February 1, 2013

Mr. Robert Durak

Director, Private Company Financial Reporting

Accounting Standards

American Institute of Certified Public Accountants

1211 Avenue of the Americas, 19th Floor

New York, NY 10036

Re: Proposed Financial Reporting Framework for Small- and Medium-Sized Entities

Dear Mr. Durak:

Deloitte & Touche LLP appreciates the opportunity to provide feedback on the AICPA’s

Proposed Financial Reporting Framework for Small- and Medium-Sized Entities (the FRF for

SMEs or the “Framework”). We support efforts to address the financial reporting needs of small

and medium-sized entities that are not required to prepare financial statements in accordance with

U.S. GAAP as well as the needs of their financial statement users. However, while we support

these objectives, we have several significant concerns that we believe should be addressed before

the Framework is finalized.

We are concerned that the Framework may create the potential for (1) competition between the

FRF for SMEs and modifications to U.S. GAAP by the Private Company Council and (2)

confusion in the lending and equity investing markets for private entities. Thus, the AICPA

should clearly indicate that the FRF for SMEs is not an alternative GAAP but rather a framework

for entities that choose to prepare financial reports on a basis other than GAAP. In addition, the

AICPA should indicate what information entities should consider in determining whether to use

the FRF for SMEs to prepare their financial statements.

The AICPA has touted the FRF for SMEs as a “financial reporting solution that addresses

marketplace demands.” However, it is not clear what marketplace demands were identified and

what role marketplace participants have played in its development. We believe that the

Framework has the potential to meet marketplace demands if the FRF for SMEs Task Force (the

TF) makes decisions, and considers input from financial statement users and preparers,

transparently. Such transparency would also help the FRF for SMEs gain wider acceptance

among financial statement users and preparers. Thus, we recommend that the TF and the AICPA

improve their due process as they continue to develop the Framework.

In addition, to ensure that the Framework is viewed as a set of criteria with substantial support

underlying the preparation of financial statements (i.e., an other comprehensive basis of

accounting), the TF should identify the set of concepts on which the FRF for SMEs is based. The

Deloitte & Touche LLP Ten Westport Road PO Box 820 Wilton, CT 06897-0820

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Re: Proposed Financial Reporting Framework for Small- and Medium-Sized Entities

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TF should link these concepts to the needs of SME financial statement users, and apply them

consistently throughout the Framework.

We elaborate on these observations and recommendations below.

Confusion in Lending and Equity Investing Markets for Private Entities

The objective of the FRF for SMEs is not the same as that of the Private Company Council

(PCC), which was created by the Financial Accounting Foundation in May 2012. The PCC is

working to determine whether exceptions or modifications to existing nongovernmental U.S.

GAAP would benefit end users of private-company financial statements and to advise the FASB

on how to treat private-company accounting matters on the Board’s technical agenda. These

efforts are not intended to create a private-company financial reporting framework that is separate

from U.S. GAAP. The FRF for SMEs, however, is a nonauthoritative framework, separate from

U.S. GAAP, that is intended for use by entities that are not required to prepare financial

statements in accordance with U.S. GAAP. We are concerned that these two initiatives will

compete for acceptance among private-entity financial statement preparers and users and will lead

to confusion in the lending and equity investing markets for private entities.

An entity’s owners, management, or owner-managers (collectively, “management”) will decide

whether to use the FRF for SMEs; however, we are concerned that they will not have the tools

and information they need to make a well-informed decision. We understand that the AICPA

intends to offer toolkits that will help CPAs explain the FRF for SMEs and its advantages. We

recommend that these toolkits, or other materials, include a clear and comprehensive discussion

of the types of entities for which the FRF for SMEs was designed. Such discussion should explain

(1) relevant differences between the FRF for SMEs and U.S. GAAP, (2) potential disadvantages

(and advantages) of using the FRF for SMEs, and (3) other relevant considerations that could

inform management’s decision. Considerations may include whether U.S. GAAP financial

statements would be needed by a parent applying U.S. GAAP or an equity-method investor now

or in the future, the size and complexity of entities contemplated by the TF when developing the

FRF for SMEs, and the information that would be needed to reconcile financial statements

prepared in accordance with the FRF for SMEs with those prepared under U.S. GAAP.

Information that may help a management team decide whether to apply the FRF for SMEs will

change and evolve over time. The PCC held its first meeting in December 2012 and will propose

exceptions and modifications to U.S. GAAP through a deliberative process that will take time.

We therefore recommend that the TF coordinate regularly with the FASB and the PCC and

update its toolkits or other materials comparing the FRF for SMEs and U.S. GAAP as modified

for private entities. A collaborative relationship between the TF and the PCC may also enhance

the PCC’s efforts as it addresses concerns related to private-entity accounting.

Due Process

Although the TF is now seeking public comment on its proposals, we are concerned about the

lack of transparency into the TF’s due process for developing the Framework to date.

Stakeholders are not able to ascertain the nature and degree of outreach conducted by the TF in

developing its proposals. Input from a broad group of financial statement preparers, users,

auditors, and other stakeholders is generally a necessary step in creating accounting guidance on

preparing decision-useful financial statements. By gathering such input and incorporating it into

the FRF for SMEs, the TF might also increase the likelihood that the FRF for SMEs becomes a

Re: Proposed Financial Reporting Framework for Small- and Medium-Sized Entities

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broadly accepted financial reporting framework. In addition, the public must have confidence that

the TF is acting in the best interests of financial statement users and is free from undue influence.

Accordingly, to ensure the TF operates with transparency and objectivity, the AICPA should

consider (1) publishing comprehensive rules of procedure and processes, (2) holding public

meetings, and (3) subjecting the TF to independent oversight by, for example, an existing or new

senior technical accounting committee of the AICPA (such as the Technical Issues Committee).

