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Financial Reporting Framework for Small and Medium-Sized Entities: Final Release. aaup.info/ A&AforAU. H. Kyle Anderson, CGMA, CMA, CPA. Find out more at: aaup.info/ KyleLinkedIn. Additional Resources in the Dropbox Folder. A & A AAIC Internal Controls & Acctg Update 8 hrs 2013

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Financial Reporting Framework for Small and Medium-Sized Entities: Final Release

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Financial reporting framework for small and medium sized entities final release

Financial Reporting Framework for Small and Medium-Sized Entities: Final Release

aaup.info/A&AforAU


H kyle anderson cgma cma cpa

H. Kyle Anderson, CGMA, CMA, CPA

  • Find out more at: aaup.info/KyleLinkedIn


Additional resources in the dropbox folder

Additional Resources in the Dropbox Folder

A & A AAIC Internal Controls & Acctg Update 8 hrs2013

A & A AAUC Compilation & Review Update 4 hrs2013

A & A AAUR Traditional Acctg Update 8 hrs2013


Financial reporting framework for small and medium sized entities final release

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

aaup.info/A&AforAU

You will learn about…

  • FRF for SMEs conceptual framework

  • FRF for SMEs major provisions

    RESOURCES

  • AICPA’s FRF for SMEs at: aaup.info/FRFSMEs

  • AICPA’s Toolkit for CPAs: aaup.info/FRFToolsforCPAs

  • AICPA’s Private Company Financial Reporting • aaup.info/aicpa-pcfr


Financial reporting framework for small and medium sized entities final release

What is FRF for SMEs?

Self-contained special purpose framework designed for privately-held small- to medium-sized entities

  • FRF for SMEs relies on:

    • Historical cost concepts

    • Reduced fair value adjustments

    • Reduced disclosures

    • Fewer M-1 adjustments for book to tax reconciliation

    • Utilization of typical financial statements encountered by SMEs

    • Reduction of complexity by planned updates approximately every 3 to 4 years.


Financial reporting framework for small and medium sized entities final release

What is FRF for SMEs?

FRF for SMEs is designed for general use financial statements for management and external users that have access to management.

We will address:

  • Basic concepts

  • General principles

  • Chapter-by-chapter summaries of materials


Financial reporting framework for small and medium sized entities final release

Financial Statement Concepts: Chapter 1

The FRF for SMEs allows the presentation of all or part of the financial statements including

  • the Balance Sheet

  • Income Statement

  • Statement of Changes in Equity

  • Statement of Cash Flows


Financial reporting framework for small and medium sized entities final release

Financial Statement Concepts

FRF for SMEs uses traditional accounting concepts

  • Cost benefit

  • Materiality

  • Understandability

  • Relevance

  • Predictive value

  • Feedback value

  • Timeliness

  • Reliability

  • Representational faithfulness

  • Verifiability

  • Neutrality

  • Conservatism

  • Comparability in financial statement preparation


Financial reporting framework for small and medium sized entities final release

Financial Statement Concepts

Assets, Liabilities, Revenues, Expenses, Gains, and Losses

  • Assets are economic resources controlled by the entity that contribute directly or indirectly to future cash flows and are the result of transactions or events that have already occurred.

  • Liabilities arise from past transactions or events requiring the future transfer of assets or services by the entity and cannot be avoided by the entity.


Financial reporting framework for small and medium sized entities final release

Financial Statement Concepts

Assets, Liabilities, Revenues, Expenses, Gains, and Losses

  • Revenues, expenses, gains, and losses are based on ordinary, peripheral, or incidental activities of the entity’s transactions and events that increase or decrease an entities economic resources or claims to those resources.

  • The accrual basis of accounting should be utilized with revenues recognized when performance is achieved and measurable and expenses either matched to the revenues generated or recognized when the expenditure or asset has no future benefit.


Financial reporting framework for small and medium sized entities final release

Financial Statement Concepts

Assets, Liabilities, Revenues, Expenses, Gains, and Losses

Historical cost is the overriding criteria for measurement with limited use of other bases such as replacement cost for inventories, realizable or market values for temporary and portfolio investments, and the present value of future obligations such as cash received or cash paid to settle liabilities.


Financial reporting framework for small and medium sized entities final release

General Principles of Financial Statement Presentation and Accounting Policies: Chapter 2

Management is required to assess whether a going concern issue exists for 12 months after the balance sheet date

An entity can choose to present all statements or a single statement.

Notes to Financial Statements are required


Financial reporting framework for small and medium sized entities final release

General Principles of Financial Statement Presentation and Accounting Policies

Summary of Significant Accounting Policies” or “Accounting Policies”, a statement is required per Chapter 2; paragraph 2.20 Disclosures regarding the primary differences, for example:

“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 framework, unlike accounting principles generally accepted in the United States of America, generally does not require the recognition of deferred taxes. We have chosen the option to recognize only current income tax assets and liabilities.”


Financial reporting framework for small and medium sized entities final release

Transition to FRF for SMEs: Chapter 3

An entity is required to apply FRF for SMEs to their opening statement of financial position and throughout all financial statements upon transition.

The following exemptions from FRF for SME principles must be considered by each entity:

  • Business Combinations, Chapter 28: An entity can elect out of retrospective application of Chapter 11 if the combination occurred before transition to FRF for SMEs

  • Financial Assets and Liabilities, Chapter 6, Special Considerations for Certain Financial Assets and Liabilities.

