THE FINANCIAL REPORTING FRAMEWORK FOR …



THE FINANCIAL REPORTING FRAMEWORK FOR SMALL- AND MEDIUM-SIZED ENTITIES—AN OVERVIEW, PART 1

CPA Firm Support Services, LLC

By Larry L. Perry, CPA

LEARNING OBJECTIVES

• To understand basic principles and concepts of the FRF for SMEs.

• To distinguish FRF for SMEs from U.S. GAAP

• To identify the basic elements of financial statements and footnotes for the FRF for SMEs.

• To know when it is appropriate to use the FRF for SMEs and how to make the transition from another applicable reporting framework.

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 one of a four-part series, we will present these foundational concepts of the FRF for SMEs:

• Basic financial statement objectives.

• Qualitative characteristics of financial statements.

• Elements of financial statements.

• General principles of financial statement presentation and accounting policies

• Recognition and measurement criteria.

• Materiality concepts.

• Basic differences between the FRF for SMEs and U.S. GAAP

• Guidance for transition to the FRF for SMEs.

BASIC FINANCIAL STATEMENT ISSUES

Financial Statements

Financial statements prepared on a U.S. GAAP framework normally include a balance sheet, a statement of income, a statement of changes in equity and a statement of cash flows. Notes to financial statements are an integral part of such statements.

Financial statements are based on management’s representations of past, rather than future, transactions and events. Estimates sometimes must be made to approximate the measurements of future transactions and events. Material financial statement classifications should not be netted unless permitted by this framework.

For the FRF for SMEs, common financial statement titles are:

• Statement of Assets, Liabilities and Equity

• Statement of Revenues and Expenses

• Statement of Cash Flows

• Notes to Financial Statements

Other descriptive titles may also be used, such as those in Appendix A of these materials. Customary references, such as balance sheet or income statement, are used in some of the following text materials.

Objective of Financial Statements

The objective of financial statements is to communicate information about the entity that is useful to management, creditors, and other users and provide information about, and changes in, an entity's economic resources, obligations, and equity and its economic performance.

Materiality

Materiality describes the significance of financial statement information to stakeholders. An item, or an aggregate of items, is material if its omission or misstatement would influence or change a decision of financial statement users. Materiality is a matter of professional judgment based on the facts circumstances in which it is considered.

Qualitative Characteristics of Financial Statements

Qualitative characteristics are the characteristics of information in financial statements that make that information meaningful to users. The four principal qualitative characteristics are understandability, relevance, reliability, and comparability and are similar to those for any reporting framework.

Elements of Financial Statements

Elements of financial statements are the basic categories of items included in financial statements. Certain elements describe the economic resources, obligations, and equity of an entity at a point in time (balance sheet elements) and others that describe changes in economic resources, obligations, and equity over a period of time (income statement elements). Net income generally includes all transactions and events increasing or decreasing the equity of the entity, except for equity transactions.

RECOGNITION CRITERIA

Recognition, generally, is defined as the process of including items in financial statements classifications, such as inventory or sales. Footnotes to financial statements generally provide additional information about items, recognized or not recognized, in the statements. The professional judgment of the preparer of the statements will determine when items meet the recognition criteria.

Basic recognition criteria in the FRF for SME include:

• The item has an appropriate measurement basis that can be reasonably estimated.

• It is probable that the events creating items which will obtain or give up future economic benefits (such as receivables and payables) will actually occur.

• The accrual basis of accounting will be used to recognize items in financial statements.

• Revenues are generally recognized when they are earned, or partially earned in the context of contracts in process, and there is reasonable assurance concerning measurement and collectability of the monetary consideration.

• Gains are generally recognized when they are realized.

• Expenses and losses are generally recognized when an expenditure or previously recognized asset does not have future economic benefit (when they are probable and can be estimated).

• Expenses are recorded in a period based on transactions or events occurring in that period or by some allocation method.

