ACCOUNTING AND AUDITING UPDATE

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1 THE PPC The PPC ACCOUNTING AND AUDITING Update, JANUARY 2013, Volume 22, No. 1 ACCOUNTING AND AUDITING UPDATE There s a New (Proposed) OCBOA in Town On November 1, 2012, the AICPA issued an exposure draft of a selfcontained, special purpose accounting framework that is intended for use by nonpublic small- to medium-sized entities (SMEs) in preparing their financial statements. Special purpose frameworks are commonly known as other comprehensive bases of accounting, or OCBOAs. OCBOAs include the cash basis, modified cash basis, tax basis, regulatory basis, contractual basis, and other bases of accounting that use a set of logical and reasonable criteria. The Proposed Framework, Financial Reporting Framework for Small- and Medium-Sized Entities (FRF for SMEs), represents a blend of traditional methods of accounting with some accrual income tax methods. It applies simplified accounting principles and is directed toward the most important reporting needs of SMEs and their financial statement users. The AICPA notes that the framework is applicable to many industries. Why Is the AICPA Proposing the Framework? The AICPA believes that, in many situations, GAAP financial statements aren t required by, or the best solution for, small- and medium-sized entities in meeting their financial reporting needs. Currently, GAAP financial statements have moved increasingly toward the use of fair value accounting and away from historical cost. In some cases, users of SME financial statements such as lenders might consider fair value measurements of limited use, given their focus on cash flow and the long-term prospects of the entity. In fulfilling those reporting needs, entities may also find that existing OCBOA frameworks may be insufficient or lack adequate standardization. In addition, GAAP has become increasingly more complex and disclosureoriented, often directed toward the needs of public companies and their diverse base of investors. With the complexity, some believe that financial statements have become less understandable for many users, especially those of SMEs. Given In this Issue: There s a New (Proposed) OCBOA in Town PPC s SMART Practice Aids Compilation & Review FASB Issues Four New ASUs This newsletter is also available online. Please call (800) , or order online at ppc.thomsonreuters.com.

2 2 The PPC ACCOUNTING AND AUDITING Update, JANUARY 2013, Volume 22, No. 1 the increasing cost of financial statement preparation that s often attributable to additional financial reporting requirements, some assert that the additional costs don t translate to added understandability or other benefits to financial statement users. David Morgan, chairman of the AICPA FRF for SMEs Task Force, noted in the AICPA press release on the Proposed Framework, For many small companies, this will save time and costs, while also producing financial statements that are more relevant to business owners and lending institutions. I believe this new framework will allow CPAs to deliver a product to their privately held business clients that is more in line with their needs. What Type of Entities Might Use FRF for SMEs? The Proposed Framework is directed to smaller- to medium-sized, owner-managed, for-profit entities where internal or external users have direct access to the owner-manager and where GAAP financial statements are not required. SMEs in the United States are estimated to number approximately 20 million entities, although the AICPA notes that there is no standard definition of a SME in the United States. The Proposed Framework is intended to be used by unincorporated and incorporated entities. It may be beneficial for owner-managers who use financial statements to confirm their performance assessments and existing assets and liabilities, as well as to understand their cash flows. Also, a lender might find them useful, for example, when the lender doesn t solely base its financing decisions on the financial statements, but also on collateral of the entity or other forms of decision-making evaluations. Entities that might use the Proposed Framework may have no plans for becoming a public company. The objective for the proposed FRF for SMEs is different than that of the recently organized Private Company Council of the Financial Accounting Foundation (PCC). The PCC will be focusing on U.S. GAAP modifications for private companies that need or are required to have GAAP financial statements. As previously noted, FRF for SMEs is intended to provide a concise, but relevant, accounting framework for small- to