Webinar Slides: 2014 Second Quarter Accounting and Financial Reporting Issues Update

CBIZ & MHM Executive Education Series™ 2014 Second Quarter Accounting Update

Presented by: James Comito, Mike Loritz, Mark Winiarski and Steve Henley

June 26, 2014 July 24, 2014

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Before We Get Started…

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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 service provider to further discuss the impact on your business.

Disclaimer

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Today’s Presenters James Comito, CPA Shareholder, MHM 858.795.2029 | [email protected] A member of MHM’s Professional Standards Group, James has expertise in all aspects of revenue recognition, business combinations, impairment of goodwill and other intangible assets, accounting for stock-based compensation, accounting for equity and debt instruments and other accounting issues. Additionally, he has significant experience with a variety of other regulatory and corporate governance issues pertaining to publicly traded companies, including all aspects of internal control. In addition, James frequently speaks on accounting and auditing matters at various events for MHM.

Mike Loritz, CPA Shareholder, MHM 913.234.1226 | [email protected] Mike has 18 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.

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Today’s Presenters Mark Winiarski, CPA Senior Manager, CBIZ MHM 913.234.1656 | [email protected] Mark has 12 years of experience in an audit and advisory function and is located in our Kansas City office. In addition to serving his clients which are primarily in the manufacturing, retail and distribution industries, Mark supports our Professional Standards Group by consulting with clients and engagement teams across the country on accounting and auditing issues in areas including revenue recognition, consolidations and business combinations.

Steve Henley, CPA National Tax Practice Leader, CBIZ 770.858.4443 | [email protected] Steve Henley is the National Tax Practice Leader for CBIZ. Steve's responsibilities include developing and implementing strategies for the successful operation of the tax practice, including national support for the CBIZ MHM's local tax practices through the National Tax Office.

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Today’s Agenda

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Financial Accounting Standards Board Update

Public Company Accounting Oversight Board Update

3 Federal Tax Update: • Foreign Reporting & Compliance • Alternative Simplified Research Credit • Capitalization v. Repair Regs: Partial Dispositions • Tax Extenders: Expired Business Provisions • Bonus Plans: IRS Focus

FASB UPDATE

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Revenue Recognition – The future is here! Lease Accounting – Continue to deliberate and expect a

final standard in 2015 Retain balance sheet presentation Discussing income statement approach Financing vs Straight line

Lessor model is not expected to change significantly Financial Instruments – No longer convergence and final

standard expected in 2014 Classification and Measurement – significant changes not expected Fair Value Option – Expected to be retained Impairment – Continue discussions/deliberations

Insurance – Targeted improvements

FASB - Convergence Projects

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Basic Observations The new guidance utilizes a contract-based approach that

places the focus on the assets and liabilities that are created when an entity enters into and performs under a contract.

While some of the concepts and principles in the new guidance are similar to existing guidance, others may change existing practice leading to changes in the amount and timing of revenue recognized.

While not overly complicated, the scope of the standard will require significant investment in time to understand and become comfortable with both the underlying principles and terminology.

Revenue Recognition – The Future has Arrived

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An entity shall apply the guidance in Topic (606) to a contract only if the counterparty to the contract is a customer. A customer is a party that has contracted with an entity to obtain goods and/or services that

are the output of the entity’s ordinary activities.

Excluded activities: Lease contracts within the scope of Topic 840

Insurance contracts within the scope of Topic 944

Certain financial instruments and other contractual rights or obligations within the scope of other topics, examples include: Topic 323, Investments – Equity Method and Joint Ventures and Topic 815, Derivatives and Hedging

Guarantees

Nonmonetary exchanges between entities in the same line to business to facilitate sales to customers or potential customers

Revenue Recognition – Scope

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Core principle: The core principle of the guidance is that an entity should recognize

revenue to depict the transfer of promised goods, or services, to customers in an amount that reflects the consideration to which the entity expects to be entitled, in exchange for those goods or services.

