAP framework
Separate from FASB and PCC
FRF for SMEs
Not GAAP - Special Purpose Framework
Complementary to efforts by FASB/PCC
AICPA fully supports the work of the PCC and FASB to address the private company environment
Private Company Council
GAAP
Modify GAAP for private companies
Who could use it?
– Small and medium-sized entities
– Owner-managed/for-profit
– Can be used by any industry group
– Incorporated and unincorporated
For use when GAAP-based financial statements are not needed
Who is it for?
Owner-ManagersDepend on reliable financial statements to
– Confirm assessments of performance
– Determine what they owe/own
– Understand cash flows
UsersExternal financial statement users who have direct access to management
Non-issuersNo intent of going public
Characteristics of typical entities
• Entity does not operate in an industry that has highly specialized accounting guidance– such as financial institutions and investment companies
• Entity does not engage in overly complicated transactions• 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
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
Features
• Excess narrative avoided• Eschews prescriptive rules • Use of professional judgment• Intuitive and understandable• Stable yet nimble
Frameworkin Action
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
Identifying Candidates
• Entities using GAAP
• Departures
• Outside requirement for GAAP
• Non-issuers
• Not highly specialized accounting guidance
Identifying Candidates
• Entities using Tax-Basis Accounting
• Significant use of accelerated depreciation
• Debt with outside parties
Identifying Candidates
• Entities using Cash Basis Accounting
• Difficult to convert
• Expanding operations and seeking financing
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
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
Acceptance Hurdles
• Modify debt covenants
• Lack of user’s understanding that they can still get a compilation, review or audit report
Finding Success
• 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
Finding Success
• 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.”
Experience 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
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
“A new effort to streamline financial reporting could help credit officers make small-business loans without studying a mountain of footnote-laden documents.”
-American Banker, 1/27/14
“The framework could help our bank land small-business customers…”
‒Banker from MO
Comparative
Financial Statements
Example Financial Statement Extracts
• Example assumes primary difference between FRF for SMEs and GAAP financial statements is that management uses “taxes payable” method rather than “deferred taxes” method.
• Deferred tax balances account for differences in financials
Statement of Financial PositionExtract from Current Assets
Assets FRF for SMEs GAAP
Cash and cash equivalents $ 304,400 $ 304,400
Accounts receivable 3,789,200 3,789,200
Inventory 89,700 89,700
Prepaid charges and other assets 118,400 118,400
Total current assets $ 4,301,700 $ 4,301,700
Statement of Financial PositionExtract from Long-term Assets
Assets FRF for SMEs GAAP
Equity in joint venture $ 205,600 $ 205,600
Note receivable, related party 175,000 175,000
Property and equipment net of accumulated depreciation
976,400 976,400
Total long-term assets 1,357,000 1,357,000
Statement of Financial PositionExtract from Current Liabilities
Liabilities FRF for SMEs GAAP
Current maturities of notes payable $ 110,300 $ 110,300
Current portion of leases payable 62,250 62,250
Accounts payable 2,543,100 2,543,100
Current deferred tax liability 594,000
Other accrued liabilities 88,600 88,600
Total current liabilities $ 2,804,250 $ 3,398,250
Statement of Financial PositionExtract from Long-term Liabilities
Liabilities FRF for SMEs GAAP
Notes payable, less current maturities $ 357,800 $ 357,800
Leases payable, less current portion 135,350 135,350
Long-term accrued liabilities 154,200 154,200
Deferred tax liability 25,200
Total long-term liabilities $ 647,350 $ 672,550
Statement of Financial PositionExtract from Shareholders’ Equity
Equity FRF for SMEs GAAP
Common stock - $1 par value, 500,000 authorized shares…
$ 300,000 $ 300,000
Retained earnings 1,907,100 1,287,900
Total shareholders’ equity 2,207,100 1,587,900
Total liabilities and shareholders’ equity $ 5,658,700 $ 5,658,700
Extract from Statement of Operations
Equity FRF for SMEs GAAP
Revenues earned $ 9,630,800 $ 9,630,800
Cost of revenues earned 7,436,100 7,436,100
Gross profit 2,194,700 2,194,700
Selling, general, and administrative expense 895,600 895,600
Income from operations 1,299,100 1,299,100
Gain on sale of equipment 10,000 10,000
Interest expense (69,500) (69,500)
Income before provision for income taxes 1,239,600 1,239,600
Provision for income taxes 451,700 662,900
Net income 787,900 576,700
Extract from Statement ofCash Flows
Cash flows from operating activities FRF for SMEs GAAP
Net income $ 787,900 $ 576,700
Adjustments to reconcile net income to net cash provided by operating activities
Depreciation and amortization 167,800 167,800
Provision for losses on receivables 6,300 6,300
Gain on sale of equipment (10,000) (10,000)
Increase in deferred taxes 211,200
Increase in long-term accrued liabilities 128,000 128,000
Decrease in inventory 9,400 9,400
Increase in accounts receivable (461,400) (461,400)
Net cash provided by operating activities 628,000 628,000