To maintain a relatively stable financial reporting environment for the Framework’s intended

constituents, the TF has proposed to update the FRF for SMEs every three or four years.

However, more frequent updates might increase the likelihood of broad acceptance and help

ensure that preparer and user concerns are addressed. Especially in the first years of adoption, but

also in subsequent years, SMEs preparing financial statements in accordance with the FRF for

SMEs are likely to have questions about how to apply certain aspects of the Framework, and

financial statement users may find that the proposed accounting is inconsistent with their needs.

As a result, more frequent amendments to the Framework or additional implementation guidance

may be warranted. Policies and procedures should be established that provide a mechanism for all

stakeholders to submit feedback, and a balance should be found that permits important updates to

be made to the FRF for SMEs more often than every three to four years. Published rules of

procedures and processes should state the criteria and processes for making such updates.

We also encourage the AICPA to establish a process whereby the AICPA (or designated body)

periodically assesses the effectiveness of the FRF for SMEs. An objective review process with

input from a broad group of stakeholders would enhance its credibility and ensure its relevance.

Conceptual Framework

Parts of the FRF for SMEs are difficult to understand because they are presented as sets of rules

pieced together rather than as a framework. Further, there is not a comprehensive set of concepts

underlying the sets of rules. The FRF for SMEs would be clearer and easier to implement if there

was a conceptual basis underlying it. A conceptual basis would (1) ensure consistency of the

Framework’s accounting guidance, (2) increase comparability of financial statements prepared

under it, and (3) help preparers exercise professional judgment when applying its principles-based

guidance. Although Chapter 1 of the FRF for SMEs describes certain qualitative characteristics,

elements of financial statements, and recognition and measurement criteria, we do not believe

these constitute a sufficient comprehensive conceptual framework. Further, we do not believe that

the Framework clearly identifies users of non-GAAP SME financial statements or their needs.

We generally agree with the observation made by the FASB in its invitation to comment, Private

Company Decision-Making Framework, that the most common types of private-company

financial statement users are lenders, other creditors, and equity investors. These users are

generally concerned about an entity’s ability to meet its obligations and about earnings before

interest, tax, depreciation, and amortization (EBITDA), which is commonly used in income-

approach valuation models. We believe that users of financial statements prepared by SMEs that

are not required to comply with U.S. GAAP are, in many cases, the same lenders and investors

that will use financial statements prepared under U.S. GAAP as modified by the PCC and the

FASB. The conceptual basis for the FRF for SMEs should clearly identify users of non-GAAP

SME financial statements and describe how their needs inform the accounting guidance in the

FRF for SMEs and the TF’s decision-making process.

Re: Proposed Financial Reporting Framework for Small- and Medium-Sized Entities

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The appendix below contains our comments about selected aspects of the FRF for SMEs. Given

the relatively short comment period, we were unable to review the Framework in greater detail.

******

Deloitte & Touche LLP appreciates your consideration of our comments on the FRF for SMEs. If

you have any questions, please contact Stuart Moss at (203) 761-3042.

Yours truly,

Deloitte & Touche LLP

cc: Robert Uhl

Re: Proposed Financial Reporting Framework for Small- and Medium-Sized Entities

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Appendix — Comments on Selected Aspects of the Framework

As noted in our cover letter, we do not believe that the conceptual framework underlying the

guidance in the FRF for SMEs (i.e., Chapter 1) is sufficiently comprehensive. In addition, we

believe that a single set of concepts in the FRF for SMEs is needed to ensure consistency of the

guidance (and amendments thereto) and to enhance comparability. The TF can develop a

comprehensive conceptual framework by using a well-designed and transparent due process.

In addition, some of the Framework’s principles-based guidance lacks clarity and may therefore

require SMEs to expend substantial time and money determining how to apply appropriate

professional judgment. Although we are unable to comment on all aspects of the Framework, the

comments below address guidance that may present operational challenges, may result in

misleading presentations of financial information, or appears inconsistent. We encourage the TF

to consider these comments in addition to developing a comprehensive and consistent conceptual

framework underlying the guidance in the FRF for SMEs.

Chapter 1 — Financial Statement Concepts

Paragraph 1.13(d) states, “Use of conservatism in making judgments under conditions of

uncertainty affects the neutrality of financial statements in an acceptable manner

[emphasis added]. When uncertainty exists, estimates of a conservative nature attempt to

ensure that assets, revenues, and gains are not overstated and, conversely, that liabilities,

expenses, and losses are not understated. However, conservatism does not encompass the

deliberate understatement of assets, revenues, and gains or the deliberate overstatement

of liabilities, expenses, and losses.”

First, it may not be appropriate, in the second and last sentences, to discuss unidirectional

misstatements for a given set of balances or transactions. In some cases, the

overstatement of assets, for example, may be considered conservative.

Second, this high-level description of conservatism appears to overstate the

appropriateness and effectiveness of conservative estimates. We do not believe that

conservatism in making judgments affects the neutrality of financial statements in an

acceptable manner in all cases or that conservative estimates, by their very nature, ensure

that assets, revenues, and gains are not overstated or that liabilities, expenses, and losses

are not understated.

We agree with the discussion in paragraph 95 of the FASB’s Statement of Financial

Accounting Concepts No. 2, Qualitative Characteristics of Accounting Information

(CON 2), in which the FASB states that “if two estimates of amounts to be received or

paid in the future are about equally likely, conservatism dictates using the less optimistic

estimate.” We recommend that the TF include a discussion of this concept in paragraph

1.13(d) of the FRF for SMEs. We also recommend that the TF consider including other

concepts from paragraphs 95 through 110 of CON 2, including the following: (1) that

“unjustified excesses in either direction may mislead one group of investors to the

possible benefit or detriment of others,” (2) that “reliability . . . may be enhanced by

disclosing the nature and extent of the uncertainty surrounding events and transactions,”

and (3) that financial “information should be free from bias.”

