THE FINANCIAL REPORTING FRAMEWORK FOR SMALL- AND …



THE FINANCIAL REPORTING FRAMEWORK FOR SMALL- AND MEDIUM-SIZED ENTITIES—PART 4

CPA Firm Support Services, LLC

By Larry L. Perry, CPA

LEARNING OBJECTIVES

• To learn the presentation format for the statement of cash flows under the FRF for SMEs.

• To learn accounting and disclosure principles for special issues under the FRF for SMEs.

INTRODUCTION

The AICPA has recognized that many non-public, small- and medium-sized companies are not required to use U.S. GAAP as their reporting framework. These companies are generally those with long-range ownership interests, those in specialized industries and/or those with no intentions to file for public offerings of their securities. While other special purpose frameworks may be appropriate for some of these entities, others are looking for ways to provide more comprehensive financial information to financial statement users that are not as burdensome as U.S. GAAP. Detailed guidance for the FRF for SMEs is available at .

For these reasons, the AICPA has developed this non-authoritative, special-purpose framework to provide simplified, consistent and relevant financial statements. Characteristics of the framework include:

• A combination of traditional accounting methods from special purpose frameworks such as the cash basis and the income tax basis.

• A historical cost basis with some modifications for market values.

• Specific, simplified footnote disclosures.

• Uncomplicated, consistent and principles-based accounting.

• A consolidation model that excludes variable interest entities.

In these materials, part four of a four-part series, we will present these topics for the FRF for SMEs:

• Presentation of the statement of cash flows under the FRF for SMEs

• Principles of accounting and disclosure for:

o Subsequent events

o Related party transactions

o Subsidiaries

o Consolidations

o Joint ventures

o Business combinations

o New basis accounting

o Foreign Currency

BASIC FINANCIAL STATEMENT PRESENTATION ISSUES

Some basic presentation issues under the FRF for SMEs are as follows:

1. The titles of these statements are not limited to a prescribed title. Some common options are:

a. Statement of Cash Flows

b. Consolidated Statement of Cash Flows

2. Each statement should include this reference or other descriptive wording under the statement title: (FRF for SMEs Basis).

3. As with other frameworks, a comparative format is considered the most meaningful but is not required. In fact, for the first period of application of the FRF for SMEs, restating prior period financial statements prepared using another framework will usually be cost-prohibitive. Single period financial statements will usually be the most appropriate in the first period of application.

4. Line item references to footnotes aren’t required but a reference on the bottom of the statement to the notes and an accountant’s report is required. Example: “See Independent Accountant’s Review Report and Notes to Financial Statements.”

STATEMENT OF CASH FLOWS

As it is with U.S. GAAP, whenever a statement of financial position and a statement of operations are presented, a statement of cash flows is required. When consolidated statements are prepared, all intercompany transactions and balances are eliminated.

Cash and Cash Equivalents

Depending on an entity’s circumstances, either the title “cash” or “cash and cash equivalents” should be used both in the statement of financial position and the statement of cash flows. Cash normally includes cash on hand and demand and time deposits in banks or other depositaries. Cash equivalents are normally financial instruments held for the purpose of meeting short-term cash commitments as opposed to investing and other purposes.

To qualify as a cash equivalent, the financial instrument must be readily convertible into cash and have little risk of changes in value due to fluctuating earnings rates. Normally, a cash equivalent will have a maturity date of three months or less from the date of acquisition by the reporting entity. An entity should establish a policy as to which short-term, highly liquid investments will be classified as cash equivalents.

Because bank borrowings are treated as financing activities on the statement of cash flows, any changes in bank overdrafts not having a legal right of offset should also be treated as financing activities.

Restricted cash balances, such as compensating balances required by credit grantors, should be presented separately from cash and cash equivalents in the statement of financial position; increases or decreases in restricted balances should be included in investing activities on the statement of cash flows.

Classifications of Cash Flows

Similar to U.S. GAAP, the statement of cash flows classifies the sources and uses of cash as operating activities, investing activities and financing activities.

Operating Activities:

Revenue producing activities are the primary sources of cash flows from operating activities. Examples include:

• Cash receipts from:

o The sale of products, merchandise or other goods.

o Providing services.

o Investment earnings.

o Other revenue.

• Cash payments for:

o Materials, merchandise and other goods purchased from vendors.

o Outside services

o Salaries and wages.

o Operating expenses.

o Income and other taxes.

o Other expenses.

As under U.S. GAAP, management may elect either the direct or the indirect method for reporting cash flows from operating activities. Under the direct method, the gross amounts of cash receipts and cash payments that arise from operating activities should be presented separately. Use of the direct method also requires a schedule presenting a reconciliation of net income to net cash flows from operating activities (as presented under the indirect method).

Presentation of the indirect method includes adjusting net income or loss for:

• Changes in current assets and liabilities during the period.

• Non-cash items such as depreciation and amortization, undistributed profits of equity investees, and deferred tax provisions or benefits.

• Any cash flows or payments presented in investing or financing activities.

Investing Activities

Examples of cash flows sources and uses from investing activities include:

• Tangible and intangible assets acquisition.

