Financial Reporting Framework for Small- and Medium-Sized Entities FRF for SMEs Accounting Framework

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Copyright 2013 American Institute of CPAs

Instructions To Firms
Below are some suggestions when using this PowerPoint to introduce your team members to the FRF for SMEs Framework
This PowerPoint is an overview of the framework. Reviewing this is not a substitute for reading and understanding the actual guidance. Several slides have a comment note for you to consider based on your processes or to consider incorporating relevant examples. To make this most useful for your team, look for other points within the presentation where you have relevant examples or experiences.

Once you have tailored this PowerPoint to your firms current practices, delete this slide and the other red notes youll find in the following slides.
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Current Special Purpose Financial Reporting Framework Environment

Small and medium-sized entities (SMEs) may not need GAAP-based financials If GAAP isnt required, a special purpose framework may be the financial reporting option currently used
Tax Cash Regulatory Contractual

Special Purpose Framework is the term that replaces OCBOA

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A New Non-GAAP Special Purpose Financial Reporting Framework

AICPA has released the Financial Reporting Framework for SMEs
Non-GAAP Streamlined Based on traditional and proven accounting methods Provides meaningful financial reports without needless complexity

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An Additional non-GAAP Framework

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Separate from FAF and Private Company Council

Private Company Council Is GAAP Modifies GAAP for private companies FRF for SMEs Not GAAP - Special Purpose Framework Is developed specifically for private small businesses

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Useful Resources
Financial Reporting Framework for Small- and Medium-Sized Entities
The body of the framework outlining the principles and concepts

An Introduction to the Financial Reporting Framework for Small- and Medium-Sized Entities
A quick look at why the framework was developed, benefits, key concepts, etc.

Comparison of FRF for SMEs to Other Bases of Accounting

Compares to GAAP, Tax and IFRS for SMEs
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Useful Resources
Illustrative Financial Statements
Examples with comparisons to GAAP financials

Illustrations of the Application of Certain Principles and Criteria

Examples of how to apply certain principles - Transition - Going concern - Amortization of goodwill - And more

www.aicpa.org/FRF-SMEs
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What entities may want to use FRF for SMEs?

Owner-managed closely held For-profit No regulatory reporting requirements that essentially require GAAP-based financial statements No intention of going public 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 entitys management
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Authority and effective date

Use of the framework is purely optional The AICPA has no authority to require the use of the FRF for SMEs accounting framework for any entity

Management represents that such financial statements have been prepared in accordance with the AICPAs FRF for SMEs accounting framework, a special purpose frame-work
Because use of the framework is optional, there is no effective date for its implementation
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Advantages of FRF for SMEs

Offers clients a cost effective, reliable, and simple method of accounting
Quickly portrays what their business owns, what it owes and its cash flow Closely aligns with how they run their businesses

The framework is concise, self-contained and stable

Only relevant financial reporting topics are included Written to be easy to understand Frequent changes to the framework are not expected.

Historical cost is the primary measurement basis

Avoids complicated fair value measurements.
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Advantages of FRF for SMEs

Financial statements will more closely align with income tax returns because there will be fewer book-to-tax adjustments. Accounting policy options will allow management to select what is best for their purposes.
Example - current taxes payable method or the deferred tax method No impairment testing is required

Goodwill is amortized over the same period as for federal tax purposes.
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Advantages of FRF for SMEs

Only relevant principles are included and the accounting is simplified.
Accounting for long-lived assets follows an amortized/depreciated cost approach. - No impairment testing is required No other comprehensive income (OCI) No variable interest entities (VIEs). Parent-only financial statements are allowed No complicated accounting for stock compensation and derivatives No hedge accounting Note - FASB exposure drafts relating to leases and revenue recognition will substantially change current GAAP treatment

Disclosures are targeted to small business issues.

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Advantages of FRF for SMEs

FIRM: Note your new disclosure checklist process for engagements using FRF for SMEs.

Targeted Disclosures
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

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A Look at Key Principles of FRF for SMEs

Primarily uses historical cost basis
Avoids complicated fair value measurements Most relevant and reliable measurement basis for small business financial reporting needs Well-suited as a metric for evaluating an entitys cash flow Objective, verifiable, straight-forward Directly relates to the past experience and past decisions of an entity

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A Look at Key Principles of FRF for SMEs

Optionality in Certain Accounting Policies
Income taxes
Taxes payable or deferred income taxes method

Subsidiaries
Consolidate or equity method

Joint ventures
Equity method or proportionate consolidation

Long-term contracts and service contracts

Percentage of completion or the completed contract method
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A Look at Key Principles of FRF for SMEs

Intangible assets acquired in a business combination
Separately recognize or include in goodwill

Internally-generated intangible assets

Either expense or capitalize development costs

Certain interest costs

Expense or capitalize if related to certain items of inventories, internally-generated intangible assets, and PP&E

Defined benefit plans

Current contribution payable or one of the accrued benefit obligation (ABO) methods
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Content of the FRF for SMEs

FIRM: Note where the downloaded framework is saved in your practice. Note where the downloaded implementation materials are also. Framework and other resources can be downloaded at www.aicpa.org/FRFSMEs.
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Chapter 2: General Principles

When preparing financial statements, management should make an assessment of whether the going concern basis of accounting is appropriate

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Going Concern
Requires management assessment of whether the going concern basis of accounting is appropriate. When management becomes aware of material uncertainties relating to events or conditions and concludes that a known event or condition is probable of having a severe impact on the entitys ability to realize its assets and discharge its liabilities in the ordinary course of business the entity should disclose those uncertainties along with its plans for dealing with the adverse effects of the conditions and events
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Chapter 3: Transition
This chapter
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

Guidance is available in the Illustrations and Applications resource.