medium-sized entities when U.S. GAAP financial statements aren t necessary or required. Basics of the FRF for SMEs Exposure Draft The proposed FRF for SMEs isn t proposed as an authoritative document and, as an OCBOA, the AICPA has no authority to compel its use. Thus, when approved in final form, it will have no specified effective date. Once final, whether to adopt the FRF for SMEs as an entity s accounting framework would be up to management of that entity based on the entity s specific operations and circumstances. Management would need to determine whether preparing the entity s financial statements using the FRF for SMEs framework rather than GAAP would be preferable to the entity s owners, lenders, and other users. Some of the key features of the Proposed Framework are as follows: z Based on a foundation of reliable and comprehensive accounting principles. z Historical cost is the primary measurement basis. z Uses familiar and traditional accounting methods. z Reduced disclosures from GAAP. z Financial reporting principles are less complicated and leaner. z Fewer adjustments to reconcile income tax return income with book income. z Retains a traditional approach to lease accounting. z Focuses on the matters that are typically encountered by SMEs. The 200-plus page exposure draft covers 32 chapters and addresses many similar topical areas addressed in the FASB Codification, such as various asset and liability matters, accounting changes, business combinations, nonmonetary transactions, leases, subsequent events, contingencies, related-party transactions, and a host of other financial accounting topics. Chapters set forth principles for the topical areas that include the scope, definitions, presentation, measurement, and disclosures, when applicable. The explanatory materials to the exposure draft indicate that implementation guidance consisting of application examples, a disclosure checklist, illustrative financial statements, and other tools will be available in a companion volume to the Proposed Framework. Also, the implementation guidance is to include accounting principles for defined benefit pension plans that are addressed in chapter 28 of the Proposed Framework. The companion implementation guidance isn t currently available with the exposure draft, but it s expected to be issued with the final FRF for SMEs. Framework Differences from GAAP The following represent some of the differences between the Proposed Framework and GAAP: z Income Taxes. The Proposed Framework allows the preparer to use either an income taxes payable method or a deferred income tax method. The Continued on page 5

3 The PPC ACCOUNTING AND AUDITING Update, JANUARY 2013, Volume 22, No. 1 3 The PPC Technology Update PPC s SMART Practice Aids Compilation & Review PPC s SMART Practice Aids Compilation and Review (SMART CAR) automates the tailoring of compilation and review engagement procedures and specific compilation and review processes, and generates completed practice aids. Features Some of the features of SMART CAR include: z SMART Engagement Setup, which automatically tailors the practice aids based on your answers. z The ability to conduct interim and annual compilations third party and management use only, SSARS reviews, SAS reviews, and PCAOB reviews. z Specialized industry content, including commercial, nonprofit, construction, and dealerships. z Engagement Dashboard, which displays overall engagement and individual statement status at a glance. z The ability to get alerts and diagnostics that identify errors and inconsistencies. z Linking to content-specific paragraph guidance and professional standards licensed on Thomson Reuters Checkpoint. z The ability to work simultaneously with coworkers on the same client engagement. z The ability to roll forward the client engagement and bring forward information to the next period. z Integration with PPC s SMART Practice Aids Disclosure. How It Works You can create a client engagement from a PPC Title or from a Master Engagement. Creating an engagement from a PPC Title creates a blank engagement based on the selected PPC Guide. When selecting the engagement type, you can select from compilation, review, or disclosure only. If you re performing a compilation, you can select from annual or interim, and third party or management use only. If performing a review, you can select a SSARS, SAS, or PCAOB review. SMART Navigator guides you through the engagement process from beginning to end. You can easily complete your work and sign off procedures program steps within SMART and insert linked workpaper references, as indicated in Figure 1.