• Proceeds from the sale of tangible and intangible assets.

• Payments to acquire equity or debt securities, other equity investments and investment contracts.

• Proceeds from the sale of investments.

• Loans and advances made to others and their repayments.

• Aggregate cash flows from business combinations under the acquisition method and disposals of business units (presented separately).

Financing Activities

Examples of cash flows sources and uses from financing activities include:

• Proceeds from, and payments for, equity transactions.

• Proceeds from, and payments for, long-term obligations, including capital leases.

• Dividends and interest payments charged to retained earnings.

Non-cash Transactions

Non-cash transactions should be excluded from the statement of cash flows and disclosed separately, either on the bottom of the statement or in a footnote. Examples include:

• Capitalized leased assets.

• Acquiring assets by assuming liabilities.

• Acquiring an entity in exchange for equity interests in the reporting entity.

• Conversions of debt to equity interests.

Disclosures

Cash and cash equivalents disclosures:

• Management’s policy for presenting cash equivalents, including any presented as investments.

• Restricted cash.

Business combinations’ and disposals of business units’ disclosures:

• Total consideration paid or received.

• The portion of the consideration comprised of cash and cash equivalents.

• The amount of cash and cash equivalents included in the acquisition or disposal.

• The total other assets and liabilities included in the acquisition or disposal.

Other investing or financing activities not requiring the use of cash or cash equivalents should be disclosed on the face of the statement or in a footnote.

Preparation of the Statement of Cash Flows

Preparing a statement of cash flows can be facilitated by using a worksheet comparing financial statement classifications from the current and prior years’ balance sheets as illustrated below.

|Account Classifications |Prior Year |Current Year |Period Change |Source or (Use)|Activity Type |

|Cash |33,000 |13,000 |(20,000) |Net |Cash |

|Trade accounts receivable |363,000 |500,000 |(137,000) |Use |Operating |

|Allowance for doubtful accounts | | | | | |

| |(12,000) |(12,000) |0 | | |

|Refundable income taxes |12,000 |0 |12,000 |Source |Operating |

|Inventories |500,000 |400,000 |100,000 |Source |Operating |

|Prepaid expenses |2,200 |1,300 |900 |Source |Operating |

|Investments |250,000 |260,000 |(10,000) |Use |Investing |

|Fixed assets |166,000 |186,000 |(20,000) |Use |Investing |

|Accumulated depreciation |(76,000) |(108,000) |(32,000) |Source |Operating |

|Note receivable |48,000 |36,000 |12,000 |Source |Investing |

|Other assets |5,800 |5,800 |0 | | |

|Total Assets |1,363,000 |1,337,100 | | | |

| | | | | | |

|Accounts payable |400,000 |430,000 |30,000 |Source |Operating |

|Accrued expenses |25,000 |(9,500) |(34,500) |Use |Operating |

|Deferred income taxes |29,000 |24,000 |(5,000) |Use |Operating |

|Accrued payroll taxes |1,200 |1,100 |(100) |Use |Operating |

|Long-term debt |300,000 |200,000 |(100,000) |Use |Financing |

|Capital stock |45,000 |45,000 |0 | | |

|Retained earnings |562,800 |646,500 |83,700 |Source |Operating |

|Total Liabilities and Equity |1,363,000 |1,337,100 | | | |

| | | | | | |

In addition to guiding the preparation of a statement, the schedule documents the amounts of classifications in the various activities. Additional guidance for preparing a statement of cash flows can be obtained at: .

RELATED PARTY TRANSACTIONS

Related party transactions in the ordinary conduct of business should be measured at arms-length, i.e., at values which are the same as for unrelated parties.

Common examples of related parties are:

• An entity that is affiliated directly or indirectly with the reporting entity (subsidiary or parent entities).

• An individual who directly or indirectly controls the reporting entity.

• An entity accounted for by the equity or proportionate consolidation method when the reporting entity is either the investor or investee.

• Management of the reporting entity.

• An individual with an ownership interest that results in significant influence or joint control of the reporting entity.

• Members of the immediate families of the individuals described above.

• The other party to any management contracts.

• Any party subject to significant influence of a party that has significant influence over the reporting entity (brother/sister entities). Significant influence can be from an ownership interest, management contract, and other management arrangements.

• Any party subject to joint control by the reporting entity.

Disclosures

Disclosures for related party transaction include:

• The nature of relationships with related parties.

• The nature of the transactions.

• The volume of the transactions and balances due to and from the related parties.

• The basis for measuring the transactions.

• Commitments with or involving related parties.

SUBSEQUENT EVENTS

Events occurring after the financial statements date, up to the date the financial statements are available to be issued, may create the need for adjustments of recorded amounts or additional disclosures. Similar to U.S. GAAP, these events are:

1. Events that provide additional information regarding amounts recorded at the financial statement date (called type one events under U.S. GAAP). For example, a major customer of the reporting entity may declare bankruptcy during this subsequent events period. Depending on the materiality of the customer’s account and the recoverability of its balance, an adjustment of the allowance for uncollectible accounts may be necessary.