  • Asset Retirement Obligations (ARO), Chapter 17, Contingencies


Financial reporting framework for small and medium sized entities final release

Transition to FRF for SMEs

In the year of adoption of FRF for SMEs:

  • An entity is required to disclose changes to equity from transition to FRF for SMEs

  • A reconciliation of prior net income to net income reported under FRF for SMEs

  • Any exemption elections adopted by management


Financial reporting framework for small and medium sized entities final release

Statement of Financial Position: Chapter 4

  • Current assets

  • Long-term assets

  • Total assets

  • Current liabilities

  • Long-term

  • Total liabilities

  • Equity

  • Total liabilities and equity

A statement of financial position should identify and present the following:


Financial reporting framework for small and medium sized entities final release

Current Assets and Current Liabilities

Current assets include those normally realizable within one year of the balance sheet date or normal operating cycle and should be reported in the financial statements by major classes.

Current liabilities include amounts payable within one year of the balance sheet date or normal operating cycle, deferred income taxes payable, and should be reported in the financial statements by major classes.


Financial reporting framework for small and medium sized entities final release

Current Assets and Current Liabilities: Chapter 5

Any debt with the unilateral right to demand immediate payment is considered current unless the creditor has waived their right, the obligation has been refinanced with long-term debt prior to issuance of financial statements, or a noncancellable agreement to restructure on a long-term basis has been completed prior to the issuance of financial statements


Financial reporting framework for small and medium sized entities final release

Special Accounting Considerations for Certain Financial Assets and Liabilities: Chapter 6

Should be reported at amortized cost and equity investments are measured at cost less any impairment reductions


Financial reporting framework for small and medium sized entities final release

Special Accounting Considerations for Certain Financial Assets and Liabilities

Financial Statement Presentation and disclosure of an entity’s items of income should be reported in the face of the statements or footnotes for the related financial assets and financial liabilities and should include:

  • Net gains and losses recognized

  • Interest & dividend income

  • Interest expense on current financial liabilities

  • Interest expense on long-term financial liabilities including presentation of premiums, discounts, and fees

  • Impairment losses and impairment recoveries


Financial reporting framework for small and medium sized entities final release

Special Accounting Considerations for Certain Financial Assets and Liabilities

Specific presentation and disclosures include:

  • The carrying value of financial assets

  • Accounts and notes receivable

  • Any impairments by financial type and related allowance


Financial reporting framework for small and medium sized entities final release

Special Accounting Considerations for Certain Financial Assets and Liabilities

Financial liability disclosures include:

  • A title or description

  • Interest rate

  • Maturity date

  • Terms and covenants in agreement

  • Outstanding principle and accrued interest

  • Repayment terms such as sinking fund, redemption, or conversion provisions


Financial reporting framework for small and medium sized entities final release

Special Accounting Considerations for Certain Financial Assets and Liabilities

  • Financial liability security provisions including assets pledged as collateral and terms and conditions of the pledge

  • Aggregate liability and payments for the next 5 years for liability settlement

  • Any default or breach of loan

  • Capitalized interest

  • Unused letters of credit

  • Long-term debt acceleration clauses


Financial reporting framework for small and medium sized entities final release

Study Question


Financial reporting framework for small and medium sized entities final release

FRF for SMEs Financial Statement concepts uses the overriding criteria of ___________ when measuring assets, liabilities, revenues & expenses:

  • Replacement cost

  • Market values

  • Historical Cost

  • Present value of future cash flows


Financial reporting framework for small and medium sized entities final release

FRF for SMEs Financial Statement concepts uses the overriding criteria of ___________ when measuring assets, liabilities, revenues & expenses:

  • Replacement cost

  • Market values

  • Historical Cost

  • Present value of future cash flows


Financial reporting framework for small and medium sized entities final release

Statement of Operations: Chapter 7

The Statement of Operations should include:

  • Major elements of revenue, cost of goods sold, operating expenses, other revenues and gains, and other expenses and losses

  • Income before discontinued operations

  • Results of discontinued operations

  • Net income or loss for the period


Financial reporting framework for small and medium sized entities final release

Statement of Operations

  • If applicable, presentation and disclosure should include:

    • Income from investments including nonconsolidated subsidiaries

    • Depreciation and amortization

    • Foreign currency translations

    • Atypical revenue, expenses, gains, or losses

    • Income taxes


Financial reporting framework for small and medium sized entities final release

Statement of Cash Flows: Chapter 8

An entity should prepare the statement of cash flows using the direct or indirect method and separately disclose the major classes of cash receipts and cash payments according to operating, investing, and financing activities.

A reconciliation schedule of net income to net cash flows is required for the direct method.


Financial reporting framework for small and medium sized entities final release

Statement of Cash Flows

Operating activities are the key indicator of an entity’s ability to repay loans, maintain operations, make new investments, and provide distributions to owners.

Investing activities relate to the acquisition and disposition of resources to generate future income and cash flows and include the acquisition and disposition of:

  • Capital assets and other long-term assets

  • Equity and debt instruments of other entities

  • Cash flows from business combinations using the purchase method

  • Loans and advances

  • Futures contracts, forward contracts, option contracts, and swap contracts unless classified as financing activities


Financial reporting framework for small and medium sized entities final release

Statement of Cash Flows

Financing activities represent cash inflows and outflows from capital and debt financing for the entity.