• Expenses are recognized in the statement of income on the basis of a direct relationship with the earning and recording of specific income items. This process is commonly referred to as the matching concept, i.e., the matching of costs and revenues.

• When economic benefits are expected to occur over several accounting periods and the relationship with income items can only be broadly or indirectly determined, expenses are recognized on a systematic and rational method of allocation. An example would be depreciation or amortization.

• An expense is recognized in the statement of income when it produces no future economic benefits or when future economic benefits do not qualify for recognition in the balance sheet as an asset.

COMPARATIVE STATEMENTS

As with other reporting frameworks, financial statements may be prepared in a comparative format; however, they are not required by this framework. Comparative statements are ordinarily considered the most meaningful presentation. In some circumstances, such as a significant change in an entity’s chart of accounts, comparative statements may not be the most meaningful or practical. Such changes ordinarily would not be a change in accounting principle but, if comparative statements are presented, prior periods’ information should be reclassified to conform to the current period.

Disclosure of Accounting Policies

Accounting policies are normally disclosed in the first note to the financial statements for all reporting frameworks. Recurring policies and other information is included to enable readers of financial statements to understand the financial position and results of operations of a reporting entity. Accounting policies disclosures are outlined in various chapters of the proposed FRF for SMEs. General guidance for these disclosures in the first note is summarized below.

• This basis of presentation should be described in the notes to financial statements, including a brief description of how this basis differs from U.S. GAAP. Following is an illustrative note patterned after the note in the proposed framework:

o 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 differs from accounting principles generally accepted in the United States of America in that it generally does not utilize fair value accounting.

• An operating cycle different than one year should be described.

• Reclassifications of prior year information for comparative presentations should be disclosed.

• Accounting policies significant to an entity’s operations should be described, along with management’s reasoning when deciding among alternative principles.

Fair Presentation Framework Concepts

The Preface to Codification of Statements on Auditing Standards, the first of the Clarified Auditing Standards effective for periods ending after December 15, 2012, contains information regarding financial reporting frameworks. Among them is a “fair-presentation framework:”

Fair-presentation framework— Refers to a financial reporting framework that requires compliance with the requirements of the framework and acknowledges explicitly or implicitly that, to achieve fair presentation of the financial statements, it may be necessary for management to provide disclosures beyond those specifically required by the framework; or acknowledges explicitly that it may be necessary for management to depart from a requirement of the framework to achieve fair presentation of the financial statements. Such departures are expected to be necessary only in extremely rare circumstances.

Underpinning the principles in this audit standard, the concepts of professional skepticism and professional judgment are discussed in the application material. Professional skepticism includes being alert for contradictory audit evidence, information that brings doubt as to the reliability of documents and managements responses to inquiries and errors or fraud that indicate the need for additional substantive procedures. Professional judgment is necessary on every engagement when considering audit risk and materiality, the nature, extent and timing of audit procedures, evaluating the appropriateness and reasonableness of financial statement assertions and the applicable financial reporting framework. Such matters are also discussed in the FRF for SMEs.

Fair Presentation in Accordance With the FRF for SMEs

As with other reporting frameworks, financial statements should fairly present the financial position, results of operations, and cash flows of an entity in accordance with the elements of financial statements and the recognition and measurement criteria applicable to this framework. A fair presentation framework includes providing clear, understandable, appropriate information and disclosures about transactions and events that have a material effect on financial statements.

Related to the discussion above regarding the Clarified Auditing Standards, management is first responsible for exercising professional judgment in preparing financial statements in accordance with this framework. Auditors, then, are responsible for evaluating the appropriateness and reasonableness of management’s selection of the framework and their application of its principles.

Going Concern Issues

When preparing financial statements, management is responsible for making an assessment of whether a going concern basis of accounting is appropriate. A going concern basis of accounting is appropriate unless a significant part of management’s decision-making concerns discontinuance or liquidation of the entity’s business. An entity that is not a going concern should use only the liquidation basis of accounting.

