MHM Executive Education Series: SMEs Framework – Comparing

AICPA and IFRS

Presented by: Shareholders Mike Loritz and Marco Pulido

August 22, 2013

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Before We Get Started…

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This webinar is eligible for CPE credit. To receive credit, you will need to answer periodic polling questions throughout the webinar.

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CPE Credit

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Marco Pulido, CPA Shareholder 310.268.2746 | mpulido@cbiz.com Marco has over 14 years of experience in public accounting working with U.S. GAAP, IFRS and other foreign accounting standards both in the U.S. and in Latin America with Big 4 accounting firms. He has experience with SEC filers (foreign and domestic) and private companies. Marco is a CPA certified in California and has IFRS certifications by the Institute of Chartered Accountants in England and Wales (ICAEW) and the American Institute of Certified Public Accountants (AICPA). Technical accounting expertise includes the following industries: Energy (Oil & Gas) - Retail, Distribution & Manufacturing - Transportation - Utilities - Consumer Services - Construction/Real Estate - Health Sciences – Financial Services – Agriculture.

Today’s Presenters

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Mike Loritz, CPA Shareholder 913.234.1226 | mloritz@cbiz.com Mike has 17 years of experience in public accounting with diversified financial companies and other service based companies, including banking, broker/dealer, investment companies, and other diversified companies ranging from audits of public entities in the Fortune 100 to small private entities. He is a member of MHM's Professional Standards Group, providing accounting knowledge leadership in the areas of derivative financial instruments, investment securities, share-based compensation, fair value, revenue recognition and others.

Today’s Presenters

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The information in this Executive Education Series

course is a brief summary and may not include all the details relevant to your situation.

Please contact your MHM service provider to further

discuss the impact on your financial statements.

Disclaimer

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Today’s Agenda

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Overview of IFRS for SMEs

Overview of AICPA Private Company Framework

Comparison of both frameworks

Questions

IFRS FOR SMES

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The IFRS for SMEs is: • A self-contained set of accounting principles

that are based on full IFRSs, but that have been tailored for SMEs:

• Topics that are not relevant to SMEs are omitted

• Some accounting policies are disallowed because a simplified method is available

• Many of recognition and measurement principles are simplified

• Substantially fewer disclosures • Simplified language and explanations throughout

• Organized by topic to be more user-friendly

Context

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Full IFRSs

• Not tailored to specific needs of users of SME financial statements

• Contains a large amount of detail which is not relevant to SMEs

• Does not take into account the limited ability of SMEs to bear costs of compliance and of the required expertise

Other Foreign GAAP

• Not comparable across national boundaries

• May not be perceived as of high quality

• Not necessarily based on a similar framework to full IFRSs

• May be limited training material and similar resources available

Drivers for the IFRS for SMEs

SME

IFRS for SMEs

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Brief history of development of the IFRS for SMEs

2001

IASB inception

June 2004

Discussion paper

October 2005

Public round tables

April 2005

Recognition and measurement questionnaire

February 2007

Exposure draft

Late 2007

Field testing

2009

IFRS for SMEs

SMEs are estimated to represent 95 percent of companies.

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Since its introduction, many countries are now requiring or plan to require use of IFRS for SMEs for private companies (e.g. UK) Initiative is taking place in countries that already require

public companies to report under IFRS Comprehensive review (2012-2014) of IFRS for SMEs

is currently under way with a timetable set for 2015 for revised version

IFRS for SMEs Today

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Quiz

False B

Statement: It is expected that IFRS for SMEs will be updated every 3 years.

True A

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Quiz

False B

Statement: It is expected that IFRS for SMEs will be updated every 3 years.

True A

AICPA FRF FOR SMES

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S pec ial P urpos e F rameworks (OC B OA ):

US G A A P Not R equired GAAP not required and not the best solution for many

small- and medium-sized entities

IF R S for S ME s Lack of familiarity, higher learning curve, not US-centric,

form of GAAP

Other S pec ial P urpos e F rameworks Tax or modified cash basis may be inappropriate or

insufficient for some SMEs/users

Why was the Framework Developed?