Five steps to apply the core principle: 1. Identify the contract(s) with a customer. 2. Identify the performance obligations in the contract. 3. Determine the transaction price. 4. Allocate the transaction price to the performance obligations in the

contract. 5. Recognize revenue when (or as) the entity satisfied a performance

obligation.

Revenue Recognition

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Basic Observations On the surface, the five-step process does not seem overly

complex and arguably, it appears to include much of what is currently done to determine revenue recognition.

However, each of the five steps will require significant judgments by management and auditor in applying the underlying principles included in the new guidance.

The transfer of “control” to the customer becomes the driving issue in evaluating the appropriateness of revenue recognition under the new guidance. Currently, the evaluation of “risk and reward” often drives the

determination of revenue recognition. While it remains an important consideration, it is no longer determinant under the new guidance.

Revenue Recognition

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Disclosures The objective of the disclosure requirements (Topic 606) is for

an entity to disclose sufficient information to enable users of financial statements to understand the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers. The disclosure requirements found in the new revenue recognition

guidance are significantly in excess of what is currently required under U.S. GAAP.

Revenue Recognition

One of the most controversial disclosure requirements is for the disaggregation of revenue.

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Effective Date of Adoption (Public Entity) For a public entity, annual reporting periods beginning after

December 15, 2016, including interim periods within that reporting period. Early application is not permitted.

For all other entities (nonpublic entities), annual reporting periods beginning after December 15, 2017, and interim periods within annual periods beginning after December 15, 2018. Early application is permitted for periods beginning after

December 15, 2016.

Revenue Recognition

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ASU 2014-07 – Accounting Alternative for VIEs A qualifying private company may elect to not apply the VIE

model to leasing entities when: The lessor entity and the private company are under common

control The private company has a lease arrangement with the lessor

entity Substantially all the activity between the two entities is related to

the leasing activities between the two entities, and The value of the asset leased by the private company must be

greater than any obligations, secured by the asset, that are guaranteed or collateralized by the private company

Commonly Controlled Leasing Entity

Election applies to all qualifying leasing arrangements

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An adopting company must apply other U.S. GAAP to a qualifying lessor entity. Other consolidation guidance Lease accounting Accounting for guarantees Accounting for joint and several obligations Accounting for investments Related party disclosures

Commonly Controlled Leasing Entity

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Effective for periods beginning after December 15, 2014 but may be elected early

Must apply the retrospective approach Deconsolidation, if required, for all periods presented Apply the impact of deconsolidation and other applicable GAAP

to beginning equity

Commonly Controlled Leasing Entity

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Implementation Challenges Evaluating the impact of the adoption on financial

covenants, contracts and expectations of users of the financial statements

Evaluating whether the value of the collateral property is greater than the principal of a debt obligation of the lessor guaranteed by the reporting entity

Computing the impact of other applicable US GAAP over multiple periods

Commonly Controlled Leasing Entity

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Implementation Challenges: The SEC staff concluded common control exists when: An individual or enterprise holds more than 50 percent of the voting

ownership of each entity A group of shareholders holds more than 50 percent of the voting

ownership of each entity and have contemporaneous written evidence of an agreement to vote a majority of the entities’ shares in concert exists

Immediate family members (i.e. married couples and their children, but not their grandchildren) hold more than 50 percent of the voting ownership interest of each entity…and there is no evidence those family members will not vote their shares in concert.

Commonly Controlled Leasing Entity

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The FASB and PCC have said that the definition of common control is broader then the SEC interpretation

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Discontinued Operations

ASU 2014-08 – Discontinued Operations Expands the scope, but increases threshold to meet

criteria for discontinued operations Eliminates scope exceptions except for oil and gas properties

accounted for under the full cost method To be discontinued operations a “strategic shift that has or

will have a major effect on an entity’s operations and financial results” must have occurred Will require more judgment!!

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Discontinued Operations

Expands disclosure requirements and cash flow information regarding discontinued operations

Adds required disclosures for individually significant components that do not qualify as discontinued operations

Effective for annual periods beginning after

December 15, 2014, (and interim periods therein for public business entities), but can be early

adopted for new disposals.