2. Other events that indicate conditions arising after the financial statement date that don’t directly affect recorded amounts (called type two events under U.S. GAAP). A significant lawsuit filed by or against the entity would be an example.

For a reporting entity, financial statements are available for issue when they include all footnotes necessary for a fair presentation, no other adjustments are planned and management’s process for finalizing the financial statements has been completed. For auditors of non-issuers of financial statements, financial statements are available for issue when all levels of review required by the CPA firm’s quality control procedures have been completed and management has finally approved the financial statements.

Disclosures

• The date through which the subsequent events review was made and that this is the date financial statements are available for issue. This disclosure could be made in Note A or, if significant subsequent events requiring disclosure are discovered, in the separate note describing such events.

• For significant subsequent events not affecting recorded amounts in the financial statements, these disclosures should be included in a separate footnote:

o A description of the event.

o An estimate of the possible affect on the financial statements, or a statement that such an estimate cannot be made.

Discussion Exercise

As CFO for the Always Best Corporation, you have completed preparation of its annual financial statements as of December 31. While drafting footnotes, you perform a subsequent events review. List the procedures you will perform for this review:

________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________

As auditor of these financial statements, what procedures would you perform for a subsequent events review?

________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________

SUBSIDIARIES

Management can elect either to use the equity method of accounting or to consolidate its majority-owned subsidiaries. A user of financial statements may require management to elect one or the other methods. For example, a lender may be primarily interested in an entity’s ability to service its debt from its operations and, therefore, prefer the equity method. If there is a material difference in the basis of accounting used by a subsidiary, neither method may elected. In this case investments would, by default, be accounted for using the cost method.

Under the consolidation method, a subsidiary is consolidated at the date an entity acquires control. There is no retroactive consolidation of the subsidiary. When an entity ceases to have control, it will no longer consolidate the subsidiary. Prior period’s consolidated statements are not retroactively restated.

When investments in majority-owned subsidiaries are not consolidated, they should be presented separately in the statement of financial position. Income or loss may be presented in the statement of operations in gross or net amounts.

Disclosures for consolidated statements include descriptions of all subsidiaries, income from each and the percentage of ownership for each. The same disclosures should be presented for non-consolidated subsidiaries.

Combined financial statements may be prepared for entities under common ownership, often referred to as brother/sister entities. Principles similar to the presentation of consolidated statements should be used for combined statements.

Consolidation Principles

At the date of acquisition of a subsidiary, the market values of its assets, liabilities, any non-controlling interests and goodwill will be determined. This process will be discussed further regarding business combinations below. Intercompany receivables and payables will be eliminated.

At dates subsequent to the initial consolidation, all intercompany balances and transactions would be eliminated upon consolidation. Acquisition values of a subsidiary’s assets are treated as purchases and are the bases for future calculations of depreciation and amortization.

Material differences between a parent and subsidiary’s bases of accounting preclude use of the consolidation method. Foreign subsidiary’s statements are, however, adjusted to conform to the FRF for SMEs. Differences in fiscal reporting periods of a parent and subsidiary don’t necessarily preclude use of the consolidation method. Adjustment of the periods presented would, of course, be necessary.

Changes in a parent’s ownership interest in a subsidiary that does not result in a loss of control should be accounted for as equity transactions. In such cases, changes in the carrying amounts of controlling and non-controlling interests and the market value of consideration paid or received should be recognized directly in equity.

Accounting Principles for the Cost and Equity Methods

Under the cost method, the investor records the investment at cost and recognizes dividends received from distributions of net accumulated earnings as income. Dividends received in excess of the accumulated net earnings of the investee reduce the cost of the investment. An other-than-temporary decline in the value of the investment should be recognized.

Under the equity method, the investor initially records the investment at cost and adjusts the carrying amount to recognize its share of earnings or losses as they occur. These adjustments in value are recognized in the investor’s net income after eliminating intercompany gains and losses and amortizing any difference between the investor’s cost and the underlying equity in the net assets of the investee. Dividends received from the investee reduce the carrying amount of the investment. Any other-than-temporary decline in value beyond that calculated under the equity method should also be recognized.

The equity method of accounting should be used when an investor’s investment in voting stock gives it the ability to exercise significant influence over the operating and financial policies of the investee even though the investee holds an investment of 20 to 50% of the voting stock. Significant influence can be indicated in these and other ways:

• Representation on the board of directors of the investee.

• Participation in policy making processes.

• Material intercompany transactions.

• Interchange of managerial personnel.

• Technological dependency.

• Concentration of other shareholdings (like a larger number of smaller shareholders.

Non-controlling Interests

A non-controlling interest, sometimes called a minority interest, is the portion of equity in a subsidiary not attributable, directly or indirectly, to a parent. Accounting policies include:

The ownership interests in subsidiaries held by parties other than the parent be clearly identified, labeled, and presented in the consolidated statement of financial position within equity, but separate from the parent’s equity.

The amount of consolidated net income attributable to the parent and to the non-controlling interest be clearly identified and presented on the face of the consolidated statement of operations.

