MHM Executive Education Series: AICPA Private Company Accounting

Presented by: Mike Loritz

July 16, 2013

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Before We Get Started…

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This webinar is eligible for CPE credit. To receive credit, you will need to answer periodic polling questions throughout the webinar.

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CPE Credit

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Mike Loritz, CPA Shareholder 913.234.1226 | mloritz@cbiz.com 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.

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Today’s Presenter

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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

PROJECT UPDATE

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S pec ial P urpos e F rameworks (OC B OA ):

US G A A P Not R equired GAAP not required and not the best solution for many

small- and medium-sized entities

IF R S for S ME s Lack of familiarity, higher learning curve, not US-centric,

form of GAAP

Other S pec ial P urpos e F rameworks Tax or modified cash basis may be inappropriate or

insufficient for some SMEs/users

Why was the Framework Developed?

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An Additional Non-GAAP Framework

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GAAP Modify GAAP for private

companies

Not GAAP – Special Purpose Framework

Complementary to efforts by FAF’s PCC – AICPA fully Supports the work of the PCC, FAF and FASB to address the private company environment

FRF for SMEs Private Company Council

Framework is Separate from FAF and PCC

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Approximately 200 pages Self-contained Excess narrative avoided Avoidance of bright lines Use of professional judgment

Principles-based, Standalone, Compact

Principles-based

Standalone

Compact

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AICPA Framework for SMEs

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.

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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?

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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

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Controversy

Public statements critical of the framework: FAF President – Teresa Polley National Association of State Boards of Accountancy

(NASBA Tells Private Companies: Don’t Use AICPA Financial Reporting Framework)

Institute of Management Accountants (IMA) Risk Management Association (RMA)

PRINCIPLES OF REPORTING

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Chapter 1 introduces the financial statement concepts Similar to the FASB Concept Statements

Discusses concepts including the following: Benefit vs. cost Materiality Measurement Qualitative characteristics

Understandability Relevance Reliability Comparability

Financial Statement Concepts

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Historical Cost = Primary Measurement Basis Framework primarily uses historical cost basis, steering away

from complicated fair value measurements Uses the term “market value”

Considered by AICPA to be the most relevant and reliable measurement basis for small businesses financial reporting needs

Designed to be well-suited as a metric for evaluating an entity’s cash flow

Financial Statement Concepts

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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

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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

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Chapter 10 – Risks and Uncertainties Requires a description of the major products or services the entity sells

or provides and its principal markets, including the locations of those markets

Requires an explanation that the preparation of financial statements in conformity with the FRF for SMEs requires the use of management’s estimates

Requires an entity to disclose certain concentrations if, based on information known to management before the financial statements are available to be issued, certain criteria are met

Risks & Uncertainties

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Chapter 11 - Investments

Historical cost approach

Market value measurement required only for investments being held for sale Changes in market value are recorded in net income No specific definition or guidance on what constitutes “held

for sale”

Investment Securities

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Investor that is able to exercise significant influence over an investee that is not a subsidiary follows the equity method.

Not able to exercise significant influence — follow the cost method

If the investor holds 20 percent or more of the voting interest in the investee, there is a rebuttable presumption that the investor has the ability to exercise significant influence.

Equity Method Investments

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Chapter 13 – Intangible Assets Goodwill is not tested for impairment. Goodwill should be amortized: Over the same period as that used for federal income tax

purposes or if not amortized for federal income tax purposes then a period

of 15 years.

Goodwill

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Chapter 14 – PP&E 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

No assessments of impairment for long-lived assets. Assets no longer used are written off.

Property, Plant & Equipment

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Revenue — Performance

Chapter 19 - Revenue For goods: Performance is achieved when

the entity transfers the risks and rewards associated with the goods to a customer

For Services: 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. Performance achieved when reasonable

assurance exists regarding the measurement of the consideration that will be derived from rendering the service

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Chapter 20 – Retirement Plans 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

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Chapter 21 – Income Taxes 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

FIN 48 No evaluation or accrual for uncertain tax positions

Income Taxes

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Chapter 22 - Subsidiaries Recognition and Presentation Does not require consolidation (No VIE concept) 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

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Chapter 25 - Leases Criteria for capitalizing a

lease for tax purposes generally matches criteria in FRF for SMEs

Classifies leases as follows: From the point of view of the lessee — capital

and operating leases From the point of view of the lessor — sales-

type, direct financing, and operating leases

Reduction of book/tax differences

Lease Accounting

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Chapter 28 – Business Combinations Requires the acquisition method in accounting for a

business combination and provides guidance on identifying a business combination, the acquirer, and the acquisition date

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

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Face or contract amount (or notional principal amount) Nature and terms Discussion of the credit and market risk and cash

requirements Description of objectives Net settlement amount

R ec ognized at s ettlement — net c as h paid or rec eived

Dis c los e pertinent information

Derivatives

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Income tax accounting: taxes payable method or deferred income taxes method

Subsidiary accounting: consolidate or equity method

Joint venture accounting: equity method or proportionate consolidation (only applicable to unincorporated entities when it is an established industry practice)

Intangible assets acquired in a business combination: separately recognize or subsume into goodwill

Primary Accounting Policy Options

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Internally-generated intangible assets: expenditures during development phase, either expense or capitalize

Certain Interest costs: expense or capitalize interest costs related to certain items of inventories, internally-generated intangible assets and PP&E

Defined benefit plans: current contribution payable method or one of the accrued benefit obligation (ABO) methods

Primary Accounting Policy Options

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Long-term contracts and service contracts: percentage of completion method or the completed contract method Completed contract method is used when the entity cannot

reasonably estimate the extent of progress toward completion.

Completed contract method may also be used if both of these conditions are met:

a) Used for income tax reporting purposes b) Financial position and results of operations would not vary

materially from those resulting from the use of the percentage of completion

Primary Accounting Policy Options

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General Requirements Disclosure requirements for each area are included in the

respective Chapter within the Framework Prescriptive requirements are included, however, are

generally significantly less than US GAAP: Investment Securities

Debt/Equity

Derivatives/Share-Based Compensation

Disclosure Checklist – 27 pages

Disclosures

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Accounting Policies (Chapter 2) The accompanying financial statements have been prepared in

accordance with the F inancial R eporting F ramework for S mall- and Medium-S ized E ntities 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

Learning Center S lide No. 68

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Questions?

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Join us for these future webinars 8/22: Private Company Framework - Comparing AICPA vs.

IFRS Standards 9/5: Third Quarter Accounting and Financial Reporting

Issues Update

Read these related MHM Messengers 6-13: AICPA's Special-Purpose Framework Proves

Controversial 5-13: Progress on Standard-Setting for Private Companies

If You Enjoyed This Webinar…

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Mike Loritz, CPA Shareholder 913.234.1226 | mloritz@cbiz.com 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.

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