4 4 The PPC ACCOUNTING AND AUDITING Update, JANUARY 2013, Volume 22, No. 1 Figure 1 In addition, for review engagements, a SMART Analytical Procedures Documentation Form in Microsoft Excel provides a list of common ratios by financial statement area. You can tailor the list by using the Excel functionality to delete or add sheets or to delete or add ratios and calculate selected ratios. It also includes a guide for meeting the analytical procedures documentation requirements of the Standards. Integration with PPC s SMART Practice Aids Disclosure SMART CAR integrates with PPC s SMART Practice Aids Disclosure. You can spend less time filling out checklists and more time ensuring compliance with financial statement disclosure requirements. You ll be able to: z Create a streamlined disclosure checklist that includes only the disclosure requirements applicable to the client. z Easily update your disclosure checklist to ensure you re using the most current checklist available. z See highlighted new or changed disclosure requirements. z Link to content-specific guidance licensed on Checkpoint for one-click access to applicable FASB references. z Save time by rolling forward answers from the prior period if desired. z Rely on diagnostics that alert you to unanswered questions and inconsistent responses. z Search PPC example note disclosures for commercial, nonprofit, and governmental engagements. z Create firm libraries of approved note disclosures, as needed. To find out more about PPC s SMART Practice Aids Compilation and Review, call (800) or head to ppc. thomsonreuters.com.

5 The PPC ACCOUNTING AND AUDITING Update, JANUARY 2013, Volume 22, No. 1 5 Continued from page 2 Proposed Framework doesn t contain the current provisions under GAAP that address uncertain tax positions. z Variable Interest Entities. Under GAAP, variable interest entities are required to be consolidated in certain situations. In addition, GAAP contains significant disclosure requirements regarding variable interests. Under the Proposed Framework, variable interest entities wouldn t be required to be consolidated. z Goodwill and Certain Equity Method Investments. Under GAAP, indefinite-lived assets, including goodwill, aren t amortized; instead, GAAP requires annual assessments of impairment. Under the Proposed Framework, goodwill would generally be amortized over the same period used for federal income tax purposes, or if not amortized for tax purposes, then a period of 10 years. For equity method investments, the difference between investor cost and the underlying equity in the net assets of the investee that is similar to goodwill would also be amortized. z Investments. In general, under the proposed FRF for SMEs, investments in equity securities would be accounted for at cost or the equity method when there is significant influence by the investor. Unlike GAAP, fair value wouldn t be used unless the investment is held for sale. In such situations, changes in fair value would be recognized in income. There would be no provision for recognition of fair value changes in other comprehensive income. z Income. Unlike GAAP, the proposed FRF for SMEs wouldn t provide separate categories of income for other comprehensive income or extraordinary income. z Reversal of Losses. The Proposed Framework would allow the reversal of losses on (1) inventory writedowns to market when lower than cost, (2) impairment of equity, and (3) long-lived asset impairment. U.S. GAAP doesn t allow reversal of such losses. z Other. The proposed FRF for SMEs doesn t include the following items most commonly relating to public companies that are addressed in GAAP: Earnings per share. Segment reporting. Interim reporting. Comments and Expected Release Date The AICPA task force is seeking comments from stakeholders in the financial reporting of SMEs, including financial statement preparers, public accountants, and users. Comments are sought by January 30, 2013, and the AICPA expects to release the framework in final form in the spring of Practical Consideration: The AICPA has established a webpage on the Proposed Framework that provides links to the exposure draft, frequently asked questions, a toolkit for educating affected parties about the Proposed Framework, recent articles, and an AICPA webcast. The website can be found at org/interestareas/frc/ ACCOUNTINGFINANCIALREPORTING/PCFR/ Pages/Financial-Reporting-Framework.aspx. FASB Issues Four New ASUs The FASB recently issued four ASUs to amend the FASB Standards Codification (ASC). These new standards are expected to either have an insignificant impact on current practice or have limited applicability. ASU ASU , Technical Corrections and Improvements, is a 200-plus page document that may appear daunting. However, the ASU indicates that it s not expected to have a significant effect on current accounting practice. It includes changes to clarify the ASC or correct unintended application of guidance. It also includes items that represent narrow and incremental improvements to U.S. GAAP and aren t purely technical corrections. Finally, it includes amendments to conform wording to the terminology in GASB ASC 820, Fair Value Measurements. The ASU is divided into the following sections: z Section A Technical Corrections and Improvements. This section is further divided into the following subsections: Source Literature Amendments amendments that carry forward legacy (pre-asc) guidance or subsequent amendments to the ASC, as well as amendments relating to missing words, references, or phrasing that arose when the guidance was originally codified. Guidance Clarifications and/or Reference Corrections updated wording, corrected references, or both, to prevent guidance from being misapplied or misinterpreted. Relocated Guidance guidance moved to a more appropriate location in the ASC.