Noncash Transactions do not require the use of cash or cash equivalents and are excluded from the statement of cash flows. These transactions are reported as “noncash investing or financing activities” in the face of the statement or disclosed in the notes to financial statements.


Financial reporting framework for small and medium sized entities final release

Accounting Changes, Change in Estimates, and Correction of Errors: Chapter 9

Changes in principles and discovery of significant errors requires retrospective reporting to the earliest opening balances as if the policy had always been applied.

Exceptions are granted for period-specific effects or the cumulative effect if the determination of adjustments is impracticable.


Financial reporting framework for small and medium sized entities final release

Accounting Changes, Change in Estimates, and Correction of Errors

Material errors resulting from intentional and unintentional mistakes in recognitions, presentation, or disclosures in financial statements should be addressed retrospectively to the earliest period presented.

An entity’s initial adoption of FRF for SMEs is considered a change in accounting policy and requires the following disclosures:

  • Nature of the change

  • Description of any transitional provisions

  • Amount of adjustments to financial items, including prior periods if practical


Financial reporting framework for small and medium sized entities final release

Risk and Uncertainties: Chapter 10

Management is required to disclosure the nature of an entity’s operations, use of estimates with additional disclosures for significant estimates, and concentration risks.


Financial reporting framework for small and medium sized entities final release

Equity, Debt, and Other Investments: Chapter 11

When an investor holds 20% or more of ownership should be accounted for using the equity method unless classified as a Subsidiary, chapter 22.

When ownership is less than 20 %, the cost method should be utilized.

When an entity ceases to exercise significant influence, the investment should be reported under the cost method using the carrying value at that time.


Financial reporting framework for small and medium sized entities final release

Equity, Debt, and Other Investments

The following disclosures should be separately reported in the balance sheet and income statement:

  • Subsidiaries accounted for using:

    • Equity method

    • Cost method

  • Other investments using the cost method

  • Equity and Debt investments held for sale


Financial reporting framework for small and medium sized entities final release

Equity, Debt, and Other Investments

  • Income from investments should be separately reported and include:

    • Equity and cost method investments

    • Equity and debt investments held for sale

  • Additional disclosures include:

    • Basis used to account for investments

    • Impact of different fiscal periods

    • Listing and description of significant investments


Financial reporting framework for small and medium sized entities final release

Inventory: Chapter 12

Measurement should be at lower of cost or market (defined as net realizable value) and costs include all purchase, conversion, or other costs to prepare inventories for sale.

Conversion costs include direct cost and indirect costs using a systematic allocation of fixed and variable production overhead based on normal production capacity.


Financial reporting framework for small and medium sized entities final release

Inventory

Entities are allowed to use the standard cost or retail method to estimate inventories if the results approximate cost. Acceptable inventory valuation methods include specific identification, FIFO, LIFO, and weighted average.

Net realizable value is appropriate when the value of the inventory has decreased due to damage, obsolescence, or decline in market value and should be applied on a consistent basis such as item-by-item, group of similar items, or geographical area.

Reversals of inventory write-downs are recorded in the cost of goods sold.


Financial reporting framework for small and medium sized entities final release

Intangible Assets: Chapter 13

An intangible asset exists when it is identifiable, an entity possesses the ability to control the asset, and the existence of future economic benefit exists.

Typically, an entity’s control results from an enforceable legal right. Identifiability of the intangible asset requires that it:

  • Is separable and can be divided, sold, transferred, licensed, rented, or exchanged

  • Arises from a contractual or other legal right


Financial reporting framework for small and medium sized entities final release

Intangible Assets

Internally-generated brands, mastheads, publishing titles, and customer lists do not qualify for recognition as intangible assets and costs are expensed as incurred

When R & D expenditures progress from research to the development phase, management must establish a policy and elect to either expense expenditures as incurred or to capitalize expenditures meeting recognition criteria.


Financial reporting framework for small and medium sized entities final release

Intangible Assets

An entity can only recognize an intangible asset in the development phase when all of the following criteria are met:

  • Technical feasibility for use or sale

  • Intention to complete and use or sell

  • Ability to use or sell

  • Ability to complete the development to use or sell

  • Ability to measure expenditures attributable to the intangible

  • Demonstrate how probable future economic benefits will occur


Financial reporting framework for small and medium sized entities final release

Intangible Assets

The useful life of intangibles should include the following analysis:

  • Expected use by entity

  • Useful lives of similar assets

  • Legal or regulatory provisions limiting the life

  • Obsolescence, demand, competition, and economic factors

  • Maintenance requirements for future use


Financial reporting framework for small and medium sized entities final release

Intangible Assets

Start-up costs incurred in establishing a new entity, new operations, or launching new products can be expensed as incurred or capitalized and amortized over 15 years.

Goodwill is amortized according to federal income tax regulations or, if not amortized for federal purposes, then amortized over 15 years.  


Financial reporting framework for small and medium sized entities final release

Intangible Assets

Presentation and disclosure of intangible assets requires an entity to present intangibles and goodwill separately in an entity’s balance sheet. Disclosures include the:

  • Net carry value in total and by major choice 

  • Aggregate amortization

  • Amortization methods

  • Basis to account for internally generated intangible assets


Financial reporting framework for small and medium sized entities final release

Study Question


Select the incorrect statement in the following list of accounting policies for frf for smes

Select the incorrect statement in the following list of accounting policies for FRF for SMEs :

  • An entity can choose to present the Statement of Cash Flows using the direct or indirect method

  • Retrospective Application is infrequently utilized in FRF for SMEs but must be applied in all cases when required

  • Inventory can be valued using specific identification, FIFO, LIFO & weighted average.

