1. Private Company Financial Reporting

2. Private Company Council

3. Purpose of the PCC Work jointly with FASB to mutually agree whether and when alternatives from GAAP are warranted for private companies. Serves as primary advisory body to FASB on appropriate treatment for private companies for items under consideration on FASBs agenda

4. Update No. 2014-02—Intangibles—Goodwill and Other A consensus from PCC Not applicable to NFP, public entities, and most EBPs Alternative treatment (election)

5. Implementation of Election Goodwill amortized over period not to exceed 10 years Testing of impairment at entity or reporting unit level “triggering event” Option of performing qualitative assessment to see if it is more likely than not that impairment exists If impaired/2-step test

6. Income Statement Income from continuing operations Amortization of goodwillxxxxx Goodwill impairment lossxxx Net income from continuing operationsxxxxx (Discontinued Operations Goodwill reported separately)

7. Balance Sheet Assets. Goodwill (net) xxxx Total Assetsxxxxx

8. Effective Date If elected, applied prospectively for goodwill existing at beginning of adoption period and new goodwill recognized in annual periods beginning after December 15, 2014 and interim periods within annual periods beginning after December 15, 2015 Early adoption/election is permitted

9. Disclosures Info about Goodwill in total/major business line/fresh start event/weighted average amortization period Gross amounts/accumulated amortization/accumulated impairment loss Info about impairment loss

10. Update 2014-03—Derivatives & Hedging Election allows privately held companies to have an alternative treatment, less expensive, avoid FV Applies to specific receive variable/pay fixed interest rate swaps (in essence allows entity to treat variable rate interest as fixed through swap) Excludes NFP, public companies, most EBPs, and financial institutions

11. Election Allows entity to measure the swap at settlement value rather than FV at each balance sheet date Ignore the nonperformance risk in valuation Assumption is that the hedge protects private business

12. 6 Conditions Needed to Elect Variable rate of interest on swap & debt have same basis Terms on swap have no floor or cap (“plain vanilla swap”) Repricing and settlement dates are near same Swap fair value at inception is near zero Notional amount of swap and debt are same All interest payments are being hedged

13. Effective Date Simplified hedge accounting approach—annual periods beginning after 12/15/2014 Interim periods within annual periods beginning after 12/15/2015 Early adoption is permitted Adoption using modified retrospective or full retrospective approach

14. Update 2014-07—Consolidation Variable Interest Entity (VIE)— common control lease arrangement Allows lessee to ignore VIE accounting rules if entity is a privately owned company

15. Conditions Required for Election 1.Lessee and lessor under common control 2.Formal lease contract exists 3.Substantially all economic activity between 2 entities is related to lease 4.If lessee provides any guarantees or collateral for lessor obligations, the amount is not in excess of value of leased asset(s)

16. Disclosures/Subsequent Events If any of those conditions cease to exist, VIE accounting applies and must consolidate entities for reporting purposes Under election, must disclose: >lessor liability information relating to exposure to any financial support from lessee >discussion of any circumstances that would require lessee to provide financial support to lessor

17. Effective Date(s) If elected, this accounting alternative treatment should be applied retrospectively to all periods presented. Effective for annual periods beginning after 12/15/2014: Interim periods, within annual periods beginning after 12/15/2015 Early application permitted

18. PCC Issue 13-01A - Accounting for Identifiable Intangible Assets in a Business Combination Endorsed by FASB in November 2014 with expected issuance in December 2014 No recognition of: Noncompetition agreements Customer related intangibles that cannot be sold or licensed independently from other assets Will require the adoption of 2014-02 Goodwill Prospective adoption for periods beginning after December 15, 2014 with early adoption permitted

19. Update 2014-15— Going Concern Management’s responsibility related to going concern evaluation Evaluation about ability to continue from 1 year from date the statements are issued Provides required disclosure information Effective annual periods after December 15, 2016

20. Implementing FRF for SMEs

21. Session Objective(s): Understand FRF for SMEs and its history Learn best practices for implementing FRF for SMEs Learn lessons from real-life implementation stories

22. FRF for SMEs Released June 2013 Background & Context

23. Current SPF reporting environment: US GAAP Not Required GAAP not required for many small- and medium-sized entities IFRS for SMEs Lack of familiarity, higher learning curve, not US- centric, form of GAAP Other Special Purpose Frameworks Tax or modified cash basis may be inappropriate or insufficient for some SMEs/users Special Purpose Frameworks (OCBOA):

24. Another option…... a framework to deliver tailored financial reporting for America’s small business community … a framework with streamlined, common- sense requirements based on traditional and proven accounting methods … a framework to provide robust, meaningful financial reports to business owners, lenders, insurers and others without needless complexity

25. An additional non-GAAP framework

26. Separate from FASB and PCC FRF for SMEs Not GAAP - Special Purpose Framework Complementary to efforts by FASB/PCC AICPA fully supports the work of the PCC and FASB to address the private company environment Private Company Council GAAP Modify GAAP for private companies

27. Who could use it? – Small and medium-sized entities – Owner-managed/for-profit – Can be used by any industry group – Incorporated and unincorporated For use when GAAP-based financial statements are not needed