Re: Proposed Financial Reporting Framework for Small- and Medium-Sized Entities

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Paragraph 1.06 states that “[m]aterial presentation items should not be netted in the

financial statements, unless specifically allowed by the FRF for SMEs.” However,

paragraph 1.31 states that “[s]imilar items may be grouped together in the financial

statements for the purpose of presentation.” Financial statement preparers and auditors

may interpret and apply these statements in contradictory ways. We recommend

providing definitions for “material presentation items” and “similar items” and clarifying

how these principles should be applied.

Paragraph 1.44(b) uses the term “market value,” but this term is not defined in the FRF

for SMEs.

Chapter 2 — General Principles of Financial Statement Presentation and Accounting Policies

Paragraph 2.06 states, in part, “Items not significant in themselves are grouped with such

other items as most closely approximate to their nature.” We recommend reconciling this

statement with the principles outlined in paragraphs 1.06 and 1.31. In addition, we

recommend providing guidance to help preparers apply this principle; in particular, in

identifying “items not significant in themselves.”

Chapter 3 — Transition

Paragraph 3.03 defines fair value as the “amount of the consideration that would be

agreed upon in an arm’s length transaction between knowledgeable, willing parties, who

are under no compulsion to act.” We do not believe the FRF for SMEs provides adequate

guidance on measuring fair value in a manner consistent with this definition. In addition,

the definition, as written, may require an entity to assess the knowledge level or attitude

of parties to an observed transaction. In contrast, under the FASB’s definition of fair

value and related guidance, entities must assess objective evidence to determine whether

a measurement represents fair value under U.S. GAAP. (Note that we acknowledge that

ASC 8201 defines market participants as buyers and sellers that, among other things, are

willing to transact for the asset or liability and are knowledgeable. However, it is not

necessary to determine whether parties to a given transaction meet the definition of

“market participant” when assessing whether an observed price represents fair value.) We

believe that the definition of fair value in U.S. GAAP, which is converged with that in

IFRSs, is an appropriate, principles-based definition, and we recommend that the TF

consider using this definition in the FRF for SMEs.

Paragraph 3.21 states “Management may receive information after the date of transition

to the FRF for SMEs about estimates that it had made previously. Management should

treat the receipt of that information in the same way as nonadjusting events after the

balance sheet date under chapter 24, ‘Subsequent Events.’” We do not agree that all

information received after the transition date should be treated in the same way as

nonadjusting events. If a balance sheet was not previously issued as of the date of

transition to the FRF for SMEs, information about items in the opening balance sheet

regarding conditions existing as of the opening balance sheet date should be used in

evaluating estimates, and the financial statements should be adjusted. In addition,

information received after the date of transition may represent objective evidence that

1 For titles of FASB Accounting Standards Codification (ASC) references, see Deloitte’s "Titles of Topics and

Subtopics in the FASB Accounting Standards Codification."

Re: Proposed Financial Reporting Framework for Small- and Medium-Sized Entities

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estimates in a previously issued balance sheet prepared as of the date of transition were in

error. Such information should be treated accordingly (i.e., as prescribed in paragraph

3.20).

Chapter 4 — Risks and Uncertainties

Because collective bargaining agreements may significantly affect cash flows, we

recommend that the TF consider requiring companies to disclose the following if a

significant portion of a their labor force is subject to collective bargaining agreements:

The percentage of the workforce covered by collective bargaining agreements.

The percentage of the workforce with collective bargaining agreements that might be

expiring in the near term (i.e., within a year).

Chapter 5 — Accounting Changes, Changes in Accounting Estimates, and Correction of

Errors

Regarding the definitions in paragraph 5.05, we note the following:

For completeness, “accounting change” should be defined.

The definition of “retrospective application” refers to the application of a “new

accounting policy” and could be misleading. There may be instances in which a

company decides to apply an existing policy to a new class of transactions upon

determining that the policy may be more appropriate. The definition should be

updated to include the application of a new or different accounting policy to one or

more previous transactions, other events, or conditions reported in the financial

statements as though the principle or policy had always been applied.

Paragraph 5.25 specifically indicates that management “should correct material prior

period errors retrospectively in the first set of financial statements completed after their

discovery.” If a significant error is identified that would affect the users of the financial

statements, SMEs should communicate the error to those relying on the financial

statement information as soon as reasonably practical. Waiting until the “first set of

financial statements after their discovery” may result in reliance on incorrect information.

Chapter 10 — Statement of Cash Flows

Paragraph 10.16 states than an “entity may acquire securities and loans for trading

purposes (that is, specifically for resale in the near term)” (emphasis added). Under U.S.

GAAP, “near term” is defined as a “period of time not to exceed one year from the date

of the financial statements.” However, this term is not defined in the FRF for SMEs. We

suggest defining it so that entities are able to consistently distinguish between cash flows

from operating activities and those from investing activities.

Chapter 10 does not address whether amounts in operating, investing, or financing

activities should be reported on a gross or net basis. We suggest that adding guidance

similar to that in ASC 230-10-45-7 through 45-9.

Chapter 10 does not require the disclosure of interest or income taxes paid when the

indirect method is used. We believe that this information is generally readily available,

that it provides useful information to financial statement users, and that it should be

disclosed.

Re: Proposed Financial Reporting Framework for Small- and Medium-Sized Entities

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Chapter 11 — Business Combinations

The framework for business combinations is similar to the guidance in ASC 805.