Changes in a parent’s ownership interest while the parent retains its controlling financial interest in its subsidiary must be accounted for consistently. A parent’s ownership interest in a subsidiary changes if the parent purchases additional ownership interests in its subsidiary or if the parent sells some of its ownership interests in its subsidiary. It also changes if the subsidiary reacquires some of its ownership interests or the subsidiary issues additional ownership interests. All of those transactions are economically similar and they should be accounted for as equity transactions.

Entities must provide sufficient disclosures that present consolidation policies and clearly identify and distinguish between the interests of the parent and the interests of the non-controlling owners.

Principles of Consolidation Summarized

• Intercompany balances should be eliminated upon consolidation.

• Retained earnings or deficit of a subsidiary at the date of acquisition should be excluded from consolidated net earnings.

• Gains and losses from previous transactions between the parent and subsidiary should not be eliminated unless the transactions were made expecting the acquisition.

• Intercompany transactions subsequent to acquisition will require adjustment and elimination in the consolidated financial statements.

• Assets and liabilities of the subsidiary acquired by the parent are treated as purchased on the date of acquisition. These bases will be used for subsequent accounting, such as depreciation and amortization calculations.

• Changes in ownership interests in a subsidiary that do not result in a loss of control are accounted for as equity transactions.

• When loss of control occurs, assets and liabilities of the subsidiary and any non-controlling interests should be derecognized.

• Any retained interest in the subsidiary should be recognized at its carrying amount at the date of loss of control along with any applicable adjustment for gains or losses.

• Only post-acquisition and pre-disposal income of subsidiaries should be presented in consolidated financial statements.

• Non-controlling interests in a subsidiary should be presented separately in the equity section of the statement of financial position.

• Net income should be attributed to both the parent and non-controlling interests.

• The parent’s consolidation policy should be disclosed.

INTERESTS IN JOINT VENTURES

By definition, a joint venture is an entity in which two or more venturers have joint control over the operations of the entity, regardless of differences in ownership interests. When investors have interests in economic activity and do not share in joint control, those interests are not considered an interest in a joint venture and are accounted for as an investment.

A venturer has joint control over a venture and has the right to future economic benefits (cash flows), as well as being exposed to economic risks (losses). A loan to an entity does not have similar risks and rewards.

The arrangements among joint venturers may be contractual or included in organizational documents, such as articles and bylaws. Matters normally included in such documentation include venture activities, length of life, and various policies and procedures.

Operations of an entity may be controlled jointly outside of a formal entity, such as a corporation or partnership. In such cases the venturers use their personal assets to accomplish joint activities. A contractual agreement ordinarily would prescribe the manner in which revenues and expenses would be shared by the venturers.

Certain assets also may be shared outside a formal entity. Venturers would share in the output and expenses related to the assets.

A venturer can elect either the equity method of accounting or a proportionate consolidation method. The equity method would be the same as describe for investments under the FRF for SMEs. The proportionate consolidation method would apply only to unincorporated entities in certain industries with established practices.

BUSINESS COMBINATIONS

A business combination under this framework occurs when an acquirer enters an agreement to acquire an entity or a group of assets that comprise a business. The formation of a joint venture or the acquisition of an asset or group of assets that does not comprise a business are not business combinations under this framework.

The acquisition method, similar to U.S.GAAP, should be used to account for business combinations under this framework. Applying the acquisition method includes the following:

• Every combination should result in one party becoming the acquirer. The acquirer is ordinarily the entity that has a controlling interest in the other party to the combination.

• The contract or agreement for a business combination should guide the determination of the acquisition date. Normally, the acquisition date will be the date all requirements of the contract or agreement are completed. This period will normally not exceed one year from the date of the contract or agreement.

• The assets, liabilities and any non-controlling interests in the acquiree must be identified and measured. Generally, assets and liabilities acquired are valued at acquisition date market values.

• Consideration given up in excess of the market values of net assets received by the acquirer will result in a carrying amount of goodwill. The fair value of net assets received in excess of consideration given up will result in a gain from a bargain purchase.

Conditions for Recognition

Identifiable assets acquired, liabilities assumed and non-controlling interests in the acquiree must meet the definitions in this framework to be recognized at the acquisition date. Costs expected to be recognized in the future as a result of the combination, such as terminating employees, would not be accounted for as part of an acquisition transaction.

All assets and liabilities recognized in the transaction must be a part of the exchange and do not include separate transactions. Some assets or liabilities may be recognized that the acquiree has not previously recognized in its financial statements, such as intangible assets like copyrights or patents for which costs have been previously expensed.

As mentioned above, identifiable assets acquired, liabilities assumed and any non-controlling interests should be recognized at their acquisition date market values. Certain exceptions to this general principle exist. For example, an entity may establish a policy for accounting for intangible assets as a separate asset or combined with the value of goodwill. For definite lived intangibles, an entity should attempt to determine their fair values and useful live for separate recognition and amortization. If the acquisition-date market value can’t be reliably determined or estimated, or if a useful life cannot be determined or estimated, the intangible asset would be recognized as a part of the value of goodwill.

