Financial Reporting Framework for
Small- and Medium-Sized Entities:
Part 3B—Accounting for Certain
Expenses
By Larry L. Perry, CPA
CPA Firm Support Services, LLC
3/12/2016
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Learning Objectives
 To learn accounting and disclosure principles
for:
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Leases
Pension and post-employment benefit plans
Income taxes
Accounting changes
Risks and uncertainties
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A Non-Authoritative, Special-Purpose
Framework
 A combination of traditional accounting methods from special
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purpose frameworks such as the cash basis and the income
tax basis (with some concepts similar to U.S. GAAP..
A historical cost basis with some modifications for market
values.
Specific, simplified footnote disclosures.
Uncomplicated, consistent and principles-based accounting.
A consolidation model that excludes variable interest entities.
Management and the users of financial statements decide if it
fairly presents an entity’s financial position and results of
operations.
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Basic Issues for Financial Statements
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The titles of these statements are not limited to a prescribed
title. Some common options are:
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Statement of Operations
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Statement of Revenues and Expenses
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Statement of Revenues, Expenses and Retained
Earnings
Each statement should include this reference or other
descriptive wording under the statement title: (FRF for SMEs
Basis).
As with other frameworks, a comparative format is
considered the most meaningful but is not required. Single
period financial statements will usually be the most
appropriate in the first period of application.
Line item references to footnotes aren’t required but a
reference on the bottom of the statement to the notes and an
accountant’s report is required. Example: “See Independent
Accountant’s Review Report and Notes to Financial
Statements.”
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Basic Lease Accounting Principles
 Criteria in lease agreements, anyone of which indicates
transfers of substantially all the risks and benefits of
ownership, are:
 End of lease transfer of ownership to the lessee.
 Bargain purchase option that would cause the lessee to
purchase.
 A lease term to give lessee substantially all the economic
benefit of an asset—normally 75+% of remaining useful
life.
 The lessor has some assurance of recovering the cost and
earning a return on an asset—when the present value of
minimum lease payments is 90+% of asset value at
inception of the lease.
 Other criteria for lessors in addition to any one of the
above are a credit risk similar to other receivables and
identifiable non-reimbursable costs.
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Lessee’s Accounting for Leases
 Capital leases
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Accounted for as the acquisition of an asset and the creation of
an obligation presented separately in the statement of financial
position. Land and buildings may be separated.
The present value of minimum lease payments, excluding known
or estimated executory costs, less than an asset’s market value,
determines the recorded amounts.
The lessor’s interest rate implicit in the lease would be used if it
can be obtained or calculated and is lower than the lessee’s
incremental borrowing rate.
The asset should be amortized over it’s expected period of use or
it’s economic life (if ownership transfers or there if a bargain
purchase option).
Interest expense is calculated using the discount rate above.
Rental expense for operating leases is accounted for on a
straight-line basis unless benefits are best presented otherwise
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Disclosures for Lessees
 Disclosures for each major category of capitalized leased
assets include:
 Cost
 Accumulated amortization, including any write-downs of
asset values, and the amortization method
 Capitalized leased obligations disclosures include:
 Interest rate
 Maturity date
 Outstanding balance and any collateral under the leases
 Interest expense disclosed separately or as part of interest
on long-term debt
 Payments for each of the next five years in accordance
with terms of the lease
 Operating leases disclosures should include future minimum
lease payments in the aggregate and for each of the five
succeeding years. Short term leases of one year or less are
excluded from this disclosure requirement.
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Lessor’s Accounting for Direct
Financing Leases
 A direct financing lease, normally between a manufacturer or
dealer and a lessee, generates financing income (the
difference between the total net minimum lease payments and
asset carrying amount).
 The lessor’s investment is comprised of the net amount of:
 Minimum lease payments receivable, net of any executory
costs (insurance, maintenance and taxes) and any profit
on the sale.
 The unguaranteed residual value of the leased asset.
 Unearned finance income, net of any initial direct costs to
be allocated over the lease term.
 Any investment tax credits to be allocated over the lease
term.
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Lessor’s Accounting for Sales-Type
Leases
 Leases are used to sell dealer’s and manufacturer’s products
and include a profit or loss on sale and financing income.
 Sales revenue is determined by discounting the net
minimum lease payments using the interest rate implicit in
the lease.
 Cost of sales include the carrying amount of the leased
asset reduced by the present value (same discount rate) of
any unguaranteed residual.
