MHM Executive Education Series:

New Accounting Framework Impacting

the AEC Industry

Presented by:

Mike Loritz and Matt Rybowicz

August 8, 2013

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Today’s Presenters

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.

Matt Rybowicz, CPA Senior Manager

913.234.1062 | rybowicz@cbiz.com

Matt has more than 13 years of experience in public accounting and is currently a Senior

Manager in the Leawood, Kansas office. He plans, executes and directs external audits for a

variety of construction industry clients. Matt focuses on complex and/or specialized issues in

the construction industry, develops and maintains productive relationships with clients, and is a

part of the firm’s national construction audit methodology taskforce.

In addition to providing attest and accounting services to clients, Matt is actively involved in

local and national construction organizations and has presented at many local and national

events including the CICPAC annual member conference, National association of independent

sureties training and the Kansas City Builders Association Construction Management

Academy.

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

Today’s Agenda

1

2

3

5

AICPA FRF for SME’s - Background

Private Company Council – Activities

FRF for SME’s & Architecture, Engineering &

Construction

4 FRF for SME’s – Other Concepts

5 Disclosure considerations

FRF FOR SME’S -

BACKGROUND

Why was the Framework Developed?

Special Purpose Frameworks (OCBOA):

US GAAP Not Required GAAP not required and not the best solution 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

FRF for SMEs Private Company Council

- Not GAAP - Special - GAAP

Purpose Framework - Modify GAAP for private

- Complementary to companies

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

Approximately 200 pages

Self-contained

Excess narrative avoided

Avoidance of bright lines

Use of professional judgment

Principles-based, Standalone, Compact

Principles-

based

Standalone

Compact

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.

AICPA Framework for SMEs

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?

- 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

Public Statements Critical of the Framework:

FAF President – Teresa Polley

National Association of State Boards of

Accountancy (see NASBA Tells Private Companies: Don’t

Use AICPA Financial Reporting Framework)

Institute of Management Accountants (IMA)

Risk Management Association (RMA)

Controversy

PRIVATE COMPANY COUNCIL

ACTIVITIES

The PCC has two principal responsibilities:

1. The PCC will determine whether exceptions or modifications to existing non-governmental U.S. Generally Accepted Accounting Principles (U.S. GAAP) are required to address the needs of users of private company financial statements.

2. The PCC will serve as the primary advisory body to the Financial Accounting Standards Board (FASB) on the appropriate treatment for private companies for items under active consideration on the FASB’s technical agenda.

Private Company Council

The PCC will conduct a review of

existing U.S. GAAP and identify

standards that it will consider for

possible exceptions or modifications.

The PCC will develop, deliberate, and

vote on proposed exceptions or

modifications, which must be

approved by a two-thirds vote of all

PCC members (super majority).

PCC Agenda Setting and Due Process for

Existing U.S. GAAP

Proposed modifications or exceptions to U.S. GAAP approved by the

PCC will be provided to the FASB for a decision on endorsement. If

endorsed by a simple majority of FASB members, the proposed

modifications will be exposed for public comment.

PCC Issue No. 13-01A, Accounting for Identified

Intangible Assets in a Business Combination

The PCC is attempting to reduce the number of

intangible assets that are recognized.

Only intangible assets that arise from either a non

cancelable contract or legal right will be subject to

recognition.

Private companies will measure the value of an asset

that originates from a non cancelable contract by

considering only the contract’s remaining non

cancelable term.

Private Company Council

PCC Issue No. 13-01B, Accounting for Goodwill

Subsequent to a Business Combination

In a return to “the past”, goodwill will once again be amortized over

an estimated useful life, which cannot exceed ten years.

Goodwill will not longer be subject to an annual impairment test,

rather, a “triggering event” model will be used. Impairment testing

would be required when an event or circumstances occur that

indicate that it is more likely than not the fair value of the entity is

below its carrying value.

The goodwill impairment test will be performed at the entity level.

Private Company Council

PCC Issue No. 13-01B, Accounting for Goodwill

Subsequent to a Business Combination

The requirement to perform a hypothetical “purchase price

allocation” is removed. The amount of impairment

recognized is simply the difference between the fair value of

the entity and its carrying value.

Private Company Council

PCC Issue No. 13-02, Applying Variable Interest Entity Guidance to

Common Control Leasing Arrangements

Exempts private companies from applying consolidation guidance for

variable-interest entities (VIEs) under common control leasing arrangements.

Exemption requirements include Nonpublic entity and legal entity are under common control

Nonpublic entity has a lease arrangement with VIE

Substantially all of the entity’s business activities consist of leasing or supporting

leasing activities.

Required disclosures: Lease terms

“related party” rent expense

Future commitments

Outstanding debt and significant liabilities of related party lessor.