  • Goodwill and Startup costs are amortized over 15 years


Select the incorrect statement in the following list of accounting policies for frf for smes1

Select the incorrect statement in the following list of accounting policies for FRF for SMEs :

  • An entity can choose to present the Statement of Cash Flows using the direct or indirect method

  • Retrospective Application is infrequently utilized in FRF for SMEs but must be applied in all cases when required

  • Inventory can be valued using specific identification, FIFO, LIFO & weighted average.

  • Goodwill and Startup costs are amortized over 15 years


Financial reporting framework for small and medium sized entities final release

Property, Plant, and Equipment: Chapter 14

Tangible capital assets should be valued at cost and include the purchase price, commissions, installation costs, architectural, design, engineering fees, legal fees, survey fees, site preparation, freight, insurance, testing, and preparation charges.

Assets to be sold are measured at fair value less expected cost to sell


Financial reporting framework for small and medium sized entities final release

Property, Plant, and Equipment

Assets constructed or developed over time include all direct construction or development costs and, if elected, capitalized interest expense until the asset is substantially complete and ready for use.

Depreciation charges are based on the greater of costs less salvage over the life of the asset or cost less residual values over the useful life of the asset using a rational and systematic method.


Financial reporting framework for small and medium sized entities final release

Property, Plant, and Equipment

The useful life is the shorter of physical, technological, commercial, or legal life.

Presentation and disclosures of property, plant, and equipment includes the cost, accumulated depreciation, write down of assets, and the depreciation method with period and rate disclosed as well as:

  • Property, plant, and equipment not being depreciated due to construction, development, or removal of service

  • Major categories of property, plant, and equipment

  • Depreciation charged to income by major category


Financial reporting framework for small and medium sized entities final release

Disposal of Long-Lived Assets and Discontinued Operations: Chapter 15

Long-term assets should be classified as held for sale when all of the following conditions have been met:

  • Management commits to a plan to sell

  • The asset’s condition allows for immediate sale

  • An active plan to sell is initiated

  • Sale is expected to be completed within a year, exceptions allowed for conditions imposed by the buyer or others, and unexpected circumstances

  • It is being actively marketed at a reasonable price

  • It is unlikely the plan to sell will be significantly changed or withdrawn


Financial reporting framework for small and medium sized entities final release

Disposal of Long-Lived Assets and Discontinued Operations

Long-lived assets held for sale should be reported at the asset’s carrying value.

Presentation: Entities should present long-lived assets held for sale and related liabilities separately in their balance sheet.


Financial reporting framework for small and medium sized entities final release

Disposal of Long-Lived Assets and Discontinued Operations

When the component is sold or classified as classified as held for sale, the entity is required to disclose:

  • Description of the circumstances leading to disposal or expected disposal

  • The gain or loss on disposal in the face of the financial statements or in footnotes

  • Any revenues, pretax profits, or losses reported in discontinued operations


Financial reporting framework for small and medium sized entities final release

Commitments: Chapter 16

Material commitments should be disclosed and include commitments to:

  • Purchase or construct facilities

  • Debt reduction

  • Working capital obligations

  • Asset acquisition

  • Unconditional obligations and firm purchase commitments


Financial reporting framework for small and medium sized entities final release

Contingencies: Chapter 17

Contingencies such as litigation, asset appropriation, guarantee of indebtedness, and other possible liabilities require evaluation and professional judgment to determine if they should be recorded or disclosed in financial statements.

Accrual and disclosure is required when the event is probable, can be reasonable estimated, and the contingency existed at the financial statement date.


Financial reporting framework for small and medium sized entities final release

Contingencies

When the loss estimate is a range, it is acceptable to use the minimum if there is no better estimate.

Disclosure is required if the likelihood is:

  • Probable and a reasonable estimate cannot be made

  • The event is probable, a loss has been accrued but the loss could be in excess of the accrual, or

  • The future event is reasonably possible


Financial reporting framework for small and medium sized entities final release

Contingencies

AROs, Asset retirement obligations should be recognized when an entity has a legal obligation to provide associated asset retirement costs.

The present value of expected future cash flows to settle the obligation is an acceptable estimation method for AROs.

AROs are adjusted for the passage of time using an interest method and recognition of an accretion expense in the income statement.


Financial reporting framework for small and medium sized entities final release

Contingencies

ARO disclosures should include:

  • General description of the ARO and long-lived assets

  • ARO balance at year-end

    • If not possible, disclosures why the amount cannot be estimated

  • Total paid toward liability during the year

  • Fair value, if possible, or the carry value of assets legally restricted to settle the ARO


Financial reporting framework for small and medium sized entities final release

Contingencies

ARO disclosures should include:

  • General description of the ARO and long-lived assets

  • ARO balance at year-end

    • If not possible, disclosures why the amount cannot be estimated

  • Total paid toward liability during the year

  • Fair value, if possible, or the carry value of assets legally restricted to settle the ARO


Financial reporting framework for small and medium sized entities final release

Equity: Chapter 18

The acquisition and resale of an entity’s stocks are reported using either the cost or constructive retirement method.