If an entity has profitable operations and adequate financing, a going concern basis of accounting normally is appropriate. On the other hand, management must consider all future information up to 12 months from the reporting date. If there are significant threats to the continuance of the entity’s business, currently or in this future period, management is required to disclose the threats and its plans to overcome them in the notes to its financial statements. Auditors, of course, would be required to evaluate the effects of the threats and management’s plans, and to determine an appropriate audit report.

FRF FOR SMEs DIFFERENCES FROM U.S. GAAP

The focus in this section will be on some of the areas of differences in the FRF for SMEs from U.S. generally accepted accounting principles. For each area, brief descriptions of the disclosure requirements for the FRF for SMEs are included.

Inventories

U.S. GAAP:

Inventories are valued under FIFO, LIFO and average cost methods at the lower of cost or market. While market is usually considered replacement cost it is not permitted to exceed the ceiling of net realizable value (selling price less costs of completion and disposal) or be less than the floor of net realizable value (ceiling of net realizable value less a normal profit margin).

FRF for SMEs:

Inventories are valued at the lower of cost or net realizable value (selling price less estimated costs of completion and disposal). General disclosures are:

• Accounting policies and costing method.

• Carrying amounts of inventories in total and by appropriate classifications, e.g., raw materials, work-in-progress, finished goods, merchandise, supplies, etc.

• Costs of goods sold for periods presented.

• Unusual or material losses resulting from costing methods.

• Material purchase commitments and any expected loss when the purchase price exceeds market value.

• Any interest costs capitalized in inventories.

Goodwill

U.S. GAAP:

Goodwill is not amortized but, instead, is tested for impairment (by a qualitative or two-step quantitative method) at least annually or triggering event arises (such as going concern or other profitability issues affecting a subsidiary)

FRF for SMEs:

Goodwill may be amortized using the federal income tax time period or 15 years. No tests for impairment are required for long-lived assets, tangible or intangible. General disclosures are:

• Aggregate carrying amounts of goodwill should be presented as a separate line item in the statement of financial position.

• Aggregate amortization expense for the period and the amortization period and rate used.

Intangible Assets

U.S. GAAP:

Indefinite-lived intangible assets are tested for impairment with qualitative or two-step quantitative methods similar to goodwill. Definite-lived intangible assets are amortized over their useful lives and long-lived intangibles are also tested for impairment as a result of certain triggering events indicating possible impairment.

FRF for SMEs:

All intangible assets will be assigned estimated useful lives and amortized over that period. No tests for impairment are required for long-lived assets, tangible or intangible. Any long-term assets no longer used are written off. Management may elect either to expense development phase intangibles or to capitalize their costs. General disclosures are:

• Aggregate carrying amounts of intangibles should be classified separately on the statement of financial position.

• Aggregate amortization expense for the period and the amortization period and rate used.

• Accounting policy elected for internally developed intangible assets including development costs.

Investments

U.S. GAAP:

Financial assets and liabilities are classified in the balance sheet based on managements intentions, i.e., to trade, hold for sale or retain until maturity. Trading securities and available-for-sale securities are valued at fair value. Unrealized appreciation or depreciation for trading securities is recorded in operating income; for available-for-sale securities such amounts are recorded in comprehensive income. Held-to-maturity securities are carried at amortized cost.

FRF for SMEs:

Investments in entities over which a company has significant influence are accounted for under the equity method. All other investments are accounted for based on historical cost, except for securities held for sale which are valued at market value (changes are included income). Income from investments should be presented separately or disclosed in the footnotes. Equity method investees should follow the same method of accounting as the as the investor. An entity’s share of any discontinued operations, changes in accounting policies or corrections of errors and capital transactions of an equity method investee should be presented and disclosed separately. General disclosures are:

• Accounting basis for all classes of investments.

• Events and transactions occurring between different reporting periods for the entity and equity-method investees should be disclosed or recorded by the investor.

• Name, description, carrying amount and ownership percentage for each significant investment.