 Finance income is the difference between net minimum
lease payments plus any unguaranteed residual
(undiscounted) and the total of the present value of
minimum lease payments.
 Initial direct costs and profit or loss is recognized at the
date of the transaction; unearned finance income is
recognized at a constant rate of return over the lease term.
Collectability should be reviewed annually.
 Rental revenue from an operating lease should normally be
recognized on a straight-line basis.
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Pension and Post-retirement Benefit
Plans
 The FRF for SMEs generally requires cost-recognition in
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periods employees perform services for any arrangement that
is a benefit plan, regardless of form or funding provisions.
The obligation meets the definition of a liability.
Defined contribution plans (including multiemployer plans)—
pension cost is normally the periodic accrual basis
contribution.
Deferred compensation contracts—only benefits attributable
to current employment should be recognized; future benefits
should be accrued at present value over the employee’s
period of service.
Defined benefit plans—management can elect:
 A current contribution payable method, disclosing the
plan’s description, method of determining benefits, it’s
funded status, contributions expected for future years,
expected rate of return and the obligation discount rate.
 An accrued benefit obligation method permits an entity to
use immediate recognition
or deferral and amortization 10
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approach.
Accounting for Income Taxes
 Two options are available under the FRF for SMEs:
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The taxes payable method—assets or liabilities
are recognized to the extent of refundable or
unpaid income taxes from the current and any
prior years, calculated at currently applicable
capital gain or ordinary income rates.
The deferred income taxes method—deferred tax
assets and deferred tax liabilities are recognized
for future deductible and taxable amounts.
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Basic Principles of Deferred Income
Taxes Method
 A current tax liability or asset for taxes payable or
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refundable on tax returns
A deferred tax liability or asset is recognized for
future tax effects of temporary differences and
carryforwards
Measurement is based on enacted tax law
Deferred tax assets that are not expected to be
realized are reduced by valuation allowances
Temporary differences arise from book/tax
differences in income and from differences in basis
See examples in text
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Deferred Tax Assets and Liabilities
 A deferred tax liability is recognized for temporary
differences that will result in taxable amounts in
future years
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Example—installment sale receivable
 A deferred tax asset is recognized for temporary
differences that will result in deductible amounts in
future years and for carryforwards.
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Example—estimated expenses
A valuation allowance is recognized if it is more likely
than not some or all of the deferred tax asset will not
be realized.
 See illustration in text
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Disclosures for Income Taxes Payable
Method
 The expense or benefit included in income or
loss before discontinued operations.
 A discussion of differences between current
period tax rates or expense and statutory
rates.
 Amount of unused tax loss carryforwards and
tax credits.
 Any portion of tax expense or benefit applying
to transactions charged to equity.
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Disclosures for the Deferred Income
Taxes Method
 Current and deferred income tax expense or benefit
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included in net income or loss before discontinued
operations.
Any portion of tax expense or benefit applying to
transaction charged to equity.
Any portion of unused tax losses, income tax
reductions or deductible temporary differences not
recognized as a deferred tax asset.
A discussion of differences between current period
tax rates or expense and statutory rates.
Amount of unused tax loss carryforwards and tax
credits.
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Accounting Changes
 Accounting policies should be consistent and only
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changed to conform with the FRF for SMEs or to
produced more reliable and relevant financial
information.
Accounting policy changes should be presented
retrospectively for all periods presented and restating
the opening balance of the appropriate equity
classification in the period first presented.
Revisions of accounting estimates based on new
information should be accounted for prospectively.
Prior period errors should be corrected by restating
comparative amounts for all period presented and the
opening balance of the earliest period presented.
See disclosures in text.
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Risks and Uncertainties
 Major products and services and the entity’s principal
markets should be disclosed in Note A.
 Other items that should be disclosed in footnotes
include:
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Discussion of management’s use of estimates and that
the estimates are based on circumstances that exist at
the date financial statements are available for issue
and may change in the future. Examples in text.
Descriptions of concentrations and any risk of loss in
the near-term future. Examples in text.
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The End
 What to do if you want more
 Email Larry Perry: larry@cpafirmsupport.com with
questions
 Visit www.cpafirmsupport.com for webcast resources
 Register for free email newsletter on CPA Firm Support
website
 Read Larry Perry’s weekly articles/blog, Today’s World
of Audits, at www.accountingweb.com under the A&A
Articles and Blog tabs for accounting and auditing
subjects applicable to small- and medium-sized entities
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