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Chapter 13: Intangibles

Goodwill is amortized over the same period as that used for federal income tax purposes or 15 years. No impairment testing All intangible assets are considered to have a finite useful life and are amortized over their estimated useful lives.

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Chapter 21: Income Taxes

This chapter
Allows an accounting policy choice to use either the - taxes payable method - only current income tax assets and liabilities are recognized - or deferred income taxes method - recognize a deferred income tax liability whenever recovery or settlement of the carrying amount of an asset or liability would result in deferred income tax outflows; - recognize a deferred income tax asset whenever recovery or settlement of the carrying amount of an asset or liability would generate deferred income tax reductions States that no provision for income taxes should be made in the financial statements of businesses if income is taxed directly to the owners

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Chapters 22: Subsidiaries

Allows management to make an accounting policy choice to either consolidate its subsidiaries or use the equity method Subsidiary is an entity that is more than 50% owned by the reporting entity All subsidiaries should be accounted for using the same method.

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Chapters 23: Consolidated Financial Statements and Noncontrolling Interests

A material difference in the basis of accounting between a parent and a subsidiary precludes the preparation of consolidated financial statements and the use of the equity method. Combined financial statements may be useful, but are not a substitute for consolidated financial statements.

When combined financial statements are prepared, similar principles to those used when preparing consolidated financial statements apply.
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Chapter 25: Leases

Familiar accounting
Overriding concept of transferring substantially all the benefits and risks of ownership to the lessee.

Criteria for capitalizing a lease generally matches criteria for tax purposes Reduces book to tax adjustments
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Chapter 25: Leases

Classifies leases from the point of view of the lessee as either:
Operating - A lease in which the benefits and risks of ownership are substantially retained by the lessor should be accounted for as an operating lease
Capital - A lease that transfers substantially all the benefits and risks of ownership from the lessor to the lessee should be accounted for as a capital lease

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Chapter 25: Leases

Classifies leases from the point of view of the lessor as either:
Operating - A lease in which the benefits and risks of ownership are substantially retained by the lessor should be accounted for as an operating lease
Sales-type or Direct Financing - A lease that transfers substantially all the benefits and risks of ownership from the lessor to the lessee should be accounted for as a sales-type or direct financing lease by the lessor

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Chapter 29: New Basis (Push-Down) Accounting

Assets and liabilities may be comprehensively revalued by means of push-down accounting when an acquirer gains control of an entity Control of an entity is gained when more than 50 percent of the outstanding residual equity interests in the entity have been acquired When an acquirer gains control of an entity a new cost basis for a continuing entity is established

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Comparisons with other frameworks

FRF for SMEs U.S. GAAP Tax basis OCBOA IFRS for SMEs

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Reporting under FRF for SMEs

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

The same standards apply when reporting on other SPF financial statements
Compilation: AR section 80, Compilation of Financial Statements Review: AR section 90, Review of Financial Statements Audit: AU-C section 800, Special ConsiderationsAudits of Financial Statements Prepared in Accordance With Special Purpose Frameworks
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Sample Reports
Firm: Use this slide to indicate where staff can find the sample reports for audited, reviewed or compiled financials. Sample reports can be found in the Introduction to the Financial Reporting Framework for Smalland Medium-Sized Entities
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Sample standard review report

Independent Accountants Review Report Board of Directors XYZ Company [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]
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Sample basis of presentation note

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.
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Presentation and Disclosure Checklist

Firm: Note where you have located the checklist within your methodology resources. Disclosures are streamlined to avoid excess detail, complexity, and extraneous information

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Outreach to clients
Firm: Use this point in the presentation to discuss what youre doing within your practice to introduce clients to the FRF for SMEs. Make sure staff know where these tools are as theyre talking to clients. Intro to FRF for SMEs PowerPoint FAQs Flyer Short video Backgrounder Article for newsletters Sample letters
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Do you have a client that may benefit from FRF for SMEs?
Firm: Ask your staff if theyve thought of clients that may be interested in this reporting alternative. Who should they inform? Identify the clients that you think may benefit from FRF for SMEs.
Owner-managed companies with few or no external stockholders and dont require GAAP financials Clients where we have large write-downs - Can we reduce write-downs in the future by converting these clients to the framework, eliminating those items that dont make sense to them?

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Discuss FRF for SMEs with Clients

Have the conversation
Introduce the framework to clients - Client-facing PowerPoint - Short video Show how the new framework can simplify their financial information - Illustrative financial statements Spread the word Firm: indicate what youve done already - Have you posted articles on your site and newsletters? - Have you posted the logo on your site? - Use social media LinkedIn, Twitter, Facebook - Sample posts are available in the toolkit

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Outreach to Financial Statement Users

Help our clients explain the framework to their financial statement users.
Special toolkit for bankers, surety companies, etc. - Intro to FRF for SMEs for Financial Statement Users - PowerPoint - Illustrative financial statements - Short video - FAQs - Flyer

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Benefits to Financial Statement Users

Bankers, surety companies and other users will get information that is
Relevant Reliable Consistent

FRF for SMES uses traditional accounting principles and accrual income tax accounting methods familiar to most users
FRF for SMEs has undergone public comment and professional scrutiny
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Outreach to Others
FIRM: Indicate what youve done or are planning to do to reach out to the community We can use all these toolkit resources to develop presentations to the community
Rotary Clubs Small Business Organizations Banking conferences National Assn of Women Business Owners Others

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Summary
Learn about the framework Familiarize yourself with the resources Discuss FRF for SMEs with clients that may benefit Help clients reach out to their financial statement users Inform the business community

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Resources

www.aicpa.org/FRF-SMEs

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Questions?

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