Questions about ASC 805 frequently arise related to (1) valuation, (2) business

combinations with unusual structures, (3) determining what constitutes a “business,” and

(4) determining what constitutes part of an acquisition. Thus, the benefits to users of

adding the following guidance to the FRF for SMEs may exceed the cost of compliance:

Valuing assets and liabilities when applying the acquisition method of accounting.

Day-two testing of intangibles and goodwill for impairments.

While many SMEs have the means to measure the fair value of intangibles or reporting

units in related impairment analyses, such measurement often comes at a significant cost,

and it is unclear whether it results in decision-useful information for users.

Preparers often find it cumbersome to differentiate between adjustments to their

accounting for a business combination that should be applied retrospectively during the

measurement period and those that should not. They often assert that such adjustments

are immaterial to avoid the analysis and to avoid retrospectively adjusting their books.

Chapter 12 — Subsidiaries

In paragraph 12.03, it is unclear from the definition of “control” whether control is based

on voting rights or economics. In addition, the proposed definition seems to permit

structuring opportunities to avoid consolidation. We would suggest using a definition for

control that is similar to that used in IFRS for SMEs because such definition has proven to

be operational. Under IFRS for SMEs, control exists when the parent directly or indirectly

owns a majority of the voting rights; however, that presumption may be overcome if such

ownership does not constitute control in certain circumstances. In addition, this definition

of control differs from the definition in Chapter 11 of the Framework. We do not

understand the conceptual basis for such difference. Finally, we believe that the

definitions for subsidiary and control should be related; that is, a subsidiary should be

defined as an entity that another entity (i.e., parent) controls.

Chapter 13 — Consolidated Financial Statements and Noncontrolling Interests

It is not clear why this chapter only discusses consolidation after a business combination.

Consolidation events may occur outside of business combinations, and a subsidiary may

not necessarily meet the definition of a business.

The definition of consolidated financial statements in paragraph 13.04 is not consistent

with the definition of control in paragraph 12.03 (i.e., “[c]ontrol of an entity is indicated

by the ownership of more than 50 percent of the outstanding residual equity interests”); in

particular, the definition in 13.04 should refer to outstanding residual equity interests.

In paragraph 13.08, the phrase “any goodwill arising as a result of the investment” could

be interpreted to mean that only the acquirer’s share of goodwill is recognized. We

recommend clarifying whether it should be 100 percent or just the acquirer’s share. In

Chapter 11, paragraph 11.32 seems to indicate that 100 percent of goodwill is recognized

even when there is no noncontrolling interest.

Paragraphs 13.09, 13.10, 13.16, and 13.19 discuss intercompany balances. We

recommend combining these paragraphs into one section to make them easier to follow.

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Paragraph 13.25, which states that a “difference in the basis of accounting between a

parent and a subsidiary precludes the preparation of consolidated financial statements,”

may be wrongly interpreted to mean that a reporting entity is prohibited from

consolidating a subsidiary when that subsidiary applies a different basis of accounting.

We recommend clarifying that subsidiary financial statements prepared by using a

different basis of accounting should be converted to be consistent with the FRF for SMEs

as applied by the consolidating, parent entity. However, there may be situations that

warrant nonconsolidation, and it might be helpful for such situations (e.g., those in IFRS

10, Consolidated Financial Statements, related to cost/benefit considerations) to be

identified.

In paragraph 13.26, a practicability exception may be appropriate that permits a parent to

consolidate subsidiary financial information as of and for fiscal periods ending not more

than three months before the reporting entity’s balance sheet date. If such exception is

provided, we recommend proposing that entities disclose or adjust for material events

that occur during the intervening period.

Chapter 14 — Interests in Joint Ventures

Regarding paragraph 14.03, which defines certain terms used in Chapter 14, we note that:

The term “corporate joint venture” is used in the definition of “corporate joint

venture,” resulting in a definition that is not clear because the definition contains

words being defined. Under U.S. GAAP, a corporate joint venture is a corporation

owned by joint venturers frequently for the purpose of sharing risks and rewards. We

recommend that the TF clarify the definition of corporate joint venture in the FRF for

SMEs and consider using a definition similar to that in U.S. GAAP.

The word “proportionate” is used in the definition of joint control. We believe that

this could lead to confusion. Joint control exists when decisions about relevant

activities require unanimous consent of the parties sharing control.

The definition of “proportionate consolidation” refers to the extractive industry. To

avoid misunderstanding, the FRF for SMEs should also define “extractive industry.”

Paragraph 14.15 states that the consolidation method is one among several appropriate

accounting policy alternatives for accounting for an interest in joint ventures. However,

we believe that consolidation would not be a feasible choice because there is no one party

that has unilateral control over a joint venture.

We recommend that paragraphs 14.17, 14.20, and 14.21 include a discussion about the

contributions of a business to a joint venture and how to account for such contributions

under the FRF for SMEs.

Paragraph 14.23(c) states that liabilities from participation in a joint venture should be

presented separately in the income statement. It may be more appropriate to include this

in 14.22(c).

Chapter 15 — New Basis (Push-Down) Accounting

Push-down accounting is currently only required for SEC registrants that have met the

thresholds (it is optional for nonregistrants). In addition, SEC registrants may currently

choose whether to apply push-down accounting when between 80 percent and 90 percent

of the entity is acquired. We believe that the use of the “virtually all” threshold in the

FRF for SMEs (i.e., 80 percent or more of the entity is acquired) will result in more

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instances of push-down accounting being required for SMEs than for public companies.

It is unclear whether the benefits provided to users of private company financial

statements would exceed the costs of compliance. The EITF has an active agenda item to

consider push-down accounting. We believe that the AICPA should therefore wait for a

consensus on this issue before it provides any specific guidance.