Fair Value Accounting

U.S. GAAP:

The definition of fair value in the accounting standards is “the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.” The standards provide guidance on valuation techniques (market approach, income approach, cost approach) and the hierarchy of inputs (levels one, two, three) for determining fair value.

FRF for SMEs:

The term “market value” is used instead of fair value. The definition is: “The amount of the considerations that would be agreed upon in an arm’s length transaction between knowledgeable, willing parties who are under no compulsion to act.” Since the FRF for SMEs uses a cost approach primarily, measurement using market values is limited to business combinations, some non-monetary transactions and marketable equity and debt securities that are available for sale.

Derivatives

U.S.GAAP:

Generally, derivatives are accounted for as assets or liabilities and are measured at their fair values; changes in fair values are accounted for based on the use of the derivative. An entity is permitted to use hedge accounting.

FRF for SMEs:

This framework requires a disclosure approach only with recognition at settlement on a cash basis. Disclosures include:

• The face, contract or notional principal amount (upon which payments are calculated).

• The nature, terms, cash requirements and credit and market risks

• The entity’s purposes in holding the derivatives.

• At the reporting date, the net settlement amounts of the derivatives.

Hedge accounting is not permitted.

Lease Accounting

U.S. GAAP:

Traditionally, a lessee treats leases as capital or operating leases depending on certain criteria. Capital leased assets and capital lease obligations are recorded in financial statements. Operating leases are disclosed. A lessor treats leases as sales type, direct financing or operating leases.

FRF for SMEs:

Accounting approaches are generally similar to traditional U.S. GAAP. A lessee either records capital leases or discloses operating leases. A lessor either records sales type or financing leases or discloses operating leases. General disclosures include:

• Capital Leases—Lessees:

o Cost of the leased asset, accumulated amortization and the amortization method used.

o Interest rate, maturity date and the outstanding balance of the obligation.

o Any security for the lease.

o Interest expense related to lease obligations.

o Aggregate payments in each of the five years after the reporting date.

• Direct Financing and Sales-Type Leases—Lessors:

o Net investment in each type of lease and implicit interest rates.

• Operating Leases

o Lessees—future minimum lease payments in total and for each of the five years after the reporting date.

o Lessors—cost of assets held for leasing and the related accumulated amortization.

Income Tax Accounting

U.S. GAAP

A deferred income tax method is use to determine the effects of temporary differences between financial and tax reporting. The standards require management to evaluate and disclose uncertain tax positions for all open tax years, for all taxing jurisdictions. Any estimated liabilities for unsustainable positions should be recorded in the financial statements.

FRF for SMEs:

Management may elect either an income taxes payable method or the deferred income taxes method. Uncertain tax positions are not required to be evaluated or accrued. General disclosures include:

• The accounting policy—income taxes payable or deferred taxes method.

• For the income taxes payable method:

o Provision for income tax expense or benefit include in net income or loss before discontinued operations.

o Explanation or reconciliation of the differences between statutory rates and the effective rate.

o Unused loss or tax credit carryforwards.

o Any allocation of expense or benefit to equity transactions.

• For the deferred taxes method:

o Current and deferred income tax expense or benefit included income or loss before discontinued operations.

o Any allocation of expense or benefit to equity transactions.

o Total amount of unused tax losses and credits and amounts of any temporary differences for which no deferred tax asset has been recognized.

o Explanation or reconciliation of the differences between statutory rates and the effective rate.

o Unused loss or tax credit carryforwards.

• Pass-through entities will disclose they are not subject to income taxes.

Retirement and Postemployment Benefits

U.S. GAAP:

Accounting standards use a projected benefit obligation model that requires accounting for the aggregate of periodic pension costs and the overfunded and underfunded status of defined benefit and post-retirement benefits plans. Defined contribution plans’ costs are accounted for as period expenses.

FRF for SMEs:

Management may elect to account for plans using a current contribution payable method or one of the accrued benefit obligation methods similar to U.S. GAAP. General disclosures include:

• Description of the plan and the period cost recognized.