Key terms of debt arrangement

Key terms of explicit interest in leasing entity

Private Company Council

PCC Issue No. 13-03, Accounting for Certain Receivable-Variable,

Pay-Fixed Interest Rate Swaps

The intent is to simplify the accounting for certain derivative

transactions involving an interest rate swap where variable rate debt

is converted to fixed rate debt.

If certain criteria are met, the swap is combined with the

related debt instrument which effectively results in a fixed

rate borrowing.

Derivative accounting is not required.

A “simplified short-cut method” is also available that makes it

easier to apply hedge accounting. Certain criteria must be

met.

Private Company Council

FASB Endorsement

While the FASB did raise questions pertaining to the proposed

alternatives, it unanimously endorsed each of the accounting

alternatives approved by the PPC (Issue 13-01 and 13-03).

The proposed alternatives are expected to be exposed for public

comment where FASB’s questions may be addressed.

Subsequent to the public comment process, the PCC will

redeliberate the accounting alternatives.

PCC accounting alternatives will be subject to “final endorsement” by

the FASB.

Private Company Council

FRF FOR SME’S &

ARCHITECTURE, ENGINEERING &

CONSTRUCTION

F/S Concepts

General Principles of F/S Presentation & Acct Policies

Transition

Statement of Financial Position

Current assets/liabilities

Special Accounting for Certain Financial Assets & Liabilities

Statement of Operations

Statement of Cash Flows

Accounting Changes, Estimates, Errors

Equity, Debt & Other Investments

Risks and Uncertainties

Inventories

Intangible Assets

Property, Plant & Equipment

Long-Lived Assets & Disc Ops

Commitments

Contingencies

Equity

Revenue

Retirement and Other Postemployment Benefits

Income Taxes

Comprehensive and Relevant Framework

Subsidiaries

Consolidation and NCI

Joint Ventures

Leases

Related Party

Subsequent Events

Business Combinations

Push-Down Accounting

Nonmonetary Transactions

FX Translation

Glossary

Comprehensive and Relevant Framework (cont.)

Does not include:

Earnings per share guidance

Segment reporting

Other comprehensive income

Interim reporting

Stock compensation

Many of the complex issues

associated with debt/equity

Comprehensive and Relevant Framework

Chapter 1

Introduces the financial statement concepts

Similar to the FASB Concept Statements

Discusses concepts including the following:

Measurement

Materiality

Recognition

Qualitative Characteristics

Understandability

Relevance

Reliability

Comparability

Financial Statement Concepts

Chapter 2

Establishes specifics of financial statements and comparative

information

Provides guidance on the disclosure of accounting policies

Requires an entity to state prominently in the notes to the

financial statements that the FRF for SME’s is the basis for the

presentation

General Principles

Chapter 3 - Transition

Requires an entity to prepare an opening statement of financial

position at the date of transition to the FRF for SMEs framework

Requires an entity to:

Recognize all assets and liabilities whose recognition is required

Not recognize items as assets or liabilities if the framework does not permit

recognition

Reclassify items that it recognized previously as one type of asset, liability, or

component of equity but are now recognized as a different type of asset, liability,

or component of equity under the framework

Apply the framework when measuring all recognized assets and liabilities

Requires certain disclosures including the amount of each charge or

credit to equity at the date of transition

Transition

Less than 20% ownership

Presumed investor does not have significant influence

Greater than 20% ownership

Rebuttable presumption that significant influence exists

If significant influence exists = equity method

Equity method accounting is similar to the existing

GAAP guidance

However, allows the reversal of previously recognized

impairments

Equity Method Investments (Investments)

No Concept of Variable Interest Entities (VIEs)

Consolidation is not appropriate when an entity has a

limited right and ability to determine or influence the

strategic policies of another entity but does not control

it.

A holding of an interest in an entity that is not a

subsidiary qualifies as an investment.

Either equity method or cost basis

Subsidiaries & Consolidation

Recognition and Presentation

Does not require consolidation

An entity should make an accounting policy choice to

either:

a. Consolidate its subsidiaries or

b. Account for its subsidiaries using the equity method

Parent-only (unconsolidated)

financial statements are permitted.

Subsidiaries & Consolidation

Closely aligned with

requirements of U.S. Income

Tax Code

Criteria for capitalizing a

lease for tax purposes

generally matches criteria in

FRF for SMEs

Evaluation of capital vs.

operating leases are the

same as US GAAP Retains “rules” based approach

Lease Accounting

Lease Accounting

25.08 A lease that transfers

substantially all the benefits

and risks of ownership

related to the leased

property from the lessor to

the lessee should be

accounted for as a capital

lease by the lessee and as a

sales-type of direct financing

lease by the lessor

25.09 A lease in which the

benefits and risks of

ownership related to the

leased property are

substantially retained by the

lessor should be accounted

for as an operating lease by

the lessee and lessor

In the case of rendering of services and long-

term contracts and modifications to those

contracts, performance should be determined

using either the percentage of completion

method or the completed contract method,

whichever relates the revenue to the work

accomplished.