In addition, we note that the definition of “control” in Chapter 11 is different from the

definition in Chapter 15. We believe this could lead to confusion and that the concept

underlying control should be defined consistently throughout the FRF for SMEs. Finally,

it is not clear whether the definition of control in this context should be solely based on

equity ownership.

Chapter 16 — Foreign Currency Transactions

We recommend clarifying that the scope of Chapter 16 includes (1) transactions of a

reporting entity that are denominated in a foreign currency and (2) financial statements

denominated in a foreign currency that are incorporated into the financial statements of a

reporting entity through consolidation, combination, or the equity method of accounting.

In addition, we recommend providing guidance on how to translate financial statements

denominated in a foreign currency that are incorporated into the reporting entity’s

financial statements. This may necessitate, among other things, amending the definition

of “reporting entity” to include reference to transactions entered into by an entity’s

subsidiary in a foreign currency.

We recommend eliminating paragraph 16.02 because the stated assumption that a

reporting entity prepares its financial statements in U.S. dollars and subsequent

references to U.S. dollars may lead to confusion. Instead, we recommend defining and

referring to a reporting entity’s “reporting currency.”

In defining the “temporal method,” paragraph 16.04 states that “nonmonetary items are

translated at historical exchange rates, unless such items are carried at market, in which

case they are translated at the exchange rate in effect at the balance sheet date” (emphasis

added). Although “market” is used throughout Chapter 16, it is not defined in that chapter

(in Chapter 18 it is defined as net realizable value). We believe that the guidance in

Chapter 16 should refer to nonmonetary items that are adjusted to market (e.g.,

inventories) and other nonmonetary items that are adjusted to fair value (e.g., intangible

assets) or another appropriate measure (e.g., goodwill reduced by an appropriate measure

of asset-group impairment losses) if such measures are stated or developed in terms of the

foreign currency.

Paragraph 16.07 states that to translate revenues and expenses, an entity should use the

exchange rate in effect on the transaction date; however, this approach may be costly and

time-consuming. We recommend permitting the use of an appropriate average of

exchange rates during the period in which the revenue and expense transactions occurred.

Paragraph 16.08 states that receivables and payables would be remeasured to U.S.

dollars. Paragraph 16.09 states that monetary items should be adjusted to reflect an

appropriate exchange rate. Other paragraphs state that balances or transactions

denominated in a foreign currency should be translated to U.S. dollars. We recommend

that the TF consistently use the term translate, or appropriate variants, throughout

Chapter 16 when referring to the translation of foreign currency denominated amounts.

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Paragraph 16.14 permits an entity to exclude exchange gains or losses arising from

investments in equity securities that are measured at fair value from its disclosure of

exchange gains or losses included in net income. We ask the TF to consider whether a

similar exclusion should be provided for exchange gains or losses arising from

impairment losses on other financial assets.

Chapter 17 — Nonmonetary Transactions

We recommend clarifying what is meant in paragraph 17.03 by a “group of monetary

transactions that represents a nonmonetary transaction in substance (that is, the exchange

of nonmonetary assets or services accomplished through the exchange of monetary

consideration),” which is part of the scope of Chapter 17. Clarifying language, an

example, or both could be used.

Monetary assets and liabilities are defined in 17.04, in part, as follows: “Money, assets to

be received, or claims to future cash flows” (emphasis added). Assets to be received

could include nonmonetary assets. We recommend clarifying that monetary assets to be

received are an example of a monetary asset.

Paragraph 17.05 states that an “entity should measure an asset exchanged or transferred

in a nonmonetary transaction at the more reliably measurable of the fair value of the

asset given up and the fair value of the asset received” (emphasis added). However, the

FRF for SMEs does not provide guidance on evaluating which of two or more

measurements is more reliable. Such guidance might include considering whether inputs

to the measurement are observable. We recommend providing additional guidance on

determining which among two or more fair value measures is more reliable under the

FRF for SMEs.

Chapter 19 — Investments

This chapter proposes that SMEs account for equity investments under the equity method

of accounting or the cost method. However, Chapter 32 proposes that investments in

equity instruments be measured at cost, less impairment, or at fair value with changes

recognized in net income if the investment is held for sale. Chapter 32 does not discuss

the equity method of accounting, which applies to equity investments that give the

investor significant influence over the investee in accordance with Chapter 19. We

recommend that the TF clarify the accounting for equity investments, which we believe

are the same as investments in equity instruments, by clarifying the scope of Chapters 19

and 32, by reorganizing these chapters, or by cross-referring to relevant guidance.

Paragraph 19.15(c) proposes that an investor recognize its share of losses in excess of the

carrying amount of its investment if, among other reasons, the investee seems assured of

imminently returning to profitability. We recommend that the TF clarify that the investor

should make this determination and should not simply accept the assurance of the

investee.

Paragraph 19.20 states that impairment losses should be measured by comparing carrying

value with the higher of (1) the present value of the cash flows expected to be generated

by holding the investment, discounted by a current market rate of interest appropriate to

the asset, and (2) the amount that could be realized by selling the asset as of the balance

sheet date. We believe that (1) the first measurement may not be a decision-useful

measure, (2) it may be inappropriate to use a measure that requires an entity to assume it

Re: Proposed Financial Reporting Framework for Small- and Medium-Sized Entities

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will hold the investment if that is not management’s intent, and (3) developing this

measure requires a high degree of subjectivity. In addition, we believe that fair value, or

(as a practical expedient) management’s best estimate of the amount that could be

realized by selling the asset, may be a more appropriate measure of an impaired equity

investment.