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Private Company Council GAAP Modify GAAP for private

companies

FRF for SMEs Not GAAP – Special

Purpose Framework Complementary to efforts

by FAF’s PCC – AICPA fully Supports the work of the PCC, FAF and FASB to address the private company environment

Framework is Separate from FAF and PCC

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AICPA Framework for SMEs

Developed for smaller- to medium-sized, owner-managed, for-profit entities where internal or external users have direct access to the owner-manager and GAAP financial statements are not required.

The AICPA has no authority to require the use of the FRF for SMEs for any entity. Therefore: Issued June 10, 2013 - The FRF for SMEs has no effective date An owner-manager can decide to use the FRF for SMEs at any

time. An owner-manager should make that decision in conjunction

with those who may use the entity’s financial statements.

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Owners-Managers Depend on reliable financial statements to: Confirm assessments of performance Determine what they owe/own Understand cash flows

Users

External financial statement users who have direct access to management

Non-issuers No intent of going public

Who Is It Designed For?

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Entity does not operate in an industry that has highly specialized accounting guidance Such as financial institutions and governmental entities

The entity does not engage in overly complicated transactions

The entity does not have significant foreign operations

Financial statement users may have greater interest in cash flows, liquidity, statement of financial position strength and interest coverage

Characteristics of Typical Entities

SMES: AICPA VS. IFRS

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AICPA Comparative financial

statements are not required.

IFRS Requires comparative

information in respect of the previous comparable period for all amounts presented in the current period’s financial statements.

An entity shall include comparative information for narrative and descriptive information when it is relevant to an understanding of the current period’s financial statements.

SMEs: Comparative Financial Statements

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AICPA No concept of comprehensive

income or items of other comprehensive income.

IFRS Provides an accounting policy

choice between presenting total comprehensive income in a single statement or in two separate statements.

Certain items are classified as other comprehensive income and displayed as such.

SMEs: Comprehensive Income

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AICPA Last in, first out (LIFO) permitted.

IFRS LIFO is not permitted.

Inventory is assessed at the end

of each reporting period for impairment or for recovery of previously recognized impairment.

SMEs: Inventories

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AICPA “Subsidiary” defined as an entity

in which another entity owns more than 50% of the outstanding residual equity interests.

Policy choice to either consolidate subsidiaries or account for subsidiaries using the equity method.

No concept of special purpose entities (SPE’s) or variable interest entities.

IFRS “Subsidiary” defined as an entity

that is controlled by the parent company.

Control is the power to govern the financial and operating policies of an entity so as to obtain benefits from its activities.

If an entity has created an SPE to accomplish a narrow and well-defined objective, the entity shall consolidate the SPE when the substance of the relationship indicates that the SPE is controlled by that entity.

SMEs: Subsidiaries

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AICPA and IFRS The criteria for determining whether a lease is a capital lease to a

lessee generally are similar, but unlike IFRS for SMEs, the FRF for SMEs accounting framework provides specific quantitative thresholds (similar to U.S. GAAP) for determining certain criteria.

Under the FRF for SMEs accounting framework, if land is the sole item of property leased, the lessee accounts for the lease as a capital lease only if the lease transfers ownership of the property at the end of the lease term.

From the point of view of a lessor, some additional criteria must be met to classify the lease as a capital lease under FRF for SMEs.

FRF for SMEs: Lessors’ capital leases are categorized as direct financing leases or sales-types leases. IFRS for SMEs: Finance leases

SMEs: Leases

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AICPA Amortized over the same period

as that used for federal income tax purposes or 15 years.

No impairment testing.

IFRS Amortized over its useful life. If

an entity cannon reliably estimate its useful life, the life is presumed to be 10 years.

Impairment testing is required only when there is an indicator of impairment.

SMEs: Goodwill

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AICPA All intangible assets are

considered to have a finite useful life and are amortized over their estimated useful lives.

In accounting for expenditures on internally-generated intangible assets during the development phase, management should make an accounting policy choice to either expense such expenditures as incurred or capitalized such expenditures as intangible asset, provided the criteria are met.

IFRS All intangible assets (including

goodwill) are finite-lived and are amortized over their useful lives. If an entity cannot reliably estimate the useful life of an intangible asset, the life is presumed to be 10 years.