Presentation and disclosures for equity and capital accounts should include:

  • Changes to, issuance, redemption, or cancellation of capital

  • Gains/losses from company stock transactions

  • Contributions to capital

  • Dividends and distributions

  • Taxes from changes in shareholder status or capital transactions


Financial reporting framework for small and medium sized entities final release

Equity

Presentation for changes in equity include:

  • Net income, including noncontrolling interests

  • Changes in:

    • Retained earnings

    • Additional paid-in capital

    • Capital stock

      • Any note receivable from shareholder should be offset against capital stock (very limited exceptions)

    • Other equity changes


Financial reporting framework for small and medium sized entities final release

Equity

The presentation of the components of equity should include:

  • Retained earnings

  • Additional paid-in capital

  • Capital stock

  • Noncontrolling interest, Chapter 23

  • Other components


Financial reporting framework for small and medium sized entities final release

Equity

Disclosures for authorized and issued capital stock include:

  • The number of shares authorized, issued, and outstanding and details of transactions

  • Dividend rates preferred shares and whether cumulative

  • Redemption price, if any, classes of stocks

  • Any dividends in arrears on preferred stock


Financial reporting framework for small and medium sized entities final release

Revenue: Chapter 19

Goods and services are considered realized when significant risks and rewards of ownership are transferred to the buyer, all significant acts required of the seller have been completed, there is no future expectation of managerial involvement, and effective control has been transferred.


Financial reporting framework for small and medium sized entities final release

Revenue

Long-term contracts and rendering of services should utilize the percentage of completion or completed contract method for recognition. Percentage of completion is required for contracts requiring more than one act with completed contract acceptable for single act contracts or multi-act contracts when percentage complete cannot be determined.


Financial reporting framework for small and medium sized entities final release

Revenue

Performance is deemed achieved when evidence of an arrangement exists, delivery has occurred or services rendered, and the price is fixed or determinable.

The risks and rewards of ownership are deemed to be transferred when there are no significant acts to be completed by the seller and the seller does not retain any managerial involvement or effective control.


Financial reporting framework for small and medium sized entities final release

Revenue

Disclosures and presentation require an entity to disclose their revenue recognition policies, nature of arrangements, major categories of income, and sources of revenues.


Financial reporting framework for small and medium sized entities final release

Retirement and Other Postemployment Benefits: Chapter 20

Benefits provided after employment and before retirement include disability, workers compensation, unemployment training, health care, life insurance, and termination benefits.

An entity should recognize retirement and postemployment plan obligations over the period the employee provides services.


Financial reporting framework for small and medium sized entities final release

Retirement and Other Postemployment Benefits

An obligation exists when an entity has a responsibility to their employees that requires them to provide future benefits and the entity cannot avoid the obligation due to the rendering of service by the employee or the occurrence of an event.

There are two types of retirement plans an employer can provide employees.


Financial reporting framework for small and medium sized entities final release

Retirement and Other Postemployment Benefits

Defined Contribution Plans should disclose a general description of the plan and the costs recognized during the period. Entities involved in multiemployer plans should also disclose whether withdrawal is probable or reasonably possible and if withdrawal would result in an obligation.


Financial reporting framework for small and medium sized entities final release

Retirement and Other Postemployment Benefits

Defined Benefit Plan obligations can be measured using the current contribution or accrued benefit obligation method.

The current contribution method only recognizes the contribution expense for the current period.

The accrued benefit obligation method is determined under the immediate recognition or deferral and amortization approach and can utilize the projected benefits or accumulated benefit method.


Financial reporting framework for small and medium sized entities final release

Retirement and Other Postemployment Benefits

Disclosures include:

  • Description of the plan, participants, and nature of benefits

  • Funding status including the benefit obligation, plan assets, and plan deficit or excess

  • The expected rate of return on plan assets and the discount rate used in determining the accrued benefit obligation

  • The nature and effect of any termination benefits provided in the period


Financial reporting framework for small and medium sized entities final release

Income Taxes: Chapter 21

An entity can choose either the taxes payable method and recognize only current taxes and tax liabilities or the deferred income taxes method that includes future deferred tax assets and liabilities.


Financial reporting framework for small and medium sized entities final release

Income Taxes

The deferred income tax method includes future deferred income tax assets and tax liabilities based on the differences between the financial and tax basis of accounting. These temporary differences will be resolved in periods extending beyond a year.


Financial reporting framework for small and medium sized entities final release

Income Taxes

Presentation and disclosure principles require an entity to disclose the method of accounting for taxes and include the following:

  • The taxes payable method including:

    • Current income tax expense or tax benefit before discontinued operations

    • Reconciliation of the income tax rate or expense or the period before discontinued operations

    • The amounts for unused tax losses, tax reductions, and temporary unrecognized deductible differences

      • Deferred tax assets and tax liabilities should be separately stated from other assets and liabilities

  • Income tax expense or tax benefit charged to equity


Financial reporting framework for small and medium sized entities final release

Income Taxes

  • Pass-through entities should disclose the entity is not subject to taxation

The deferred income tax method

  • Current income tax expense or tax benefit before discontinued operations

  • Deferred income tax expense or tax benefit before discontinued operations for the current period

  • The amounts for unused tax losses, tax reductions, and deductible temporary differences that have not been recognized as a deferred income tax asset

    • Deferred tax assets and tax liabilities should be separately stated from other assets and liabilities


Financial reporting framework for small and medium sized entities final release

Subsidiaries: Chapter 22

Consolidated Statements are appropriate when an entity acquires control and continues as long as control exists.