Other Business Combination Issues

• Asset retirement obligations: Any asset retirement obligations associated with the acquired assets should be recognized and measured by the acquirer. For example, the disposal and replacement of underground gasoline storage tanks, as required by statute, should be provided for in an acquisition of an entity that stores and sells gasoline.

• Income Taxes: When an acquirer uses the deferred income taxes method, it should provide for a deferred income tax asset or liability related to assets acquired and liabilities assumed. This would include temporary differences and carryforwards of the acquiree that exist at the acquisition date.

• Employee benefits: Essentially, pension and post-retirement plan assets are valued at market value. The accrued benefit asset or obligation is the difference between that market value and the plans’ accrued benefit obligations.

• Indemnification assets: When the acquiree agrees to indemnify the acquirer as to the outcome of an uncertainty or contingency, the acquirer should recognize an acquisition-date asset at market value, the same basis it uses to recognize the liability for the indemnified item.

• Goodwill: The aggregate of consideration transferred at acquisition-date market value and the amount of any non-controlling interests in the acquiree over the acquisition-date market value of an acquiree’s net assets results in either the carrying amount of goodwill or a gain on a bargain purchase.

• Contingent consideration: When the payment for contingent consideration can be estimated and is probable, it should be recognized by the acquirer as an a asset or liability based on the terms of the agreement.

• A business combination in stages: When an acquirer has a less than controlling interest in an entity and obtains a controlling interest, the previously acquired equity interest should be revalued at its acquisition-date market value and recognize any gain or loss in net income.

• No transfer of consideration: In a contractual combination, equity interests in an acquiree held by parties other than the acquirer are treated as non-controlling interests, even if all the equity interests are held by non-controlling interests.

• Measurement period: At the end of the reporting period in which a combination occurs, estimated amounts should be provided for items that are not complete. Adjustments to such amounts may be made, and additional assets or liabilities recognized, during the measurement period. Such adjustments will result in an increase or decrease in goodwill. The period may not exceed one year.

• Acquisition-related costs: Costs incurred to accomplish a business combination, such as legal, accounting and other professional services, and direct general and administrative costs, should be recognized as period costs when they occur.

Disclosures

The following disclosures should be included in footnotes of the acquirer for each material business combination during the reporting period, as well as after the reporting date up to the date financial statements are issued.

• Name and description of the acquired entity.

• The date of acquisition.

• The percentage of voting equity interests obtained in the combination.

• The total consideration transferred at acquisition date market value and each major class of consideration such as cash, liabilities and type of equity interests.

• Descriptions of contingent consideration arrangements and indemnification assets and the basis for payments.

• A summary statement of financial position at the acquisition date presenting the recognized amounts of assets acquired and liabilities assumed.

• The amount of any gain on a bargain purchase and the line item in the statement of operations where it is included.

• The basis for determination, and the amount, of any non-controlling interest in the acquiree.

• Accounting policies for intangible assets acquired and amounts classified separately, along with their useful lives.

• When business combinations are achieved in stages, the acquisition-date market value of the acquiree held before the acquisition date and any market value re-measurement gain or loss, along with the line item in which it is reported.

• When immaterial business combinations occur that are material in the aggregate, disclosure similar to the above are required.

Combinations of Entities under Common Control

Such combinations may include transferring assets to a new entity, transfers from a subsidiary to a parent, transfers of a parent’s partial interests in several entities to a new entity, formation of a limited liability company for entities under common control and other similar transfers.

Accounting policies include:

• The receiving entity should recognize the transferred assets and liabilities at the transfer date.

• The receiving entity should ordinarily account for the assets and liabilities at their transfer-date carrying amounts recorded by the transferring entity.

• The receiving entity should present its statement of financial position and its results of operations as though the transfer of net assets or exchange of equity interests occurred at the beginning of the period.

• Prior year comparative financial statements and other information should be retrospectively adjusted with appropriate disclosures.

• The footnotes of the receiving entity should disclose the name and description of the combined entity or entities and the method of accounting for the assets’ transfer or equity exchange.

Summary of Accounting for Business Combinations

1. Determine if a transaction is a business combination.

2. Identify the acquirer.

3. Determine the acquisition date.

4. Recognize and measure assets, liabilities and non-controlling interests at market values.

5. Separate transactions for the benefit of the acquirer.

6. Recognize and measure goodwill or bargain purchase.

7. Amortize goodwill over 15 years.

8. Recognize intangibles that are separable, have a determinable value and have identifiable useful lives.

9. Amortize intangibles over their estimated useful lives.

10. Recognize other intangibles as a part of goodwill.

11. No tests of impairment are necessary for tangible or intangible assets.

NEW BASIS (PUSH-DOWN) ACCOUNTING

When an acquirer gains control of an entity by acquiring more than 50% of the equity interests in an entity, assets and liabilities of the continuing entity may be revalued with a new cost basis. In an arms-length transaction between unrelated parties, negotiated values ordinarily represent market values.

New basis accounting, referred to as push-down accounting, results in the same carrying amounts for assets and liabilities in an acquired entity’s financial statements as are included in the consolidated financial statements of a parent company. Push-down accounting is applied using the same values as the acquisition method in business combinations, generally market values.