Very limited discussion of multiple element

deliverables

Limited, but similar, guidance on gross vs.

net reporting of revenues

Revenue

Percentage of Completion Method

Used when performance consists of the execution of more than one act, and revenue would be recognized proportionately by reference to the performance of each act.

Determination using a rational and consistent basis

Sales values

Associated costs

Extent of progress

Number of acts

Practical Expedient Services are provided by an indeterminate number of acts of a

specific period of time, revenue should be recognized on a straight-line basis over the period, unless there is evidence that some other method better reflects the pattern of performance.

Long-term contracts

Percentage of Completion Method

Measurement

Amount of work accomplished

Measures of performance that are reasonably determinable

Relate as directly as possible to the activities critical to the completion of the contract

Measures

Output measures

Units produced

Project milestones

Input measures

Cost

Labor hours

Machine use

Amounts billed are not an appropriate basis unless they reflect the work accomplished

Long-term contracts

Completed Contract Method

Used when the entity cannot reasonably estimate the

extent of progress toward completion.

If both of the following conditions are met:

Completed contract method is used for income tax reporting

purposes

The financial position and results of operations…would not

vary materially from those resulting from the use of the

percentage of completion method (for example, in

circumstances in which an entity has primarily short-term

contracts).

Long-term contracts

Contract-Related Claims

Recognition…only if it is probable that the claims will result in additional contract revenue and if amounts can be reliably estimated, as evidenced by satisfying the following conditions:

There is a legal basis for the claims.

Additional costs are caused by circumstances that were unforeseen at the contract date and are not the result of contractor performance deficiencies.

Costs associated with the claims are identifiable or otherwise determinable and are reasonable in view of the work performed

Evidence supporting the claims is objective and verifiable.

Long-term contracts

Contract-Related Claims

If the foregoing requirements are met, revenue from

contract-related claims should be recorded only to the

extent that contract costs relating to the claims have

been incurred. Cost attributable to claims should be

treated as costs of contract performance as incurred.

A practice such as recording revenues from claims

only when the amounts have been received or

awarded may be used.

Long-term contracts

Sureties, and loan agreements still require U.S. GAAP

financial statements

State DOT and state licensing board requirements

ESOP considerations

Future changes accounting changes (i.e. Leases,

revenue recognition) could drive companies to revisit

framework.

Other AEC Considerations

FRF FOR SME’S – OTHER

CONCEPTS

Depreciation should be recognized in a rational and

systematic manner appropriate to the nature of the item

with a limited life and its use by the entity. Depreciation

recognized is the greater of:

the cost, less salvage value over the life of the asset or

the cost, less residual value over the useful life of the asset

Allows for the subsequent reversal of impairments

Analysis is still performed using undiscounted cash flows

Asset group concept is the same as GAAP

Allows capitalization of finance costs

Property, Plant & Equipment — Depreciation

Straight-line method

Constant charge as a function over time

Variable charge method

An increasing charge method may be used when an entity

can obtain a constant rate of return on the investment in the

asset.

A decreasing charge method may be appropriate when the

operating efficiency of the asset declines over time.

PP&E – Different Depreciation Methods

Goodwill is not tested for impairment.

Goodwill should be amortized:

the same period as that used for federal income tax

purposes or

if not amortized for federal income tax purposes then a

period of 10 years.

Goodwill

Assets acquired and liabilities assumed are measured at their acquisition date market values. Certain exceptions exist.

An entity should make an accounting policy election to account for an intangible asset acquired either separately from goodwill or by not recognizing the intangible assets separately from goodwill (subsuming into goodwill the value of the intangible asset)

All intangible assets are considered to have a finite useful life and are amortized over that estimated useful life

Business Combinations

Accounting Policy Election

An entity should make a policy election to account for defined benefit plans

Current contribution payable method

One of the accrued benefit obligation methods

Current Contribution Payable Method

Only the contribution attributable to the current year is expensed

Accrued Benefit Obligation Methods

Immediate recognition approach

Deferral and amortization approach

Defined Benefit Plans

Accounting Policy Election

An entity should make an accounting policy election to account for income taxes using either

the taxes payable method or

the deferred income taxes method

Taxes Payable Method

Under the taxes payable method, only current income tax assets and liabilities are recognized

Current income taxes, to the extent unpaid or refundable, should be recognized as a liability or asset

The liability for current income taxes included in the balance sheet is the cost (benefit) or current income taxes for current and prior periods less amounts already paid in respect of these income taxes

Income Taxes

Certain Financial Assets and Liabilities

At each reporting date,

an entity should

measure: a. Investments in equity

instruments at cost, less

any reduction for

impairment,

b. All other financial assets at

amortized cost; and

c. Financial liabilities at

amortized cost

• An entity should

measure investments in

equity instruments held

for sale at market

value.

