Auditing Special Purpose Frameworks—Part 4

Previous articles in this series presented basic principles for the income tax basis of accounting.  To continue laying the foundation of principles for commonly used financial reporting frameworks, this and several future articles will present a comparison of key issues in U.S. GAAP to the AICPA’s Financial Reporting Framework for Smal-l and Medium-Sized Entities. Extensive documentation for the FRF for SMEs is available in various Toolkits on the AICPA’s website. http://www.aicpa.org/interestareas/frc/accountingfinancialreporting/pcfr/pages/frf-smes-cpas.aspx

FRF for SMEs Differences From U.S. GAAP

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.

Future articles will summarize more differences between U.S. GAAP and the FRF for SMEs.  For more information about the FRF for SMEs, and to register for a future series of webcasts on the FRF for SMEs, click on the applicable box on the left side of my home page, www.cpafirmsupport.com.