When assets and liabilities have undergone a comprehensive revaluation and the new bases used for the acquired entity, the portion of the retained earnings adjustment not included in consolidated retained earnings of the acquirer, or which is not related to non-controlling interests, should be reclassified as capital stock, additional paid-in capital or a separately named equity account in stockholders’ equity.

When the deferred income taxes method is used, deferred tax assets are recognized when it is more likely than not they will be realized. Those not likely to be realized are excluded from the revaluation. Subsequent recognition of deferred tax benefits not included in the revaluation should ordinarily be recognized in net income.

Disclosures

The following disclosures are required for the first period in which push-down accounting is first applied:

• The date of application of push-down accounting and the dates of the purchase or other transaction that led to its application.

• A description of transaction or event leading to the application of push-down accounting.

• Changes in major accounts resulting from the application of push-down accounting.

• In the fiscal period following the period push-down accounting was first applied, the date of its application, the amount of the revaluation adjustment and the equity account affected and the amount of retained earnings reclassified to other equity accounts.

FOREIGN CURRENCY TRANSLATION

Under this framework, the U.S. dollar is the measure for foreign currency translations; this is called the temporal method. Specific aspects of the temporal method are:

• The exchange rate in effect at the statement of financial position date is used for translating monetary items.

• Historical exchange rates are used to translate non-monetary items, except when they are valued at net realizable value or market value. In such cases, they also are translated at the exchange rate in effect at the reporting date.

• Revenue and expense transactions are translated based on the exchange rate at the date of occurrence.

• Depreciation or amortization amounts are recorded on the same historical exchange rates used to translate related assets.

Other relevant matters:

• Sales on credit to be settled in a foreign currency may result in a payable or receivable in that foreign currency. Changes in the exchange rate before settlement will affect their dollar equivalents.

• Foreign currency purchases and sales, inventories, property and equipment or other non-monetary items are translated as they occur and will not be adjusted for changes in exchange rates.

• Monetary items denominated in a foreign currency are translated at the exchange rate in effect at the reporting date.

• Gains or losses that result from foreign currency translations are included in the statement of operations and should be separately disclosed.

• Weighted averages of exchange rates may be used to translate revenues and expenses in the statement of operations.

CHOOSING THE FRF FOR SMES

The AICPA has developed a Decision Tool for Adopting an Accounting Framework which is available at . This guidance includes detailed questions for management to facilitate answering these basic questions:

1. Are GAAP-based financial statements required by users?

2. Does the entity’s industry require complex accounting guidance not provided by non-GAAP frameworks?

3. Does the applicable financial reporting framework currently used by the entity meet the needs of financial statement users or would another framework be more appropriate?

4. Are there additional practical reasons that affect the decision to use a certain reporting framework like the FRF for SMEs?

SUMMARY OF REASONS FOR USING THE FRF FOR SMES

Practical reasons for using the FRF for SMEs as an entity’s applicable financial reporting framework center on efficiencies in the preparation and auditing of financial statements and footnotes. Following is a summary of opportunities for efficiencies:

• An uncomplicated, primarily historical cost basis will limit the time necessary to comply with the fair value accounting requirements of U.S. GAAP.

• Specific, simplified, consistent footnote disclosure requirements with a disclosure checklist will require less time than the voluminous disclosure checklists for U.S. GAAP.

• Because management can elect the equity method of accounting for greater than 50%-owned subsidiaries, variable interest entities and other investments over which it has significant influence, complex, time-consuming consolidated financial statements can be eliminated. With the historical cost method used for all other investments, time spent on the difficult to apply and disclose fair-value accounting rules under U.S. GAAP can be avoided and related audit time can be reduced.

• Basic financial statement preparation and accounting principles (such as revenue and expense recognition) are similar to U.S. GAAP and do not require preparers to learn a new set of complicated criteria.

• Inventories valuation at the lower of cost or the ceiling of net realizable value eliminates complicated costing and valuation methods common to U.S. GAAP.

• Goodwill and all other intangible assets can be amortized and no tests for impairment are required for any intangible or other long-lived assets, thereby reducing financial statement preparation and audit time.

• Lease accounting requirements will remain similar to traditional U.S. GAAP, even if new accounting standards become applicable. This can eliminate the capitalization of many operating leases which may be required by future U.S. GAAP.

• The income taxes payable method can be elected by management. The time-consuming deferred taxes method under U.S. GAAP can be avoided.

• Accounting for pension and post-employment plans under a current contribution payable method can simplify accounting, save financial statement preparation time and reduce auditor’s time charges and the use of costly specialists.

• With only footnote disclosures required for such items as derivatives and stock-based compensation plans, costly accounting methods under U.S. GAAP can be avoided.

• While the acquisition method is required for business combinations similar to U.S. GAAP, push-down (new basis) accounting is permitted for acquired entities resulting in similar values being recorded in the acquired entity’s financial statements. This can simplify and save time for future consolidations.

While the aggregate time-savings for accounting, financial statement and footnote preparation and audit fees will differ based on the facts and circumstances in each reporting entity, it is clear that the FRF for SMEs can significantly reduce these administrative costs for most reporting entities.