Chapter 20 — Property, Plant, and Equipment

We recommend clarifying that the amount of depreciation calculated in paragraphs

20.14(a) and 20.14(b) is for one year. Further, we recommend clarifying whether the

determination of which amount is greater should be made at inception or also in

subsequent periods, including periods after the recognition of an impairment-related write

down (see paragraph 20.26). We note, however, that requiring two different calculations

may add unnecessary complexity.

We ask the TF to consider whether it would be appropriate to include in paragraph 20.17

a practicability exception under which, similarly to a provision in paragraph 21.61, the

straight-line method of depreciation is deemed acceptable when the pattern of economic

benefit (or consumption) cannot be reliably determined.

Paragraph 20.24 permits the reversal of impairment losses recognized on plant, property,

and equipment (PP&E) in prior periods. We are concerned that such an approach is

inconsistent with the needs of SME financial statement users. We do not believe that an

increase in the value of previously impaired PP&E that is being held and used provides

decision-useful information related to an entity’s ability to meet its obligations or

EBITDA, which is commonly used in income-approach valuation models. In addition, it

is not clear what the conceptual basis would be for permitting impairment reversals in

certain cases (e.g., PP&E, cost method equity investments that are not held for sale) and

not in other cases (e.g., intangible assets).

Paragraph 20.39 refers to indefinite-lived intangible assets although such assets are

outside the scope of Chapter 20. In addition, paragraphs 20.23 and 30.16 refer to

indefinite-lived intangible assets evaluated in accordance with Chapter 21, although

paragraph 21.57 indicates that all intangible assets should be considered to have a finite

useful life under the FRF for SMEs. This inconsistency may lead to confusion.

If the TF continues to allow reversals in the FRF for SMEs, we recommend that

suggested disclosures include a discussion of the nature and amounts of impairment loss

reversals.

Chapter 21 — Intangible Assets

The definition of “useful life” in Chapter 21 differs from that in Chapter 20. We

recommend that the TF consider using one definition.

Paragraph 21.63 states that intangible assets should be tested for impairment in

accordance with Chapter 20; however, paragraph 20.23 states that the guidance in

Chapter 20 related to the impairment of long-lived assets does not apply to goodwill and

intangible assets accounted for under Chapter 21. It is not clear how an entity would

account for the impairment of goodwill or indefinite-lived intangible assets under the

FRF for SMEs; however, we believe that an entity applying the FRF for SMEs would not

classify any of its intangible assets as indefinite-lived.

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We recommend adding guidance on the presentation of impairment losses to paragraphs

21.69 and 21.70. Such guidance should indicate whether goodwill and intangible assets

are shown net of impairment or whether gross amounts for the carrying amount and

impairment are shown separately. Paragraph 21.73 may also need to be adjusted

accordingly.

Paragraph 21.71 states that an entity should disclose, among other things, the

amortization method used, including the amortization period or rate. Because these

disclosures could differ for each intangible asset or for classes of assets, we recommend

(1) clarifying whether the disclosures in Chapter 21 should be made for asset classes or at

a different level of aggregation and (2) providing guidance on the proper identification of

class or the alternative level of aggregation.

Chapter 22 — Leases

We do not believe that the exceptions listed in paragraph 22.02 are necessary because

“lease” is defined in paragraph 22.03 as the conveyance of the right to use a tangible

asset. However, other exceptions should be considered, including:

PP&E that is identified in an arrangement but is not the subject of a lease, because

fulfillment of the arrangement does not depend on the use of the specified PP&E.

Inventory (including equipment parts inventory) and minerals, precious metals, or

other natural resources, because such assets are not depreciable.

Regarding the definitions in paragraph 22.03:

The definition of “bargain purchase option” is different from that in paragraph

22.06(a).

The first and second bullet in the definition of “fair value” indicate that fair value

could be greater or less than carrying value simply as a result of either (1) prevailing

market conditions at lease inception or (2) a lapse in time between the date of

acquisition of the property by the lessor and lease inception. The paragraphs could

be interpreted as implying that property is impaired whenever it is subject to a lease.

We recommend clarifying the language to avoid confusion.

It may be helpful to define “sublease” in Chapter 22.

While the criteria in paragraphs 22.04 through 22.13 for determining whether a lease is a

capital or an operating lease are consistent with U.S. GAAP, we believe that certain

clarifications should be provided:

The definition of bargain purchase option in paragraph 22.06 should be consistent

with that in paragr`aph 22.03.

The guidance in paragraph 22.06(b) should be expanded to include guidance on the

treatment of assets that are leased near the end of their useful life.

Paragraph 22.06 should be expanded to include guidance on the appropriate

allocation of amounts to a leased asset that includes both land and buildings.

Paragraph 22.11 should be modified to read, “A renewal, an extension, or a change

in the provisions of an existing lease that was not contemplated in the original lease

agreement should be considered treated as a new lease . . . .”

Paragraph 22.12 should be expanded to discuss the treatment of operating leases

being replaced by a capital lease.

Paragraph 22.13 should be expanded to add guidance on (1) the replacement of an

operating lease with a capital lease, (2) the replacement of a capital lease with

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another capital lease, and (3) the replacement of an operating lease with another

operating lease.

The beginning of the first sentence of paragraph 22.24 should be modified from “Because

most operating leases are short term” to “Because of the nature of operating leases.” As

currently written, it may be inferred that most operating leases are “short term,” which

may or may not be the case (e.g., property with a 20-year life that may be leased for 10

years would not be short term).

Paragraph 22.30(b) should be amended as follows: “the cost or carrying amount if

different, of the leased property.”

The last sentence of paragraph 22.35 should be amended as follows: “The remaining

unearned income should be.”

Paragraph 22.38 should be amended as follows: “The cost of sale recognized at the

inception of the lease is the the cost or carrying value, if different, of the leased

property.”

