Spring 2014 issue of Horizons

FEATURE

∙ In broad terms, lease accounting is similar to current GAAP and the distinction between a capital lease and an operating lease is retained. Such treatment differs from accounting for leases as currently proposed by the FASB. ∙ Generally, the conditions for recognizing revenue are consistent with current GAAP and not according to the revenue recognition standard currently proposed by the FASB. ∙ A choice should be made to account for income taxes under either the “taxes payable” method or the “deferred” method. This new accounting framework has also undergone public comment and professional scrutiny, and incorporates significant feedback from CPAs, bankers and other relevant stakeholders. The AICPA expects to review the framework and propose changes approximately every three or four years. The use of this framework is entirely optional. As a result, there is no effective date. The AICPA believes that the FRF for SMEs can be used by entities in many industry groups and may also be used by unincorporated, as well as incorporated entities. Characteristics of typical entities that may utilize the FRF for SMEs include: ∙ The entity does not have regulatory reporting requirements that essentially require it to use GAAP-based financial statements. ∙ The entity does not operate in an industry that requires highly-specialized accounting guidance. ∙ The entity does not engage in overly complicated transactions and does not have significant foreign operations. ∙ Key users of the entity’s financial statements have direct access to the entity’s management. ∙ The entity is for-profit and has no intention of going public.

managed businesses that are not required to use GAAP for financial reporting purposes.

The FRF for SMEs gives small business owners an alternative to the non-GAAP options that are currently available while providing meaningful results without unnecessary complexity or cost. The focus of the FRF for SMEs is on traditional and proven accounting methods to ensure consistent application. ∙ The FRF for SMEs uses historical cost and attempts to avoid complicated fair value measurements. ∙ The new framework offers options to businesses that can tailor the presentation of statements to their specific users. Significant items of interest include:

∙ The FRF for SMEs includes targeted disclosure requirements.

∙ The framework also attempts to reduce book-to-tax differences.

∙ The FRF for SMEs produces internal financial statements that can be compiled, reviewed or audited by independent third parties.

FRF for SMEs Versus GAAP Some of the most significant recognition and measurement elements of the AICPA’s FRF for SMEs that differ from GAAP are: ∙ The basic financial statements include a balance sheet, income statement, statement of changes in equity and a statement of cash flows. A statement of comprehensive income is not required. ∙ A choice can be made by a parent company either to consolidate its subsidiaries, or account for its subsidiaries under the equity method. In either case, all subsidiaries have to be accounted for in the same way.

∙ Control of a subsidiary is based entirely on ownership of more than 50%.

page 26 | horizons Spring 2014