CONCLUSION

The FRF for SMES may quickly become the most popular framework for reporting entities and their financial statement users that are not required to use U.S. GAAP. This special-purpose framework contains practical guidance for application and comprehensive illustrations of financial statements and footnotes. Its principles and concepts are easy to understand and apply and are not likely to change significantly in the future. In short, for entities not required to use U.S. GAAP as their applicable reporting framework, this framework offers management of small- and medium-size reporting entities, their financial statement users and their auditors a cost-beneficial reporting alternative.

APPENDIX A--ILLUSTRATIVE STATEMENT OF CASH FLOWS

Following is an illustrative, basic set of financial statements and footnotes prepared under the FRF for SMEs. A brief review of these statements will reinforce the concepts discussed in this presentation.

Illustrations of comparative, detailed financial statements for this framework, U.S. GAAP basis and the income tax basis are available in the FRF for SMEs section of the AICPA’s website ().

When management and users of an entity’s financial statements agree upon use of the FRF for SMEs as the applicable reporting framework, financial statement and footnote preparation and audit will often be most efficient choice among the alternatives.

ALWAYS BEST CORPORATION

STATEMENT OF ASSETS, LIABILITIES AND EQUITY

(FRF for SMEs Basis)

December 31, 2014

ASSETS

CURRENT ASSETS

Cash $ 13,000

Accounts receivable—trade 488,000

Accounts receivable—related parties 55,000

Inventories 400,000

Prepaid expenses 1,300

Total Current Assets 957,300

INVESTMENTS 260,000

PROPERTY AND EQUIPMENT

Land 5,000

Buildings 90,000

Machinery and equipment 85,000

Office furniture and equipment 6,000

186,000

Less accumulated depreciation (108,000)

Net Property and Equipment 78,000

OTHER ASSETS

Note receivable 36,000

Deposits 5,800

Total Other Assets 41,800

TOTAL ASSETS $1,337,100

LIABILITIES AND EQUITY

CURRENT LIABILITIES

Current portion of long-term debt $ 75,000

Accounts payable 410,000

Accrued expenses 10,500

Income taxes payable 24,000

Payroll tax liabilities 1,100

Total Current Liabilities 520,600

LONG-TERM DEBT, net of current portion 125,000

TOTAL LIABILITIES 645,600

EQUITY

Common stock—no par value, 450 shares authorized, issued

and outstanding 45,000

Retained earnings 646,500

TOTAL EQUITY 691,500

TOTAL LIABILITIES AND EQUITY $.1,337,100

See Independent Accountant’s Review Report and Notes to Financial Statements.

ALWAYS BEST CORPORATION

STATEMENT OF REVENUES AND EXPENSES

(FRF for SMEs Basis)

Year Ended December 31, 2014

NET SALES $ 4,185,000

COST OF SALES 3,700,000

GROSS PROFIT 485,000

OPERATING EXPENSES

Selling, general and administrative 543,900

Interest expense 17,000

Total operating expenses 560,900

OPERATING INCOME (LOSS) ( 75,900)

OTHER INCOME

Vending machine franchise income 121,000

Interest and dividends on investments 24,000

Gain on sale of fully-depreciated assts 8,900

Cell towers rent 24,000

Miscellaneous income 14,100

Total Other Income 192,000

PROVISION FOR INCOME TAXES 21,000

NET INCOME 95,100

RETAINED EARNINGS, January 1, 2014 551,400

RETAINED EARNINGS, December 31, 2014 $ 646,500

See Independent Accountant’s Review Report and Notes to Financial Statements.

ALWAYS BEST CORPORATION.

STATEMENT OF CASH FLOWS

(FRF for SMEs Basis)

Year Ended December 31, 2014

CASH FLOWS FROM OPERATING ACTIVITIES

Net income $ 95,100

Adjustments to reconcile net income to net cash

provided by operating activities

Depreciation 32,000

Increase in accounts receivable (137,000)

Decrease in inventories 100,000 Decrease in prepaid expenses 900

Increase in accounts payable and accrued expenses 30,100

Decrease in income taxes payable (11,100)

Net Cash Provided by Operating Activities 110,000

CASH FLOWS USED BY INVESTING ACTIVITIES

Purchase of machinery and equipment (20,000)

Purchase of marketable securities (10,000)

Cash Used By Investing Activities (30,000)

CASH FLOWS USED BY FINANCING ACTIVITIES

Payments on debt obligations (100,000)

NET DECREASE IN CASH (20,000)

CASH AT BEGINNING OF YEAR 33,000

CASH AT END OF YEAR $ 13,000

See Independent Accountant’s Review Report and Notes to Financial Statements.

ALWAYS BEST CORPORATION

NOTES TO FINANCIAL STATEMENTS

(FRF for SMEs Basis)

Year Ended December 31, 2014

NOTE A—SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Nature of the Organization

The Corporation manufactures precast concrete products, including various types of blocks and patio and yard decorations. Its business is located in Anywhere, USA.