The following changes should be made to the impairment guidance in paragraphs 22.46

through 22.50:

The first sentence in paragraph 22.46 should include the words “direct financing

leases” and “operating lease receivables (the lease asset).”

Paragraph 22.49(b) should state, “by selling the lease at the balance sheet date net of

disposal costs.”

Paragraph 22.49(c) should be deleted because it does not accurately reflect the value

of the asset or asset group in question.

The guidance in the FRF for SMEs on leases of land and buildings is limited; therefore,

guidance should be added on (1) leases of equipment and real estate, (2) leases of both

land and buildings, and (3) leases of only part of a building.

The guidance in the FRF for SMEs on related-party leases should include recognition,

measurement, and presentation and disclosure requirements.

Chapter 23 — Equity

Paragraphs 23.27 and 23.28 discuss disclosures related to stock-based compensation

plans. However, the FRF for SMEs does not provide clear and explicit guidance on the

accounting for such plans and indicates that an SME applying the Framework would not

recognize an expense for awards under such plans. Because there are income tax

consequences related to such plans and suggested disclosures, we recommend that the TF

include explicit guidance on the accounting for stock-based compensation or its exclusion

from the financial statements, and we recommend making the selected approach

consistent with the conceptual framework underlying the FRF for SMEs.

Chapter 25 — Commitments

The guidance on commitments lacks specificity about what should be disclosed. It would

be helpful if examples were provided, such as (1) unused letters of credit, (2) long-term

leases, (3) assets pledged as collateral or security for loans, and (4) other types of

obligations (e.g., purchase commitments, asset acquisition commitments). Disclosures

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about commitments expected to be settled in each of the next five years might also

benefit SME financial statement users.

Chapter 26 — Contingencies

Paragraph 26.06 notes that the term “probable” indicates that the “chance of the

occurrence (or nonoccurrence) of the future event(s) is high” (emphasis added). Use of

the word “high” in defining probable introduces a concept that is not present in U.S.

GAAP, which uses the word “likely” in its definition of probable. Further, such definition

is inconsistent with the guidance in paragraph 26.12, which requires a probable loss to be

reduced (or avoided) when an entity has a claim against a third party or a counterclaim

against a plaintiff as long as the success of such claim is not “less than likely” to occur.

Thus, we suggest that the definition of the term “probable” specify that “the chance of the

occurrence (or nonoccurrence) of the future event(s) is likely.”

Paragraph 26.30 allows the effect of possible new legislation to be taken into

consideration when an entity measures an asset retirement obligation (ARO) when that

entity has objective evidence that the legislation is virtually certain to be enacted. That

paragraph goes on to state that in many cases, objective evidence will not exist until the

new legislation is enacted. Under U.S. GAAP, entities do not have a legal obligation to

recognize an ARO until new legislation is enacted. Accordingly, entities may incur

additional cost by using the Framework because they would be required to determine

whether there is objective evidence that new legislation may be passed. We therefore

suggest that this paragraph be modified to state that the effect of new legislation is taken

into consideration in the measurement of an existing obligation “when the new legislation

is enacted.” Any new legislation that is enacted after the balance sheet date but before the

financial statements are issued would be subject to subsequent-event disclosure as

required by Chapter 24 of the FRF for SMEs .

Paragraph 26.31 states that a “present value technique is often the best available

technique with which to estimate the expenditure required to settle the present obligation

[of an ARO] at the balance sheet date.” However, Chapter 26 does not contain guidance

on what discount rate entities should use in calculating such present value. Under U.S.

GAAP, a credit-adjusted risk free rate must be used to discount expected cash flows. We

suggest that Chapter 26 include guidance on the appropriate rate to use in discounting

expected cash flows.

Chapter 26 does not include guidance on the derecognition of a liability or an ARO. We

suggest that the chapter include a discussion that is similar to those in ASC 405-20-40-1

through 40-2 and ASC 410-20-40-1 through 40-3.

Chapter 27 — Revenue

Paragraphs 27.08 through 27.10 list factors that management should consider when

determining whether performance can be regarded as achieved (i.e., whether the criteria

in 27.07 have been met). U.S. GAAP and IFRSs contain guidance on each of these

factors to help entities make consistent judgments about whether to recognize revenue.

Without guidance on these factors, users of the FRF for SMEs (or their auditors) may

have difficulty consistently making sound professional judgments that are cost effective.

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Paragraph 27.11 states that “separately identifiable components of a single transaction”

may need to be accounted for separately “in order to reflect the substance of the

transaction.” However, the Framework does contain guidance on how contract

consideration should be allocated among separate components. The Framework should

include a principle for allocating contract consideration among separately identifiable

components of a single transaction as well as examples of allocation techniques.

Other topics we suggest the TF consider addressing in the FRF for SMEs include

consideration (including sales incentives) given by a customer, accounting for contract

claims (for a construction-type and production-type contract), provisions for losses on

certain types of contracts, a customer’s option for additional goods or services that

includes a significant incremental discount, use of a residual allocation method (e.g.,

software contracts), costs to obtain and fulfill a contract, warranties, and nonrefundable

up-front fees.

The chapter refers to a “reasonable assurance” threshold but does not define this term. In

comment letters on the FASB’s and IASB’s revised exposure draft on revenue

recognition, respondents noted that the term “reasonably assured” may have inconsistent

meanings under U.S. GAAP, IFRSs, and certain auditing literature, which could result in

inconsistent application. We therefore suggest that this term be defined so that it can be

consistently applied. Similarly, guidance should be added to paragraph 27.21 on (1) when

consideration is determinable within “reasonable limits” and (2) when future returns are

sufficiently “predictable” (i.e., definitions of “reasonable limits” and “sufficiently”

predictable).

