CFO Essentials Newsletter - March 2013

March 2013

RISKSINTERNALCONTROLS

I.T.MANAGEMENT

FINANCIALREPORTING

TECHNICALACCOUNTING

REGULATORYREPORTING

M&A

TAX

RESOURCEMANAGEMENT

CASHFLOW

FINANCIAL REPORTING____________________________________________________________

Proposed Framework: Financial Reporting Framework for Small- and Medium-Sized Entities

Essential BriefingsFASB PROPOSES A NEW MODEL FOR CLASSIFICATION AND MEASUREMENT OF FINANCIAL INSTRUMENTS

1 | SingerLewak March 2013

Contents

______________________________________________________________________________________________________________________________________________________

ESSENTIAL BRIEFINGS2 FASB PROPOSES A NE W MODEL FOR CL ASSIF ICAT ION AND

ME ASUREMENT OF F INANCIAL INSTRUMENTSThe FASB issued a revised proposal for the classification and measurement of financial instruments in February 2013. The FASB’s proposal outlines either fair value or amortized cost related to the measurement approach for financial assets and financial liabilities.

______________________________________________________________________________________________________________________________________________________

FINANCIAL REPORTING4 PROPOSED FR AME WORK: F INANCIAL REPORT ING

FR AME WORK FOR SMALL- AND MEDIUM-SIZED ENT I T IES Recent concerns raised by stakeholders of privately-held companies regarding the complexity of financial reporting prompted the AICPA to issue the Proposed Financial Reporting Framework for Small- and Medium-Sized Entities (the “Framework”) in November 2012.

March 2013

March 2013 SingerLewak | 2

E S S E N T I A L B R I E F I N G S

FASB PROPOSES A NEW MODEL FOR CLASSIFICATION AND MEASUREMENT OF FINANCIAL INSTRUMENTSBY HARMEET SINGH | [email protected] | 408.294.3924

The FASB issued a revised proposal for the classification and measurement of financial instruments in February 2013. The FASB’s proposal outlines either fair value or amortized cost related to the measurement approach for financial assets and financial liabilities.

In general, the proposal applies to financial instruments with certain exceptions and addresses both initial and subsequent clas-sification and measurement. The following is a summary of the key provisions as outlined in the proposal.

DEBT INVESTMENTS

Debt investments, whether loans and debt securities, will be clas-sified into one of three measure-ment categories:

•Amortized cost•Fair value with changes in fair

value recognized in other com-prehensive income

•Fair value with changes in fair value recognized in net income.

The classification and measure-ment of a debt investment is de-termined at the acquisition date or origination, as follows:

•Amortized cost – The debt investment is held in a business model with a primary objective of holding to collect contrac-tual cash flows, and has terms

that give rise on specified dates to cash flows that represent solely payments of principal and interest.

•Fair value through other com-prehensive income – The debt investment is held in a business model with a primary objective of holding to collect contrac-tual cash flows and to realize changes in fair value through sale, and has terms that give rise on specified dates to cash flows that represent solely pay-ments of principal and interest.

•Fair value through net income – The debt investment does not meet the eligibility criteria for either the amortized cost or the fair value through other com-prehensive income approach.

In addition, the FASB proposed that hybrid financial assets will not be bifurcated between em-bedded derivatives and the finan-cial instrument host contract as is done today. Instead, the entire instrument will be evaluated and classified based on the above criteria.

The proposal applies to financial instruments with

certain exceptions and addresses both initial and

subsequent classification and measurement

EQUITY INVESTMENTS

Equity investments excluding investments accounted for in the equity method of account-ing (unless these investments are held for sale) will be measured at fair value through net income. However, companies, not includ-ing broker-dealers and invest-ment companies, can elect a practicability exception to mea-sure equity investments without a readily determinable fair value at cost. The proposal simplifies the method for assessing impair-ment for equity investments that qualify for the practicabil-ity exception, as well as equity investments accounted for under the equity method.

F INANCIAL L IABIL IT IES

Financial liabilities will gener-ally be measured at amortized cost, and the current embedded

derivative bifurcation require-ments for hybrid financial liabili-ties will be retained unless intent is to subsequently transact at fair value. Nonrecourse financial li-abilities that must be settled with only the cash flows from specified financial assets will be measured

on the same basis as the financial assets. A fair value option is avail-able in certain limited circum-

stances and if elected the com-pany will recognize the change in fair value due to a change in the company’s own credit risk in other comprehensive income.

PRESENTAT ION AND DISCLOSURE

Public companies will present fair values parenthetically on the face of the balance sheet for financial assets and financial liabilities measured at amortized cost. Only demand deposit liabil-ities and receivables and payables that are due within one year are excluded from this requirement. Nonpublic companies will not be required to present or disclose fair value information for these instruments.


The proposal simplifies the method for assessing impairment for equity

investments that qualify for the practicability exception, as well as equity investments

accounted for under the equity method

HARMEET SINGH CAN BE REACHED AT

[email protected] OR 408.294.3924

F I N A N C I A L R E P O R T I N G

PROPOSED FRAMEWORK: FINANCIAL REPORTING FRAMEWORK FOR SMALL- AND MEDIUM-SIZED ENTITIESBY JOSH CROSS | [email protected] | 408.294.3924

Recent concerns raised by stake-holders of privately-held com-panies regarding the complexity of financial reporting prompted the AICPA to issue the Proposed Financial Reporting Framework for Small- and Medium-Sized Entities (the “Framework”) in November 2012. This exposure draft was written because the traditional financial statements in accordance with accounting principles generally accepted in the United States of America (GAAP) were not always the best solution for small- and medium-sized companies (SMEs). The recent push in fair value account-ing under GAAP has proven to be less beneficial for SMEs than it is for publicly traded compa-nies, especially given the increas-ing costs that are associated with compliance to the new standards.