Expenditures on internally developed intangibles, including R&D costs, are expensed as incurred, unless they are part of the cost of another asset that meets the recognition criteria in IFRS for SME’s.

SMEs: Intangible Assets

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AICPA Uses the term “market value.” It

is the amount of the consideration that would be agreed upon in an arm’s length transaction between knowledgeable, willing parties who are under no compulsion to act.

Market value measurement used only in very limited circumstances, such as business combinations, certain nonmonetary transactions, and marketable equity and debt securities held-for-sale.

IFRS Uses the term “fair value.” It is

the amount for which an asset could be exchanged, or a liability settled, between knowledgeable, willing parties in an arm’s length transaction.

Wider use of fair value measurements compared to the FRF for SMEs accounting framework.

SMEs: Fair Value

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AICPA Historical cost approach for

investments and financial assets and liabilities.

Market value measurement required only for investments being held for sale, with changes in market value included in net income.

Investees over which the investor has significant influence are accounted for under the equity method.

IFRS There are two classification

categories for financial instruments: amortized cost and fair value through earnings.

Basic financial instruments are measured at amortized cost except for investments in nonconvertible and nonputtable preference shares and nonputtable ordinary shares that are publicly traded or whose fair value can be measured reliably.

SMEs: Investments / Financial Assets and Liabilities

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AICPA IFRS All instruments other than basic

debt instruments (including instruments with embedded derivatives) are measured at fair value through earnings.

Investments in associates (associates are entities in which the investor has the ability to exercise significant influence) are accounted for using one of the following methods: the cost method (if there is no published price quotation), equity method, or fair-value-through-earnings method.

SMEs: Investments / Financial Assets and Liabilities (continued)

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AICPA Disclosure approach.

Recognition at settlement (cash

basis).

No hedge accounting.

IFRS Derivatives are recognized and

measured at fair value through earnings.

Hedge accounting is prescribed.

SMEs: Derivatives

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AICPA Disclosure only.

IFRS Compensation expense is

recognized.

Specific accounting depends on terms and type of instrument.

SMEs: Stock-Based Compensation

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AICPA Cash inflows from interest and

dividends received are classified as cash flows from operating activities.

Cash outflows related to interest paid are classified as an operating activity, unless capitalized.

Cash outflows related to dividends paid are classified as cash flows used in financing activities.

IFRS An entity may classify interest

paid and interest and dividends received as operating cash flows because they are included in profit or loss.

Alternatively, the entity may classify interest paid and interest and dividends received as financing cash flows and investing cash flows, respectively, because they are costs of obtaining financial resources or returns on investments.

SMEs: Statement of Cash Flows

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AICPA Cash outflows from dividends

paid by subsidiaries to noncontrolling interests are presented separately cash flows used in financing activities.

IFRS An entity may classify dividends

paid as a financing cash flow because they are a cost of obtaining financial resources.

Alternatively, the entity may classify dividends paid as a component of cash flows from operating activities because they are paid out of operating cash flows.

SMEs: Statement of Cash Flows (continued)

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AICPA Debt covenant violations may be

cured after the balance sheet date, eliminating the need to reclassify the debt.

IFRS Curing a debt covenant violation

after the balance sheet date may not eliminate the need to reclassify the debt.

SMEs: Debt Covenant Violation

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AICPA No specific definition of

investment property. Investments in land and buildings are accounted for as property, plant, and equipment.

IFRS Separate accounting guidance

for investment property (fair value when measured reliably).

Investment property is property (land or a building, or part of a building, or both) held by the owner or by the lessee under a finance lease to earn rentals or for capital appreciation or both, rather than for use in the production or supply of goods or services or for administrative purposes, or sale in the ordinary course of business.

SMEs: Investment Property

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AICPA No requirement for separate

components of an asset (nor is there a prohibition against doing so).

Composite depreciation method may be used.

IFRS If the major component of an

item of property, plant, and equipment have significantly different patterns of consumption of economic benefits, an entity shall allocate the initial cost of the asset to its major components and depreciate each such component separately over its useful life.