The entity should describe the statements as prepared on the consolidated basis and label each statement accordingly.


Financial reporting framework for small and medium sized entities final release

Consolidated Financial Statements & Noncontrolling Interest: Chapter 23

At the Date of acquisition, the identifiable assets, liabilities, noncontrolling interest, and any resulting goodwill should replace the investment account.

Subsequent transactions and miscellaneous transactions or relationships between the parent and subsidiaries require adjustment for intercompany sales, services, purchases, inventory, fixed assets, lending and borrowing, gains and losses, exchange of equity interest outside of the consolidated group, depreciation, amortization, and dividends.


Financial reporting framework for small and medium sized entities final release

Consolidated Financial Statements & Noncontrolling Interest

The noncontrolling interest should be separately presented from the equity of the owners of the parent entity in the equity section of the balance sheet and the noncontrolling share of net income or loss should be separately reported in the income statement.


Financial reporting framework for small and medium sized entities final release

Consolidated Financial Statements & Noncontrolling Interest

Loss of control by the parent entity requires the parent to:

  • Derecognize the subsidiary’s assets, liabilities, goodwill, and noncontrolling interest

  • Recognize the fair value of consideration received and any distribution of shares to owners

  • Recognize any interest retained at the carrying value when control was lost

  • Recognize any gains or losses in net income attributable to the parent


Financial reporting framework for small and medium sized entities final release

Consolidated Financial Statements & Noncontrolling Interest

Presentation of consolidated financial statements and noncontrolling interest include only the post-acquisition and predisposal income from the subsidiary.


Financial reporting framework for small and medium sized entities final release

Interest in Joint Ventures: Chapter 24

A venturer can use the proportionate consolidation method or the equity method (chapter 11) to account for the venture.

The proportionate consolidation method recognizes the venturer’s share of assets, liabilities, revenues, and expenses with intercompany transactions eliminated in their financial statements.


Financial reporting framework for small and medium sized entities final release

Interest in Joint Ventures

Presentation and disclosure of joint ventures require the following presented separately in the balance sheet and income statement reported under the equity method and the proportionate method.


Financial reporting framework for small and medium sized entities final release

Interest in Joint Ventures

Disclosures of joint ventures should include:

  • Basis used and reasons for selection of reporting joint ventures

  • Listing, description, names, carrying value, and proportional interest in joint ventures

  • The venturers share of existing contingencies, commitments, liabilities, and guarantees for joint ventures and other venturers in the joint venture


Financial reporting framework for small and medium sized entities final release

Study Question


Select the incorrect statement in the following list of accounting policies for frf for smes2

Select the incorrect statement in the following list of accounting policies for FRF for SMEs :

  • Defined Benefit Plan obligations can be measured using the current contribution or accrued benefit obligation method.

  • The proportionate consolidation method for Joint Ventures does not required elimination of intercompany transactions.

  • An entity can choose either the taxes payable method or the deferred income taxes method.

  • Consolidated Statements are appropriate when an entity acquires and continues to maintain control.


Select the incorrect statement in the following list of accounting policies for frf for smes3

Select the incorrect statement in the following list of accounting policies for FRF for SMEs :

  • Defined Benefit Plan obligations can be measured using the current contribution or accrued benefit obligation method.

  • The proportionate consolidation method for Joint Ventures does not required elimination of intercompany transactions.

  • An entity can choose either the taxes payable method or the deferred income taxes method.

  • Consolidated Statements are appropriate when an entity acquires and continues to maintain control.


Financial reporting framework for small and medium sized entities final release

Leases: Chapter 25

Lease provisions under FRF for SMEs primarily follow current GAAP,

The key criteria for determining an operating versus capital lease centers on the transfer of the benefits and risks associated with ownership of the leased asset.

A lease that transfers benefits and risks of ownership to the lessee are considered capital leases and should be recorded as both an asset and liability on the lessee’s books and a sales-type or direct financing lease in the lessor’s books.


Financial reporting framework for small and medium sized entities final release

Leases

The risks and benefits of ownership are deemed transferred when one or more of the following conditions exist at the inception of the lease:

  • A bargain purchase option or the terms of the lease make it probable they will obtain ownership at the end of the lease term

  • The lease term covers substantially all of the economic benefits of the leased property, usually 75 % or more of economic life

  • The lessor is assured of recovering their investment and earning a return, typically 90 % or greater of the present value of the minimum lease payments


Financial reporting framework for small and medium sized entities final release

Leases

Accounting treatment for a capital lease by lessee:

A lessee capitalizes the present value of minimum lease payments using the lower of the lessee’s rate for incremental borrowing or the implicit rate in the lease.

A corresponding liability, including appropriate residual values and lease inducements, is reported as an obligation and amortized over the term of the lease.


Financial reporting framework for small and medium sized entities final release

Leases

Accounting treatment for a capital lease by lessee:

Disclosure requirements include presenting capital leases separately from other assets and liabilities that it owns and those it only has the right to use, reporting interest expense, and allocation of the obligation as current and long-term.