The Framework was developed by a working group of CPA profes-sionals and AICPA staff who have years of experience serving SMEs and provides a blend of

accrual income tax methods and traditional methods of account-ing to create a more relevant, less complex and cost effective framework to be used.

Accounting professionals who serve SMEs have heard the increasingly common question about the relevance of certain accounting treatment and foot-note disclosure requirements under GAAP. Many companies have found that the most costly and time consuming accounting requirements are often the least relevant to management and to the users of the financial state-ments.

The Framework is geared towards closely-held companies where:

1. Individuals that own a con-trolling interest in the com-pany are the same individu-als that run and operate the company on a daily basis

2. Internal and external users of the financial statements have direct access to the owner/manager of the company

3. GAAP financials are not required

WHAT IS A SME?

Currently there has been no stan-dard definition developed by the AICPA or any other regulatory body to define SMEs. SMEs can be comprised of any size opera-tions and operate in any type of industry group. The identification of a SME will be largely based on the corporate structure, opera-tional management structure and by the users of the financial state-ments. It is estimated that there are approximately 20 million SMEs in the United States.

March 2013 SingerLewak | 4


KEY DIFFERENCES BETWEEN THE FRAMEWORK AND GAAP

The main difference between the Framework and GAAP is that the Framework is based mainly on historical cost and does not use fair value except for a few cases of assets which are held for sale. Other significant differences between the Framework and GAAP are as follows:

• Income Taxes – allows the use of either an income tax payable or deferred income tax method and does not contain provisions around uncertain tax positions.

•Variable Interest Entities – under the Framework variable interest entities would not be required to be consolidated.

•Goodwill – goodwill would not require an annual assessment of impairment, rather it would be amortized.

•Reversal of Losses – inventory write-downs, other-than-tem-porary-impairments of invest-ments, and long-lived asset impairments would be allowed to be reversed in subsequent years if circumstance change.

• Investments – there would be no provision for recognizing fair value changes through other comprehensive income.

As accountants and trusted business advisors to our clients, we need to be aware that the Framework is not for everyone. Due to the key differences stated above, the Framework should not be used by companies that do not know the full user base of the financial statements or the potential impacts that omitting these items would have on those users. Also, companies that do have complex transactions with

significant impacts to the finan-cial statements under GAAP would be discouraged from using the Framework. The implementa-tion of the Framework will take a collaborative effort between management, the users of the financial statements, and the accountants to ensure it works ef-fectively while also providing the company with the cost-benefit savings they are requesting.

The comment period has been closed and the AICPA expects to issue the final exposure draft in late spring 2013.

JOSH CROSS CAN BE REACHED AT

[email protected] OR 408.294.3924

S I N G E R L E W A K

ACADEMYE X E C U T I V E& B U S I N E S SL E A D E R S H I PP R O G R A M

The SingerLewak Academy is a practical program for Owners and Executives of Private companies in all industries — and is designed to build and enhance business acumen, skills, strategies and operational expertise.

Our Academy series has been customized to meet the needs of each geographic market and will be intro-duced to the business communities in Los Angeles, Orange County, and Silicon Valley throughout 2013. Each session presented by the SingerLewak Academy has been designed to fill the “knowledge gaps” experi-enced today by most business owners and executives.

Our team of presenters will consist of a mix of industry experts, business specialists and SingerLewak profes-sionals who will provide with solutions and forward thinking paradigms to optimize business strategies.

RISK & COMPLIANCE

FINANCIAL HEALTH

EXIT STRATEGIESSUCCESSION/

BUSINESS G

ROWTH

EXCE

LLEN

CEOP

ERAT

ION

AL

YOURBUSINESS

PLEASE CALL877.754.4557

OR [email protected]

MAY 2013 - JANUARY 2014LOS ANGELES

ORANGE COUNTY

SingerLewak is a leading regional accounting services firm in California with offices in Los Angeles, Orange County, Wood-land Hills, Monterey Park, San Diego, Silicon Valley and San Francisco. Serving California since 1959, SingerLewak has established a reputation for excellence as professionals with expertise in the Accounting and Management Consulting industry. Providing the services of a large firm with a blended environment of practices, industry specializations and partic-ular attention to hands-on service, SingerLewak continues to demonstrate leadership and industry growth year-over-year.

We are nationally recognized as active community and profes-sional services partners, working among many sectors of the business world. Our core services deliver results whether it’s auditing, accounting, entrepreneurial business services, tax preparation, business management, SEC filings, transactions, enterprise risk management, forensic accounting, business valuation, litigation support, or consulting.

OUR FIRM

OUR NEWSLETTERS

TO SIGN UP FOR NE WSLE T TERS, PLE ASE V IS I T S INGERLE WAK .COM/CONTACT

SINGERLEWAKNEWSLETTER

CFOESSENTIALS

ENTREPRENEUR & FAMILY-OWNED BUSINESSES

NONPROFIT TAX BRIEF BITE NEWSLETTER

THE SKILLS YOU NEED. THE SERVICE YOU EXPECT.

CFO Essentials Newsletter - March 2013

Documents

Transcript of CFO Essentials Newsletter - March 2013