SMEs: Component Depreciation

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AICPA A venturer should make an

accounting policy choice to account for its interests in joint ventures using one of the following methods: Equity Proportionate consolidation

(only applicable to unincorporated entities where it is an established industry practice)

IFRS Investments in jointly controlled

entities may be accounted for using one of the following methods: Cost (if there is no published

price quotation) Equity Fair-value-through-earnings

SMEs: Joint Ventures

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AICPA No assessment of impairments

for long-lived assets.

A depreciated or amortized cost approach is followed. Assets no longer used are written off.

IFRS Impairment testing is required

only when there is an indicator of impairment.

SMEs: Impairment of Long-Lived Assets

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AICPA A contingency is recognized

when (1) it is probable that a future event will confirm that the value of an asset has diminished or a liability has been incurred at the date of the financial statements and (2) the amount of the loss can be reasonably estimated.

“Probable” is defined as likely to occur (generally 80%), a threshold higher than the “more likely than not” threshold used in IFRS for SMEs.

IFRS A contingency is recognized

when it is more likely than not (generally 50% probability) that the entity will be required to transfer economic benefits in settlement and the amount of the obligation can be estimated reliably.

SMEs: Contingencies

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AICPA Policy choice to account for

income taxes using either the taxes payable method or the deferred income taxes method.

No evaluation or accrual of uncertain tax positions.

IFRS Income taxes accounted for

using a deferred income tax method.

Uncertain income tax positions must be evaluated and accrual made if certain conditions are met.

SMEs: Income Taxes

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AICPA An entity can choose to

capitalize interest costs related to an item of property, plant, and equipment that is acquired, constructed, or developed over time.

When a financial liability is issued or assumed in an arm’s length transaction, an entity should measure it at its exchange amount adjusted by financing fees and transaction costs that are directly attributable to its origination, acquisition, issuance, or assumption.

IFRS Borrowing costs are interest and

other costs that an entity incurs in connection with the borrowing of funds. An entity should recognize all borrowing costs as an expense in net income in the period in which they are incurred.

SMEs: Borrowing Costs

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AICPA An entity can choose to

capitalize interest costs related to inventories that require a substantial period of time to get them ready for their intended use or sale.

IFRS

SMEs: Borrowing Costs (continued)

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AICPA A long-lived asset to be sold

should be classified as a held for sale and presented separately in the entity’s statement of financial position. The assets and liabilities of a disposal group classified as held for sale should be presented separately in the asset and liability sections, respectively, of the statement of financial position.

A long-lived asset should not be amortized while it is classified as held for sale.

IFRS There is no “held for sale”

classification for nonfinancial assets or groups of assets and liabilities and related measurement provisions.

SMEs: Long-Lived Assets Held for Sale

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Questions?

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Join us for these future webinars 9/18: IFRS – Impairment of Assets 9/26 & 10/1: Third Quarter Accounting and Financial

Reporting Issues Update

Read these related MHM Messengers 14-13: AICPA Issues Optional Framework for Small- and

Medium-Sized Entities 6-13: AICPA's Special-Purpose Framework Proves

Controversial 5-13: Progress on Standard-Setting for Private Companies

If You Enjoyed This Webinar…

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Mike Loritz, CPA Shareholder 913.234.1226 | mloritz@cbiz.com Mike has 17 years of experience in public accounting with diversified financial companies and other service based companies, including banking, broker/dealer, investment companies, and other diversified companies ranging from audits of public entities in the Fortune 100 to small private entities. He is a member of MHM's Professional Standards Group, providing accounting knowledge leadership in the areas of derivative financial instruments, investment securities, share-based compensation, fair value, revenue recognition and others.

Today’s Presenters

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Marco Pulido, CPA Shareholder 310.268.2746 | mpulido@cbiz.com Marco has over 14 years of experience in public accounting working with U.S. GAAP, IFRS and other foreign accounting standards both in the U.S. and in Latin America with Big 4 accounting firms. He has experience with SEC filers (foreign and domestic) and private companies. Marco is a CPA certified in California and has IFRS certifications by the Institute of Chartered Accountants in England and Wales (ICAEW) and the American Institute of Certified Public Accountants (AICPA). Technical accounting expertise includes the following industries: Energy (Oil & Gas) - Retail, Distribution & Manufacturing - Transportation - Utilities - Consumer Services - Construction/Real Estate - Health Sciences – Financial Services – Agriculture.

Today’s Presenters

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