Operating leases are reported as operating expenses over the term of the lease and include any expected residual value guarantees as well as reductions for lease renewal inducements.


Financial reporting framework for small and medium sized entities final release

Leases

Accounting treatment for a capital lease by lessor:

Direct financing capital lease income arises from the difference between the minimum lease payments, including any unguaranteed residual value less executory costs versus the cost or carry amount of the leased property.

Residual values should be evaluated annually for impairment losses with no provision for recovery of impairment.


Financial reporting framework for small and medium sized entities final release

Leases

Accounting treatment for a capital lease by lessor:

Sales-type leases include both direct financing revenue and profit on sale of leased asset.

The financing income consists of the present value of the minimum lease payments, including any unguaranteed residual value and the cost of the sale is the carry value of the leased asset, including the PV of the unguaranteed residual value using the implicit interest rate in the lease.


Financial reporting framework for small and medium sized entities final release

Leases

Accounting treatment for a capital lease by lessor:

Initial direct costs are considered part of the sales transaction and expensed immediately.

Residual values should be evaluated annually for impairment losses and treated as a change in estimates.

Subsequent renewals of sales-type leases are reported as direct financing leases.


Financial reporting framework for small and medium sized entities final release

Leases

Accounting treatment for a capital lease by lessor:

Leased asset carry values should be reduced to the highest of:

  • PV of expected cash flows using a current market rate of interest

  • Realizable selling price of lease at balance sheet date


Financial reporting framework for small and medium sized entities final release

Leases

Operating leases

  • Should be recognized in income over the life of the lease term on a straight-line or other rational systematic basis with initial operating lease costs amortized over the life of the lease in proportion to revenue recognized.


Financial reporting framework for small and medium sized entities final release

Leases

Operating leases

  • Disclosures of capital leases by lessees in financial statements require the cost, accumulated depreciation, write-downs, and amortization method for each major category of leased property. Disclosures include the interest rate, maturity date, obligation balance, security, payments in the aggregate and for the next 5 years with sinking funds or retirement provisions, and any interest expense separately disclosed.


Financial reporting framework for small and medium sized entities final release

Leases

Operating leases

  • Requirements for operating leases include disclosure of the minimum operating lease payments in the aggregate and for the next 5 years.


Financial reporting framework for small and medium sized entities final release

Leases

Operating leases

  • Disclosures by lessors include their net investment in direct financing and sales-type leases with disclosures about interest rates, carry values of impaired leases and any related allowance. The cost of property, accumulated amortization, carry values, impairments of lease receivables, and related allowance for impairment should be disclosed for operating leases.


Financial reporting framework for small and medium sized entities final release

Related Party Transactions: Chapter 26

Related party transactions are required to be disclosed in the face of the financial statement and appropriately described in the footnotes.

Related parties include those controlled or under common control by an individual or entity, management and their immediate family members, and any party subject to significant influence or control.


Financial reporting framework for small and medium sized entities final release

Related Party Transactions

Related party transactions are reported at their carrying value and measured using the cash, cash equivalent, or the fair value (arm’s length) at the date of the transaction.


Financial reporting framework for small and medium sized entities final release

Related Party Transactions

An entity should disclose the following information on related parties:

  • Description of the relationship

  • Description of transactions included in the financial statements and those which no transaction has been recognized

  • The measurement basis and amount of transactions

  • Any amounts due to and due from related parties, including terms and conditions

  • Commitments and contingencies with related parties separately reported and disclosed from other commitments and contingencies


Financial reporting framework for small and medium sized entities final release

Subsequent Events: Chapter 27

Subsequent events provide information about conditions that exist at the financial statement date or those arising after the financial statement date. Financial statements are considered issued when:

  • A complete set of financials has been prepared

  • All adjusting entries have been posted

  • There are no expected changes

  • The entity has approved the financial statements


Financial reporting framework for small and medium sized entities final release

Subsequent Events

Subsequent events should only be reported for conditions that existed at the date of the financial statements.

Subsequent events not existing at the date of the financial statements should be disclosed if they could cause a significant change in assets or liabilities or affect future operations of the entity.


Financial reporting framework for small and medium sized entities final release

Study Question


Select the incorrect statement in the following list of accounting policies for frf for smes4

Select the incorrect statement in the following list of accounting policies for FRF for SMEs :

  • Lease provisions under FRF for SMEs primarily follow current GAAP

  • Related party transactions are reported at their carrying value and measured using the cash, cash equivalent, or the fair value (arm’s length) at the date of the transaction.

  • Subsequent Events should be reported for the period after the year-end until the financial statements are considered issued.

  • Subsequent Events should include only conditions that existing at the Balance Sheet date and never those that arose after the Balance Sheet date.


Select the incorrect statement in the following list of accounting policies for frf for smes5

Select the incorrect statement in the following list of accounting policies for FRF for SMEs :

  • Lease provisions under FRF for SMEs primarily follow current GAAP

  • Related party transactions are reported at their carrying value and measured using the cash, cash equivalent, or the fair value (arm’s length) at the date of the transaction.

  • Subsequent Events should be reported for the period after the year-end until the financial statements are considered issued.

  • Subsequent Events should include only conditions that existing at the Balance Sheet date and never those that arose after the Balance Sheet date.