• Changes in market

value should be

recognized in net

income in the period

incurred.

• Impairments may be

reversed.

Derivatives

Recognize net cash paid or received at settlement

Disclosures

Face or contract amount (or notional principal amount if there is

no face or contract amount)

The nature and terms — including a discussion of the credit and

market risk of those instruments

A description of the entity’s objectives for holding the derivatives

The cash requirements of those instruments

Financial Instruments

Learning Center Slide No. 68

DISCLOSURE CONSIDERATIONS

Significant accounting policies (Note 1)

Changes in accounting policies

Nature of operations

Use of management estimates

Significant estimates

Changes in accounting estimates if material

Concentrations

Operating cycle if longer than 1 year

Details about any reclassification from previously issued comparative statements

Corrections of errors

Disclosures – Consistent with GAAP

Policy in determining the composition of cash and cash

equivalents.

Restrictions on cash

Details regarding business combinations and disposals

of business units

Investing or financing transactions that do not require

the use of cash presented either on the face of the

statement of cash flows or notes to the financial

statements.

Information regarding each material business

combination.

Disclosures – Consistent with GAAP

Consolidation policies

Basis of accounting for joint ventures along with

additional information.

Basis used to account for investments

Nonmonetary exchanges

Inventory accounting policies including classifications.

Cost of each major category of property and

equipment, total accumulated depreciation,

depreciation methods, life, and depreciation charged to

income

Contingency gains and losses

Disclosures – Consistent with GAAP

Intangible asset carrying amount by major asset class,

aggregate amortization expense, amortization method

and life

Policy for accounting for start-up costs.

Capital lease information including payments

estimated in each of the next 5 years

Operating lease minimum lease payments for each of

the five succeeding years

Subsequent events

Commitments

Defined contribution plans

Disclosures – Consistent with GAAP

Deferred compensation plans

Guarantees

Revenue recognition policies and components

Income tax – if deferred method is elected

Related party transactions

Disclosures – Consistent with GAAP

Multi-employer plans –

Name and description of plan

If withdrawal is probable or reasonably possible, whether it

would give rise to an obligation

Cost recognized in the period

Taxes payable method policy

Stock issued to employees in lieu of cash

compensation (measurement and disclosure)

Disclosures – Not Consistent with GAAP

Financial statements are prepared in accordance with

FRF for SMEs

Primary differences between FRF for SMEs and GAAP

Does not require quantification – very broad discussion

The accompanying financial statements have been prepared in

accordance with the Financial Reporting Framework for Small- and

Medium-Sized Entities issued by the American Institute of Certified

Public Accountants. This framework, unlike accounting principles

generally accepted in the United States of America, generally does

not make use of fair value accounting provides more flexibility in the

areas of accounting for income taxes and consolidations etc.

Disclosures – Additional Items

In the year of adoption of FRF for SMEs –

If prior year financial statements are restated and presented-

Amount of each change or credit to equity

Explanations of material adjustments to the statement of cash flows

Any election to use the exemption for retrospective application

Derecognition of financial assets and liabilities

Estimates

Non-controlling entities

Basis used to account for unconsolidated subsidiaries along with additional information

Disclosures – Additional Items

Substantially the same as GAAP based financial

statements

Supplementary information permitted

Contract schedules

Cost of goods sold schedules

General and administrative expense

Presentation

Accounting Policies (Chapter 2)

The accompanying financial statements have been prepared in accordance with the Financial Reporting Framework for Small- and Medium-Sized Entities issued by the American Institute of Certified Public Accountants. This special purpose framework, unlike generally accepted accounting principles (GAAP) in the United States of America, does not require the recognition of deferred taxes. We have chosen the option to recognize only current income tax assets and liabilities.

Other primary differences would be described as necessary.

Disclosures – Accounting Policies

Questions?

Today’s Presenters

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.

Matt Rybowicz, CPA Senior Manager

913.234.1062 | rybowicz@cbiz.com

Matt has more than 13 years of experience in public accounting and is currently a Senior

Manager in the Leawood, Kansas office. He plans, executes and directs external audits for a

variety of construction industry clients. Matt focuses on complex and/or specialized issues in

the construction industry, develops and maintains productive relationships with clients, and is a

part of the firm’s national construction audit methodology taskforce.

In addition to providing attest and accounting services to clients, Matt is actively involved in

local and national construction organizations and has presented at many local and national

events including the CICPAC annual member conference, National association of independent

sureties training and the Kansas City Builders Association Construction Management

Academy.

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