Chapter 28 — Retirement and Other Postemployment Benefits

Paragraph 28.06 defines an “expected future benefit,” which implies that implementation

guidance for the FRF for SMEs will include an asset “ceiling test.” Because such test

could confuse financial statement users or mislead them, we recommend that it not be

included in the FRF for SMEs.

Paragraphs 28.17 through 28.20 describe the “current contribution payable” method.

Excluding the net defined benefit plan obligation from the balance sheet would result in a

presentation that is inconsistent with the faithful representation of the entity’s obligation

to provide future benefits in exchange for employees’ current service, and it reduces

transparency. The current contribution payable method conflicts with basic principles for

retirement and postemployment benefits as outlined in paragraph 28.07, which states that

“an obligation for retirement and other postemployment benefits possesses all the

characteristics of liabilities.” We note that when entities use the current contribution

payable method, paragraph 28.20(b) nevertheless requires information about the funded

status of the plan (i.e., actuarially determined benefit obligation less plan assets) to be

disclosed. Since the cost and complexity of measuring the obligation is not alleviated, we

do not believe there is a sufficient rationale for allowing SMEs to exclude the funded

status of the plan from the balance sheet. In addition, providing SMEs with an accounting

policy choice between two methods that potentially would have a materially different

impact on the balance sheet will reduce comparability among similar entities.

Paragraph 28.17(b) refers to multiple accrued benefit obligation methods that will be

available under the accrued benefit obligation approach. Providing SMEs with a choice

of different methods may reduce comparability of entities. In addition, financial

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statement users may not be familiar with the various actuarial methods that may be

allowed.

Regarding paragraph 28.22, although inherent complexities warrant providing

implementation guidance to assist SMEs in their recognition, measurement, and

disclosure of defined benefit plan obligations, we believe that the FRF for SMEs itself

should prescribe (1) the permitted accrued benefit obligation attribution methods, (2) the

principles for determining the related assumptions to be used, and (3) the related

disclosure requirements. Since the various accrued benefit obligation methods being

proposed have not been fully described in the Framework, we cannot comment on the

acceptability of those methods.

Chapter 29 —Income Taxes

Since paragraphs 29.41 and 29.42 are repetitive, paragraph 29.41 could be deleted.

Paragraphs 29.48 and 29.50 state that income tax liabilities and income tax assets should

“normally” be measured by using the tax laws and rates that have been enacted as of the

balance sheet date. We suggest that the word “normally” be removed from these

paragraphs because the chapter does not include guidance on when an entity should use a

rate or law other than those enacted as of the balance sheet date.

Paragraph 29.72(c) requires disclosure of the “amount and timing of capital gain reserves

and similar reserves to be included in taxable income within five years.” The phrase

“capital gain reserves” is not a commonly known phrase. We therefore suggest that this

disclosure requirement be revised to more clearly state its intent.

The chapter does not contain guidance on how to account for uncertainty about whether a

position an entity takes (or is expected to take) in a tax return will be sustained upon audit

by the taxing authority. Possible solutions would be to add language based on the

guidance in ASC 740 on uncertain tax positions or to specifically state that a liability for

such uncertainties should be accounted for in accordance with Chapter 26 of the FRF for

SMEs.

The chapter does not provide guidance on accounting for the income tax effects of share-

based payment awards. We suggest that the TF consider adding such guidance.

Chapter 30 — Disposal of Long-Lived Assets and Discontinued Operations

Paragraph 30.22 states that “[c]urrent and long-term assets (and liabilities) are presented

separately unless the entity’s balance sheet is unclassified.” However, for assets and

liabilities of a disposal group to be classified as held for sale, it must be probable that the

long-lived assets will be sold within one year. We recommend clarifying in Chapter 30

whether it would be appropriate to classify assets held for sale as noncurrent.

Paragraph 30.28(b) states, as a condition for reporting the results of operations of a

disposed or held-for-sale component, that “the entity will not have any significant

continuing involvement in the operations of the component after the disposal

transaction.” However, we understand that the FASB has tentatively decided to eliminate

this criterion from U.S. GAAP, observing that it is applied or interpreted inconsistently

and is difficult to apply.

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Chapter 32 — Financial Instruments and Long-Term Debt

As noted in our comments on Chapter 19, the guidance in Chapters 19 and 32 could lead

to confusion about the accounting for equity investments. We recommend clarifying

relevant guidance by reorganizing these chapters, refining the scope of each chapter, or

adding cross-references to such guidance.

Paragraph 32.11 proposes, among other things, that all financial assets other than equity

instruments be subsequently measured at amortized cost. We do not understand the

conceptual basis for this principle. Specifically, we are concerned that measuring

derivatives or debt-instrument financial assets held for sale at amortized cost may not

provide SME financial statement users with decision-useful information.

Paragraph 32.13(c) refers to conversion value and intrinsic value. However, these values

are not defined in the FRF for SMEs, and we are unclear about how such measures would

be applied to financial liabilities indexed to a measure of the entity’s financial

performance or changes in the entity’s equity value.

Paragraph 32.16 proposes guidance on impairment of financial assets that is similar to the

impairment guidance proposed in paragraph 19.20 for equity investments. We are

concerned that the guidance in paragraphs 32.16(a) and 19.20(a) may result in

measurement of impaired financial assets that is misleading to SME financial statement

users.

Paragraph 32.21 states that acceptable methods of initially measuring separate liability

and equity components of instruments include measuring the equity component as zero or

applying the residual method. However, the FRF for SMEs does not state the conditions

under which these methods might be acceptable.

Paragraph 32.23 states that an “entity should derecognize receivables transferred to

another entity only when control has been surrendered” (emphasis added). However,

“control” is not defined in Chapter 32 or elsewhere in the context of financial assets.