28. Who is it for? Owner-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

29. Characteristics of typical entities Entity does not operate in an industry that has highly specialized accounting guidance – such as financial institutions and investment companies Entity does not engage in overly complicated transactions 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

30. Features Standalone framework Concise Suitable criteria for general-use financial statements Accrual based Blend of traditional accounting and accrual income tax methods Fewer adjustments from book to tax

31. Features Excess narrative avoided Eschews prescriptive rules Use of professional judgment Intuitive and understandable Stable yet nimble

32. Framework in Action

33. CPAs are putting FRF for SMEs to use… Firms assessing client base Using tools and resources available on AICPA website Taking steps to implement, and actually converting clients Otherwise risk losing business or missing opportunities

34. Identifying Candidates Entities using GAAP Departures Outside requirement for GAAP Non-issuers Not highly specialized accounting guidance

35. Identifying Candidates Entities using Tax-Basis Accounting Significant use of accelerated depreciation Debt with outside parties

36. Identifying Candidates Entities using Cash Basis Accounting Difficult to convert Expanding operations and seeking financing

37. Identified – Now What? Prepared financial information to compare current reporting framework to FRF for SMEs Meeting to discuss with client – ensure understanding Easier “Made sense” Discuss cost concerns

38. Identified – Now What? Set up meeting with users of financial statements Present comparison of current financial statements to those prepared under FRF for SMEs Explain needs are being met User’s needs Business entity’s needs – helps them run their business Potential cost savings

39. Acceptance Hurdles Modify debt covenants Lack of user’s understanding that they can still get a compilation, review or audit report

40. Finding Success CPA in Ohio ─ converted clients save a lot on disclosures; financials are more relevant CPA in FL ─ influenced local BofA branch to accept FRF for SMEs on behalf of a client

41. Finding Success CPA in AK ─ met with client starting new construction company; bonding agency agreed to use FRF for SMEs CPA in WA ─ “We met with 18 banks… They appreciated the framework’s comprehensiveness and relevant disclosures.”

42. Experience with Bankers & other Users CPAs introducing FRF for SMEs and educating state bank organizations FRF for SMEs treated as OCBOA Mostly positive responses Bankers want to see what they are getting Use tools – sample financial statements and comparison charts

43. Banking regulators/acceptance Discussed FRF for SMEs with regulators/exam chiefs Bankers accept OCBOA today/Flexible with smaller businesses Exam chiefs will treat FRF for SMEs as another OCBOA

44. “A new effort to streamline financial reporting could help credit officers make small-business loans without studying a mountain of footnote- laden documents.” -American Banker, 1/27/14 “The framework could help our bank land small-business customers…” ‒ Banker from MO

45. Comparative Financial Statements

46. Example Financial Statement Extracts Example assumes primary difference between FRF for SMEs and GAAP financial statements is that management uses “taxes payable” method rather than “deferred taxes” method. Deferred tax balances account for differences in financials

47. Statement of Financial Position Extract from Current Assets AssetsFRF for SMEsGAAP Cash and cash equivalents$ 304,400 Accounts receivable 3,789,200 Inventory 89,700 Prepaid charges and other assets 118,400 Total current assets $ 4,301,700

48. Statement of Financial Position Extract from Long-term Assets AssetsFRF for SMEsGAAP Equity in joint venture$ 205,600 Note receivable, related party 175,000 Property and equipment net of accumulated depreciation 976,400 Total long-term assets 1,357,000

49. Statement of Financial Position Extract from Current Liabilities LiabilitiesFRF for SMEsGAAP Current maturities of notes payable$ 110,300 Current portion of leases payable 62,250 Accounts payable 2,543,100 Current deferred tax liability 594,000 Other accrued liabilities 88,600 Total current liabilities$ 2,804,250$ 3,398,250

50. Statement of Financial Position Extract from Long-term Liabilities LiabilitiesFRF for SMEsGAAP Notes payable, less current maturities $ 357,800 Leases payable, less current portion 135,350 Long-term accrued liabilities 154,200 Deferred tax liability 25,200 Total long-term liabilities$ 647,350$ 672,550

51. Statement of Financial Position Extract from Shareholders’ Equity EquityFRF for SMEsGAAP Common stock - $1 par value, 500,000 authorized shares… $ 300,000 Retained earnings 1,907,100 1,287,900 Total shareholders’ equity 2,207,100 1,587,900 Total liabilities and shareholders’ equity$ 5,658,700

52. Extract from Statement of Operations EquityFRF for SMEsGAAP Revenues earned$ 9,630,800 Cost of revenues earned 7,436,100 Gross profit 2,194,700 Selling, general, and administrative expense 895,600 Income from operations 1,299,100 Gain on sale of equipment 10,000 Interest expense (69,500) Income before provision for income taxes 1,239,600 Provision for income taxes 451,700 662,900 Net income 787,900 576,700

53. Extract from Statement of Cash Flows Cash flows from operating activitiesFRF for SMEsGAAP Net income$ 787,900$ 576,700 Adjustments to reconcile net income to net cash provided by operating activities Depreciation and amortization 167,800 Provision for losses on receivables 6,300 Gain on sale of equipment (10,000) Increase in deferred taxes 211,200 Increase in long-term accrued liabilities 128,000 Decrease in inventory 9,400 Increase in accounts receivable (461,400) Net cash provided by operating activities 628,000