Middle Tennessee State University Presented by: David K. Morgan, CPA/PFS Lattimore Black Morgan & Cain, PC

1. Private Company Financial Reporting • Middle Tennessee State University • Presented by: • David K. Morgan, CPA/PFS • Lattimore Black Morgan & Cain, PC

2. Financial Reporting - Overview • 15,000 issuers vs. 28.5 million private companies, but GAAP has been driven by public company issues • Small businesses employ more than half of private-sector workers • Private companies, users of their financial reports have different needs

3. Difference Between Private and Public Companies • Private companies have a narrower array of financial statement users compared to the broader and larger range that public companies have. • Lenders, venture capitalists, and sureties are the primary external users of private company financial statements. Their financial information needs are mostly centered on short-term cash flows, liquidity, and EBITDA. • These users, unlike their public company counterparts, often have easy access to a company’s management and to additional financial information beyond what is provided in the financial statements. • Private company financial statements in many ways are intended to satisfy different informational needs than public company financial statements

4. What Stakeholders Said about GAAP for Private Company Financial Reporting • Too many GAAP-specific requirements not useful or relevant for private companies’ financial statement users • Greater FASB emphasis on equity/public company investors • Most important problem: relevance • Increased complexity burdensome, time-consuming

5. This Led to… • Unnecessary costs • More GAAP exceptions • System not attuned to needs of all parties

6. Blue Ribbon Panel on Standard Setting for Private Companies • Sponsored by AICPA, FAF and NASBA • 18 panel members: cross-section of financial reporting constituencies, including lenders, investors, owners, preparers and auditors • Addressed how accounting standards can best meet private company financial statement users’ needs

7. Blue Ribbon Panel on Standard Setting for Private Companies • Resolved: A systemic problem exists that needs solving • Supermajority recommendation #1: • Enhance GAAP for private companies by making significant modifications, where warranted • Supermajority recommendation #2: • FAFshould create board whose decisions are not subject to FASB ratification

8. FAF Actions • FAF considered panel’s recommendations • FAF formed working group to address accounting standards for private companies and nonprofits • Outreach with stakeholders and meetings with FASB advisory groups • In the end, FAF established the Private Company Council (PCC) in May 2012

9. America’s Main Street businesses Small- and medium-sized entities pervade the business worldand form the backbone of the US economy They provide goods and services in awide-range set of activities and are active in many industry groups No standard definition of SMEin US

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

11. 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

12. It’s here

13. An additional non-GAAP framework

14. Separate from FAF and PCC 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 Private Company Council - GAAP - Modify GAAP for private companies

15. FRF for SMEs overview ResponsiveAddresses well-documented financial reporting issues and concerns among SMEs Cost effectiveComprehensive yet relevant information TailoredDesigned to suit financial reporting needs of SMEs and users of their financial statements

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

17. 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

18. Characteristics of typical entities – 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

19. 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

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

21. Features Relevant Only relevant financial reporting topics included(e.g., no comprehensive income/OCI) Simplified Simplified principles (e.g., no VIEs, no complicated derivative/hedge accounting or stock compensation rules)

22. Effective date Because use of the framework is optional, there is no effective date for its implementation The AICPA has no authority to require the use of the FRF for SMEs accounting framework for any entity Use of the framework is purely optional Management represents that such financial statements have been prepared in accordance with the AICPA’s FRF for SMEs accounting framework, a special purpose frame-work

23. Benefits

24. CPAs CPAs serve as … ... a credible, knowledgeable professional who applies the most up-to-date accounting tools and practices ... a trusted business advisor with the broad perspective to provide strategic insights The FRF for SMEs framework delivers

25. SME owner-managers Owner-managers need ... ... reliable and understandable financial information to inform business decisions ... ways to control costs The FRF for SMEs framework delivers

26. Lending community/users Bankers, sureties and other interested parties ... ... need to get financial information that is relevant and clear so they can make informed decisions ... want to help customers realize cost-savings and efficiencies where possible The FRF for SMEs framework delivers

27. FRF for SMEs answers banker needs – With substantial relevance and cost-benefit factors, the AICPA believes that the lending community will accept financial statements prepared under the FRF for SMEs – Reliable, principles-based framework

28. Lending community/users can rely on FRF for SMEs – CPAs across the country worked to develop the Framework – Considered the needs of users of private company financial statements – Framework subjected to rigorous professional scrutiny and public input

29. 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

30. Key Principles

31. Historical cost Framework primarily uses historical cost basis, steering away from complicated fair value measurements Most relevant and reliable measurement basis for small business financial reporting needs Well-suited as a metric for evaluating an entity’s cash flow Objective, verifiable, straight-forward

32. Historical cost Directly relates to the past experience and past decisions of an entity Sound basis for financial forecasts Best measurement basis to help evaluate the performance of a small business. Stands the test of time

33. Optionality in certain accounting policies More relevant and tailored approach to financial reporting Answers the varying informational needs of different financial statement users Financial reporting that is truly representative of the underlying economics of a small business

34. Optionality in certain accounting policies Provide users with the most decision-useful information Optionality nothing new to accountants – make choices today Well-suited to small business community where financial statement users commonly have direct access to management.