Financial reporting framework for small and medium sized entities final release

Business Combinations: Chapter 28

Business combinations are accounted for using the acquisition method and require:

  • Identification of the acquirer and acquisition date

  • Recognizing and measuring identifiable assets, liabilities, noncontrolling interest, goodwill, and any gains from a bargain purchase

    The measurement of assets and liabilities are based on the acquisition-date fair values.


Financial reporting framework for small and medium sized entities final release

Business Combinations

Gains from bargain purchases should only be recorded after the acquirer reassesses and reviews:

  • Identifiable assets and liabilities

  • Noncontrolling interest

  • Previously held equity interest in business combinations achieved in stages

  • Consideration transferred


Financial reporting framework for small and medium sized entities final release

Business Combinations

The recognition of assets and liabilities for the combination of entities under common control is recorded at the date of transfer and measured at the carrying value.


Financial reporting framework for small and medium sized entities final release

Business Combinations

Disclosures are required for combinations occurring during the reporting period and after the reporting period but before the financial statements are completed and include the:

  • Name and description of the acquired

  • Date of acquisition

  • Percentage of voting equity interest


Financial reporting framework for small and medium sized entities final release

Business Combinations

  • Fair value of consideration at the date of acquisition by

    • Cash

    • Liabilities

    • Equity

    • Contingent consideration

    • Any gains recognized

    • Noncontrolling interest


Financial reporting framework for small and medium sized entities final release

Business Combinations

Combinations of entities under common control should include the following information in the notes to financial statements about:

  • The name and description of the entity

  • Method of accounting for the transfer of net assets or exchange of equity interest


Financial reporting framework for small and medium sized entities final release

New Basis (Push-Down) Accounting:

Chapter 29

Available for entities to establish a new cost basis when control of an entity (50% or more) has been acquired in one or more transactions between nonrelated parties by an acquirer controlling the entity after the transaction.


Financial reporting framework for small and medium sized entities final release

New Basis (Push-Down) Accounting

This treatment produces the same results as if the entity had purchased the assets and assumed the liabilities directly or established a new legal entity to hold the assets and liabilities.

The application of push-down accounting is not required.


Financial reporting framework for small and medium sized entities final release

New Basis (Push-Down) Accounting

Disclosures are required in the period push-down accounting is first applied and include the:

  • Date push-down accounting was applied and the date(s) of transactions leading to the application

  • Description of the situation resulting in application of push-down accounting

  • Amount of changes in each major class of assets, liabilities, and shareholders’ equity from the application of push-down accounting


Financial reporting framework for small and medium sized entities final release

New Basis (Push-Down) Accounting

Disclosures in Subsequent reporting periods include the:

  • Date push-down accounting was applied

  • Amount of the revaluation adjustment and the equity account in which the adjustment was recorded

  • Amount of reclassified retained earnings and the equity account used for the reclassification


Financial reporting framework for small and medium sized entities final release

Nonmonetary Transactions: Chapter 30

Nonmonetary exchanges are measured by the fair value of consideration received or given up based on the most reliable value.

Transactions are excluded when they lack commercial substance, are for products or property held for sale in the normal course of business, when fair values cannot be determined, are nonreciprocal transfers to owners under paragraph 30.10, or transactions with related parties not in the normal course of business.


Financial reporting framework for small and medium sized entities final release

Nonmonetary Transactions

Transactions are measured at fair value when commercial substance exists and the transaction results in a significant change in future cash flows.

Entities should recognize gains or losses on nonmonetary exchanges in net income in the period of transfer.

Financial statement disclosure requirements include information about the nature of the transaction, basis of measurement, the amount, and related gains and losses.


Financial reporting framework for small and medium sized entities final release

Foreign Currency Translation: Chapter 31

The temporal method is used for the translation of foreign currency when an entity prepares it financial statements and assumes U.S. dollars are the reporting currency.

Translation adjustments result from the purchase or sale of goods or services in a foreign currency and require adjustment for changes in currency rates as of the statement of financial position date.


Financial reporting framework for small and medium sized entities final release

Foreign Currency Translation

Exchange gains and losses resulting from the settlement of a transaction at an exchange rate different from recorded amount are reported in net income for the current period.

It is acceptable to use averages or other methods of approximation if the record keeping and computations would be burdensome and the level of detail unnecessary.


What entities will benefit from using frf for smes

What entities will benefit from using FRF for SMEs?

What clients do you have that will benefit from using FRF for SMEs?

Who should not adopt FRF for SMEs?

When should you adopt FRF for SMEs?


Financial reporting framework for small and medium sized entities final release

Study Question


Financial reporting framework for small and medium sized entities final release

FRF for SMEs is a self-contained special purpose framework designed for privately-held small- to medium-sized entities. What group is this framework specifically designed for:

  • Bankers and creditors

  • Owners, shareholders, management, and external users that have access to management

  • Potential investors when the entity completes their transitions to a public company

  • Owners and Shareholders of the entity


Financial reporting framework for small and medium sized entities final release

FRF for SMEs is a self-contained special purpose framework designed for privately-held small- to medium-sized entities. What group is this framework specifically designed for:

  • Bankers and creditors

  • Owners, shareholders, management, and external users that have access to management

  • Potential investors when the entity completes their transitions to a public company

  • Owners and Shareholders of the entity


Financial reporting framework for small and medium sized entities final release

H. Kyle Anderson, CPA, CGMA, CMA

[email protected]

Cell: 864-933-3815


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