• Multi-employer plans description, period cost and any liability that would result from a probable withdrawal.

• Description of deferred compensation plans, their participants and how payments are determined.

• For defined benefit plans:

o Description, plan participants and how benefits are determined.

o Funded status information including benefit obligation, market value of plan assets and the under-funded or over-funded status at the reporting date.

o Under the current contribution method, the current and following years contributions.

o Expected rate of return on assets and the discount rate used to determine the benefit obligation.

o Any current period termination benefits.

Comprehensive Income

U.S. GAAP:

Items of comprehensive income, such as the unrealized appreciation on available for sale securities and prior service costs for defined benefit pension plans, are reported in a separate statement of comprehensive income or a single statement combined with operating income.

FRF for SMEs:

This framework does not recognize items of comprehensive income.

Revenue Recognition

U.S. GAAP:

Revenue is recognized when it is earned or realized based on evidence of the arrangement, the occurrence of a point of sale or delivery, a fixed sales price and reasonable assurance of collectability. Contracts for production or construction are accounted for currently under the percentage of completion or completed contract methods. Future standards for recognizing revenue under the contract method will likely require revenue recognition as performance obligations are completed.

FRF for SMEs:

Revenue recognition is more principles-based and revenues will be recorded based on performance and reasonable assurance of collectability. When the risks and rewards of ownership of goods are transferred to a customer, performance of a transaction is accomplished. For services in long-term contracts, such as construction or production contracts, the percentage of completion or completed contract methods may be used. The consideration received for the service will indicate accomplishment of stages of performance of a service. General disclosures include:

• Revenue recognition policy for all types of transactions in Note A.

• Accounting policies for multi-deliverables.

• Explanation of why the completed contract method is used instead of the percentage-of-completion method, if applicable.

• Revenue and contingent assets from any contract-related claim.

• Major categories of revenue disclosed on the statement of operations.

• Any unrecorded claims if claims are not recorded until received or awarded.

Stock-Based Compensation Plans

U.S. GAAP:

This form of compensation may be accounted for as either a liability or equity amount, depending on management’s intentions, at fair values. Fair value will be determined based on this hierarchy: 1) a fair value accounting method when it can be reasonably determined, 2) calculated-value method if it can be reasonably estimated or 3) intrinsic value method when neither of these methods can be used.

FRF for SMEs:

This framework requires only footnote disclosures for such plans. The disclosures include:

• The terms of awards under the plan.

• Vesting requirements.

• The maximum terms of options granted.

• Separate disclosures for multiple plans.

Going Concern Issues

U.S. GAAP:

There currently is no requirement in the accounting standards for management to assess and disclose going concern issues and whether a going-concern basis of accounting is appropriate. Future accounting standards will likely create this responsibility for management, along with the requirement to develop and disclose plans to mitigate significant threats to the continuance of an entity. Clarified Auditing Standards for non-public entities published by the AICPA’s Auditing Standards Board, require auditors to evaluate significant threats to continued existence of an entity and to request management to provide plans for mitigating such threats.

FRF for SMEs:

This framework requires management to assess whether the going concern basis of accounting is appropriate. When business or environment events or conditions create material uncertainties about business continuance, the entity should include footnote disclosures of these circumstances, along with its plans to mitigate the uncertainties.

Consolidation and Subsidiaries

U.S. GAAP:

An entity having a controlling financial interest (normally more than 50% ownership) in another entity is required to consolidate the subsidiary. When the entity cannot maintain significant influence over the operation of the subsidiary, such as in the case of external events like bankruptcy, the subsidiary would not be consolidated. For investments in variable interest entities, investors that have the power to significantly influence the operations of such entities will usually be deemed “primary beneficiaries.” In such circumstances, primary beneficiaries are required to consolidate variable interest entities. Either the equity method or cost method would be used otherwise.