35. Primary accounting policy options Income tax accounting − taxes payable method or deferred income taxes method Subsidiary accounting − consolidate or equity method Joint venture accounting − equity method or proportionate consolidation (only applicable to unincorporated entities when it is an established industry practice)

36. Primary accounting policy options Long-term contracts and service contracts −percentage of completion method or the completed contract method • Completed contract method is used when the entity cannot reasonably estimate the extent of progress toward completion. • Completed contract method may also be used if both of the following conditions are met: a. Used for income tax reporting purposes. b. Financial position and results of operations would not vary materially from those resulting from the use of the percentage of completion

37. Primary accounting policy options Intangible assets acquired in a business combination − separately recognize or subsume into goodwill Internally-generated intangible assets − expenditures during development phase, either expense or capitalize Certain Interest costs − expense or capitalize interest costs related to certain items of inventories, internally-generated intangible assets, and PP&E Defined benefit plans − current contribution payable method or one of the accrued benefit obligation (ABO) methods

38. Targeted disclosures Only targeted disclosures in the financial statements Stakeholders receive the pertinent, understandable information they need Avoid excess narrative or irrelevant “noise” in the financial reports

39. Targeted disclosures External users of a small business’s financial statements usually possess a familiarity and knowledge about the entity They have direct access to the management The value of financial statements to such users lies in its capacity to confirm and supplement a user’s knowledge and expectations about the business

40. Targeted disclosures Results − Financial disclosures that are relevant, transparent, clear and decision-useful No sifting through voluminous information in search of the pertinent information If a user requires additional information about the business, management can tailor the nature and extent of disclosures to suit those needs

41. Specific Accounting Areas

42. Table of contents(comprehensive yet relevant) • Financial Statement Concepts • General Principles of Financial Statement Presentation and Accounting Policies • Transition • Statement of Financial Position • Current assets/liabilities • Special Accounting Considerations for Certain Financial • Statement of Operations • Statement of cash flows • Accounting Changes, Changes in Accounting Estimates, and Correction of Errors • Risks and Uncertainties • Equity, Debt and Other Investments • Inventories • Intangible Assets • Property, Plant and Equipment • Disposal of Long-lived Assets and Discontinued Operations

43. Table of contents(comprehensive yet relevant) • Commitments • Contingencies • Equity • Revenue • Retirement and Other Post-employment Benefits • Income Taxes • Subsidiaries • Consolidated Financial Statements and Noncontrolling Interests • Interests in Joint Ventures • Leases • Related Party Transactions • Subsequent Events • Business Combinations • New Basis (Push-Down) Accounting • Nonmonetary Transactions • Foreign Currency Translation

44. Lease accounting Familiar accounting/Aligned with U.S. tax code Criteria for capitalizing a lease for tax purposes generally matches criteria in FRF for SMEs Overriding concept of transferring substantially all the benefits and risks of ownership to the lessee Reduction of book to tax adjustments

45. Subsidiaries & consolidation • Entity should make an accounting policy choice to either - consolidate its subsidiaries OR - account for its subsidiaries using the equity method • Parent-only (unconsolidated) financial statements permitted • No Concept of Variable Interest Entities (VIEs) • Simplified Model

46. Investments Investor that is able to exercise significant influence over an investee that is not a subsidiary follows the equity method Not able to exercise significant influence - follow the cost method • If the investor holds 20 percent or more of the voting interest in the investee, there is a rebuttable presumption that the investor has the ability to exercise significant influence

47. Investments held for sale Equity and debt investments held for sale should be recognized and measured at market value. Changes in market value should be recognized in net income in the period incurred.

48. Derivatives Recognized at settlement – net cash paid or received Disclose pertinent information - Face or contract amount (or notional principal amount) - Nature and terms - Discussion of the credit and market risk and cash requirements - Description of objectives - Net settlement amount

49. Revenue Performance The seller of the goods has transferred to the buyer the significant risks and rewards of ownership Reasonable assurance exists regarding the measurement of the consideration Recognition Revenue from sales and service transactions should be recognized when the requirements regarding performance are satisfied, provided that at the time of performance, ultimate collection is reasonably assured

50. Goodwill No impairment testing Goodwill should be amortized generally over the same period as that used for federal income tax purposes or if not amortized for federal income tax purposes then a period of 15 years