AICPA - Special Purpose Framework

Posted on 09.24.13

small bizAuthor: Toby R. Leslie, CPA | Business Assurance & Advisory Services Partner

As discussed in last month’s article Simplified Financial Reporting Standards for Private Companies, the AICPA has proposed a new alternative to Generally Accepted Accounting Principles (“GAAP”) for smaller and privately-held companies entitled Financial Reporting Framework for Small and Medium-Sized Entities (FRF for SMEs). 

The framework does not define a “small and medium-sized entity,” but does give some guidance as to entities that may, or may not be considered a SME.

(For more information on characteristics of SMEs as defined by the AICPA, click here.) The goal of the FRF for SMEs is to provide latitude in determining certain key accounting policies, while also simplifying financial reporting in a number of particularly complex areas. Below is a brief summary of some of the areas in which substantial differences exist between the FRF for SMEs and GAAP:

Category FRF for SMEs GAAP
Investments and Financial
Assets and Liabilities
 “Market value” approach is required only for investments being held for sale. Changes in market value are recognized directly into net income (loss). Changes in fair value of “available-for-sale” investment securities are charged or credited directly to other comprehensive income and recognized into net income (loss) when the investments are disposed. Changes in fair value of “trading
securities” are charged or credited directly to net income (loss) regardless of whether the gain (loss) is realized or unrealized. “Held-till-maturity” investments are recorded at amortized cost.
Intangible Assets All assets are considered to have a finite life and are amortized over their estimated useful lives. There is no concept of impairment mentioned in the framework.  Assets with a finite life are amortized over their estimated useful lives and evaluated for impairment if certain triggering events occur. Certain assets with an infinite life (such as goodwill) are not amortized but evaluated for impairment on an annual basis.
 Leases Lessee classifies arrangement as either operating or capital lease and lessor accounts for leases as sales- type, direct- financing, or operating. Lessee classifies arrangement as either operating or capital lease and lessor accounts for leases as sales- type, direct- financing or operating. However, a current FASB proposal would modify current GAAP, and would require that most leases be recorded on the balance sheet under a right-of-use model.
Income taxes - General Entities may choose to account for income taxes under either the deferred income taxes method, prescribed under GAAP, or the ”taxes payable” method. Under the taxes payable method, the current income taxes paid, or payable, for the current tax year are recognized as an expense and no income tax assets or liabilities are recognized for timing differences.  Income taxes for C Corporations are accounted for using the “deferred income taxes” method, which requires that timing differences between the GAAP and tax basis of assets and liabilities be recognized. The effect is that items that reduce future taxable income are recognized as a deferred tax asset and items that increase future taxable income are recognized as a deferred tax liability. Changes in the deferred tax assets and liabilities are recognized as income or expense, as appropriate.
Income tax uncertainties No required evaluation or recognition of uncertain income tax positions. Uncertain income tax positions must be evaluated and disclosure and accrual made if it is deemed that an income tax position is more-likely-than-not to result in a liability if the position was challenged.
 Consolidation Control is defined as a greater than 50% of the residual equity interest, which is generally based on voting rights. May elect to either consolidate controlled subsidiaries or account for subsidiaries using the equity method. The framework does not incorporate the VIE model. Consolidation is required for entities with a controlling financial interest in another entity. A controlling financial interest is generally assumed when an entity controls greater than 50% of the voting interests. However, a variable interest entity (VIE) model is applied when a controlling financial interest is achieved through arrangements that do not involve voting interests. Under the VIE model, consolidation may be required if it is determined than an entity is controlled by a “primary beneficiary” which controls less than 50% of the voting interests.
Equity-based compensation Disclosure is required and no compensation expense is recognized when stock, or other equity compensation is issued in lieu of cash compensation. Exercised stock options are accounted for as a normal stock issuance transaction. Measurement of stock-based compensation is fair value based. The fair value of stock-based instruments is recognized over the service period.
Derivatives Disclosure related approach. Income (loss) recognition occurs upon settlement of the derivative instrument. All derivatives are recognized at fair value as either an asset or liability, with changes in fair value recognized as a component of net income (loss) or OCI, depending upon the nature of the derivative.

 

The categories listed are just a few of the areas in which differences exist. For more information on the framework visit AICPA.org. If you have additional questions on this topic, contact your Keiter representative or tleslie@keitercpa.com