FRF for SMEs:

Management can elect to consolidate more than 50%-owned subsidiaries or account for them using the equity method (if it exercises significant influence over the entity). When significant influence is not exercised over the subsidiary, the cost method should be used to report the investment. Equity and debt securities that are available for sale, however, should be recognized at market values with changes in such values included in periodic net income. General disclosures include:

• Consolidation policy.

• When consolidated, the names of all subsidiaries, income from each and the percentage of ownership.

• Descriptions of the periods for subsidiaries’ financial statements that don’t coincide with the parent’s reporting date, along with any significant events or transactions in the intervening periods.

• When financial statements are not consolidated, method of accounting for its subsidiaries, descriptions, names, carrying amounts, income and percentage of ownership for each.

Business Combinations

U.S. GAAP:

The acquisition method of accounting is required. The acquisition-date fair values of assets, liabilities, goodwill and non-controlling interests in an acquired entity are used for measurement in financial reporting.

FRF for SMEs:

This framework essentially requires the acquisition method of accounting using acquisition-date market values. It permits, however, management to elect to account for an intangible asset either separately or as a part of goodwill. General disclosures similar to U.S. GAAP are required for material and immaterial business combinations.

Push-Down (New Basis) Accounting

U.S. GAAP:

There is no requirement to permit new-basis accounting for acquired entities.

FRF for SMEs:

When an acquirer gains more than 50% control of an entity, the assets and liabilities of the acquired entity may be comprehensively revalued in its financial statements, assuming the new values are reasonably determinable. This results in similar values being used in the acquired entity’s financial statements and the acquirer’s consolidated statements. General disclosures include:

• First applications:

o Date push-down accounting was first applied and the date of the related purchase transaction.

o Description of the situation resulting in push-down accounting and the amounts of changes to major classes of assets, liabilities and equity.

• In addition for the following fiscal period:

o Amount of the revaluation adjustment and the equity account in which it was recorded.

o Amount of reclassified retained earnings and the equity account in which it was recorded.

FINANCIAL STATEMENTS AND TRANSITION TO THE FRF FOR SMES

After management of an entity has made a decision to adopt the AICPA’s FRF for SMEs, it should prepare an opening statement of financial position as the basis for the entity’s accounting under the framework, which framework should be consistent with that used at the end of the year of adoption. Adjustments necessary to transition from a previously applied framework should be recognized directly in equity at the date of transition.

As discussed previously, financial statements should include all information necessary for a fair presentation under this framework. Financial statements, in addition to notes and supporting schedules should include:

• Statement of financial position

• Statement of operations

• Statement of changes in equity unless detailed in the notes or another statement

• Statement of cash flows

Other descriptive titles of these statements may be used.

As discussed above, the first note to financial statements should describe the accounting policies that are significant to the entity’s operations and the primary differences in this framework from generally accepted accounting principles. Minimum disclosures for accounting policies should include the use of alternative principles and those used in specific industries.

Management may elect exemption from certain principles in the framework upon transition. These principles are:

• Business combinations

This election is to not apply the provisions of the framework regarding business combinations retrospectively. Restatement of prior business combinations requires future application of principles in the framework.

• Components of certain assets or liabilities

This election exempts management from classifying the components of a financial instrument separately when it contains both a liability and equity component.

• Asset retirement obligations

Management may elect to measure asset retirement obligations not previously recognized as of the transition date and estimate the carrying amount based on its original and remaining life of the obligation.

Retrospection application of certain principles in the framework is prohibited. These include:

• De-recognition of financial assets and liabilities is only permitted prospectively.

• Management’s estimates in its opening statement under the framework must be consistent with previous accounting policies.

• Accounting for equity changes in accordance with the framework will only be permitted prospectively.

Deciding to Use 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 Opportunities for Increased Efficiency 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 touse 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 FINANCIAL STATEMENTS FOR A SMALL REPORTING ENTITY

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

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

ALWAYS BEST CORPORATION.

STATEMENT OF CASH FLOWS

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)

Net 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

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

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 d 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

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