The AICPA has proposed the use of a principles-based framework as a practical compromise between GAAP and the unmet needs of some financial statement users.
At Mayer Hoffman McCann P.C. we’ve been following this topic closely. For your convenience, we’ve compiled the list below which highlights a number of areas in which the OCBOA framework would depart from or be less prescriptive than US GAAP.
- Measurement basis: Historical cost is the primary measurement criteria. Only held-for-sale equity securities are measured at fair value.
- Inventories: Inventories are measured at the lower of cost or market, with market defined as net realizable value. The cost of inventories is calculated using the first-in, first-out (FIFO), last-in, first-out (LIFO), or weighted average cost formula.
- Property, plant and equipment: Permitted depreciation methods include a straight-line method, a variable charge method that reflects service as a function of usage, and other methods that may be appropriate in certain situations. The amount of depreciation that should be charged to income is the greater of (a) the cost, less salvage value over the life of the asset, or (b) the cost, less residual value over the useful life of the asset.
- Goodwill: Goodwill is amortized. The period of amortization is generally the same period as that used for federal income tax purposes, or a period of ten years if the goodwill is not amortized for federal income tax purposes.
- Revenue: For services and long-term contracts, performance is determined using either the percentage of completion method or the completed contract method, whichever relates the revenue to the work accomplished.
- Leases: Lease accounting for financial reporting is aligned with lease accounting for federal income tax purposes. The criteria for capitalizing a lease are the same for book and tax purposes.
- Accounting for income taxes: Companies would have the flexibility to make an accounting policy election to use either: (a) the taxes payable method, or (b) the deferred income taxes method. Under the taxes payable method, only current income tax assets and liabilities are recognized. If a portion of current income taxes is unpaid, it is recognized as a liability; if a portion is refundable, it is recognized as an asset. The liability for current income taxes on the balance sheet is the cost or benefit of current income taxes for current and prior periods less amounts already paid for these income taxes.
- Subsidiaries and consolidation: The OCBOA framework would not use the concept of variable interest entities. Instead, the framework would spell out that 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 would qualify as an investment. Companies would have the flexibility to make an accounting policy election to either: (a) consolidate their subsidiaries, or (b) account for their subsidiaries using the equity method.
Learn more about the proposed framework in our latest MHM Messenger: AICPA’s Special-Purpose Framework Proves Controversial»
We will also be hosting a free webinar on April 18 regarding this topic. Register now to attend the first course in MHM’s Executive Education Series: What Private Companies Need to Know about the AICPA’s Proposed Framework.