6 6 The PPC ACCOUNTING AND AUDITING Update, JANUARY 2013, Volume 22, No. 1 The PPC Accounting and Auditing Update is published monthly by Thomson Reuters/Tax & Accounting, P.O. Box 966, Fort Worth, Texas , (800) COPYRIGHT 2013 BY THOMSON REUTERS/PPC. Reproduction is prohibited without written permission of the publisher. Not assignable without consent. This publication is designed to provide accurate information regarding the subject matter covered. It is sold with the understanding that the publisher is not engaged in rendering legal, accounting, investment, or other professional advice. If such assistance is required, the services of a competent professional should be sought. Reports on products or services are intended to be informative and educational; no advertising or promotional fees are accepted. Tax & Accounting Research and Guidance P.O. Box 966 Fort Worth, Texas PRSRT STD U.S. POSTAGE PAID Thomson z Section B Amendments Related to Fair Value Measurement. This section includes conforming amendments such as changing the terms market value and current market value to fair value, or markto-market to subsequently measure at fair value. Some of the conforming changes may result in a change to existing practice, and transition guidance and a delayed effective date are provided for such changes. ASU is effective upon issuance for both public and nonpublic entities. Amendments that are subject to transition guidance are effective for fiscal periods beginning after December 15, 2013, for nonpublic entities, and for fiscal periods beginning after December 15, 2012, for public entities. ASU ASU , Statement of Cash Flows Not-for-Profit Entities: Classification of the Sale Proceeds of Donated Financial Assets in the Statement of Cash Flows, requires cash receipts from the sale of donated financial assets to be classified as cash inflows from operating activities if there were no donor-imposed limitations for sale of the donated assets and they were sold almost immediately. If the donor restricted the use of the donated assets to long-term purposes, the cash receipts from sale should be classified as cash flows from financing activities. Otherwise, cash receipts from the sale of donated financial assets should be classified as cash flows from investing activities. The amendments in ASU are effective prospectively for fiscal years, and interim periods within those years, beginning after June 15, Retrospective application to all prior periods presented upon the date of adoption is permitted. Early adoption from the beginning of the fiscal year of adoption is permitted. For fiscal years beginning before October 22, 2012, early adoption is permitted only if the financial statements have not yet been made available for issuance. ASU ASU , Business Combinations: Subsequent Accounting for an Indemnification Asset Recognized at the Acquisition Date as a Result of a Government-Assisted Acquisition of a Financial Institution, is a consensus of the FASB Emerging Issues Task Force that has limited applicability. It affects only entities that recognize an indemnification asset as a result of a governmentassisted acquisition of a financial institution. It is effective for public and nonpublic entities for fiscal years, and interim periods within those years, beginning on or after December 15, Early adoption is permitted. ASU ASU , Entertainment Films: Accounting for Fair Value Information That Arises after the Measurement Date and Its Inclusion in the Impairment Analysis of Unamortized Film Costs, is a consensus of the FASB Emerging Issues Task Force. It applies to entities that perform impairment assessments of unamortized film costs. It eliminates certain requirements related to an impairment assessment of unamortized film costs and clarifies when unamortized film costs should be assessed for impairment. It doesn t add any new guidance to the ASC. The amendments in the ASU are effective prospectively for impairment assessments performed on or after December 15, 2013, except for SEC filers, for which the amendments are effective for impairment assessments performed on or after December 15, Early application is permitted. Practical Consideration: To access the new ASUs, see the Standards section at