The Corporation is wholly-owned and is classified as a “C” corporation for income tax purposes. The sole shareholder of the Corporation has controlling investments in several other corporations that purchase its products. All transactions with affiliates are at fair market values and the Corporation has no monetary investment in, or significant influence over, the affiliated corporations.

Basis of Accounting and Financial Statement Presentation

Financial statement presentation is based on the American Institute of Certified Public Accountants’ Financial Reporting Framework for Small- and Medium-Size Entities (FRF), which is a special purpose framework. This FRF differs from U.S. generally accepted accounting principles. For example, this FRF does not require the consolidation of variable interest entities and, instead of tests of impairment of goodwill, permits its amortization.

Accounts Receivable and Revenue Recognition

Revenues consist primarily of sales of concrete constructions blocks, patio blocks and various landscaping precast products. Sales are made to construction contractors, governmental organizations and private parties. There is no economic dependency on any one, or a group, of customers.

The Corporation records all trade receivables at gross amounts billed to customers. A direct-write-off method is used for bad debts due to insignificant uncollectible accounts in the past. Management continually analyzes accounts with slow-paying customers and they are written off as bad debts if they are deemed uncollectible.

Inventories of Raw Materials and Finished Goods

The inventory consists of raw materials (sand, gravel and cement), concrete construction blocks, patio blocks and various landscaping precast products. The inventory is stated at the lower of cost or net realizable value and accounted for on an average cost basis.

Property and Equipment

Property and equipment expenditures of $1,000 or more are capitalized at cost and depreciated over the estimated useful lives of the respective assets on a straight-line basis. Buildings are depreciated over 30 years, 7 years for machinery and equipment and 5 years for office furniture and equipment. Routine repairs and maintenance are expensed as incurred.

Income Taxes

The Corporation has elected the taxes payable method for recording income taxes. Current income taxes payable or refundable are recorded as a liability or asset and are based on income tax rates and laws enacted and effective at the reporting date. Statutory rates do not differ significantly from the effective tax rates used to calculate the provision for income taxes. There are no unused tax loss or tax credit carryforwards.

Use of Estimates

The preparation of financial statements in conformity with the Financial Reporting Framework for Small- and Medium-Sized Entities requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

Concentrations Risk

Concentrations risk consists of cash deposits. The Corporation maintains its cash in various bank deposit accounts that, at times, may exceed federally insured and other insured limits. The Corporation currently has no deposits in excess of insured limits, has not experienced any losses in such accounts and does it expect to incur any such losses in the future.

Cash

Cash consists of funds on deposit at financial institutions. The Corporation has no cash equivalents.

Subsequent Events

Management of the Corporation has evaluated subsequent events through April 30, 2015, the date financial statements are available to be issued.

NOTE B—INVESTMENTS

The Corporation has invested in various marketable equity securities. All of the investments are accounted for at cost since the Corporation does not have significant influence over the iinvestee companies.

Description Shares Ownership % Carrying Amount

Dorcus, Intl. 100 .00001 $ 25,000

Pork Belly Feeds 390 .00005 40,000

Shovels, Inc. 510 .0001 80,000

Bean Bagger Co. 10,105 .0007 75,000

U.S. Motors 215 .00001 40,000

$ 260,000

NOTE C—RELATED PARTY TRANSACTIONS

The Corporation sells products to companies that are wholly or partially owned by its President and sole shareholder. Transactions with these companies are at sales prices charged other customers.

Sales Volume Accounts Receivable at December 31, 2014

Pine Tree Lumber Co. $ 275,000 $ 22,000

Open Space Development Co. $ 430,000 33,000

$ 55,000

A note balance of $36,000 is receivable from the Corporation’s President and sole shareholder. The note bears interest at 7% compounded annually and payments are due on demand.

NOTE D—DEBT OBLIGATIONS

Debt obligations as of December 31, 2014 consist of:

Note payable to bank, payable in monthly installments of

$ 8,000 including interest at 5.0%, collateralized

by inventories $ 200,000

Less current portion (75,000)

Long-term debt $ 125,000

Principal maturities on these obligations are:

Year Ending December 31,

2015 $ 75,000

2016 85,000

2017 40,000

$146,098

Interest paid during the year ended December 31, 2014 amounted to $ 17,000.

NOTE E—CHANGES IN EQUITY

Common Retained

Stock Earnings

Balance at January 1, 2014 $ 45,000 $ 551,400

Net income 95,100

Balance at December 31, 2014 $ 45,000 $ 646,500

NOTE F—OPERATING LEASE

The Corporation leases three GMC delivery trucks under an operating lease for a 36 month period which provides for all vehicle maintenance and repairs. The residual value at the end of the lease term is the fair market value of the vans; there is no bargain purchase option. This lease is classified as an operating lease because the risks and rewards of ownership are retained by the lessor. Rent expense classified in costs of goods for the period ended December 31, 2014 was $72,000. Future lease payments are as follows:

Years Ending December 31,

2015 $ 72,000

2016 72,000

Discussion Exercise:

While discussing the FRF for SMEs with the user of your financial statements, you were asked to point out the policy differences on the illustrative statement of cash flows above from U.S. GAAP. Write your answers below.

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