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ASU 2014-10 - Development stage entities Development stage entities:

Devote substantially all efforts to establishing a new business, and Have not commenced planned principal operations or have begun

operations but have not had significant revenues Eliminates inception to date presentation requirements and

disclosures Added additional risk disclosures for entities that have not

begun operations Removed guidance for development stage

entities from the VIE model

Development Stage Entities

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Effective dates

Development stage entities and disclosure changes are effective for annual periods beginning after December 15, 2014 (and interim periods therein for public business entities)

Variable interest entity modification is effective for periods beginning after December 15, 2015 for public business entities and annual periods beginning after December 15, 2016 for all others.

Development Stage Entities

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ASU 2014-11, Transfers and Servicing (Topic 860): Repurchases-to-Maturity Transactions, Repurchase Financings, and Disclosures

ASU No. 2014-12, Compensation – Stock Compensation (Topic 718): Accounting for Share-Based Payments When the Terms of an Award Provide That a Performance Target Could Be Achieved after the Requisite Service Period.

Exposure Draft: Business Combinations (Topic 805): Pushdown Accounting Comments Due July 31, 2014

FASB – Other Activities

PCAOB UPDATE

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New PCAOB Auditing Standard: Auditing Standard 18: Related Parties Requires specific audit procedures for:

Related party transactions Significant unusual transactions Financial relationships and transactions with executive officers

Effective for years beginning on or after December 15, 2014

PCAOB Update

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Other Projects: Audits of Brokers and Dealers

Proposal of Auditor’s Reporting Model and Auditor’s Responsibilities Regarding Other Information

Audit Transparency Project

Proposed Reorganization of PCAOB Auditing Standards

Staff Audit Practice Alert No. 11

PCAOB Update

FEDERAL TAX UPDATE

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Form 114 (Previously Form 90-22.1) US persons with a financial interest in or signature

authority over offshore foreign accounts > $10,000 at any time during the year

Must be received by June 30, 2014, for 2013 Electronic filing requirement Significant penalties apply for non-compliance

Foreign Reporting:

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Foreign Account Tax Compliance Act (FATCA) Became law in March 2010 Targets income earned offshore by specified US persons and enforces

tax compliance Imposes reporting, documentation and withholding obligations

Requires 30% withholding tax on “withholdable payments” Withholdable payment – Any payment of U.S.-source FDAP (fixed

or determinable, annual or periodic) income To non-compliant foreign entities Certain exceptions and exclusions apply

Foreign Reporting, continued:

FATCA is not just an issue for financial institutions!

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The nature and extent of any reporting obligations will be determined based on: The classification of the payor (US or non‐US) and its

FATCA status The documentation available with respect to the payee The nature of the payment Whether an Intergovernmental Agreement (IGA) exists

Many nonfinancial companies have complex international organizations that can include entities that are subject to information reporting.

Many operating units within a company’s organization may make or receive payments that are subject to information reporting and withholding.

FATCA: Impact on US-based Companies

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Most operating businesses classified as a NFFE (a foreign entity that is not a financial institution)

Unless payee exception applies, NFFE Must attest to information “under penalties of perjury” On a completed W-8BEN-E 30% withholding applies to any NFFE failing to provide info Payor/Withholding Agent (WA) responsible for collecting proper documentation and

determining withholding requirements Exemptions for low-risk payments:

Publicly traded foreign corporations and affiliates Non-financial holding companies Intercompany treasury and hedging centers Payments made in the ordinary course of the WA’s business (e.g., non-financial

goods/services; outstanding AP from acquisition of non-financial goods/services/use of property)

Active NFFEs Less than 50% gross income for preceding tax year is passive, and Less than 50% weighted average % of assets produce, or held for production of, passive income

Grandfathered obligations unless materially modified

FATCA: Non-Financial Foreign Entities (NFFE)

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Establish a scalable compliance program including the appointment of a responsible person

Identify sources of withholdable payments Implement new vendor onboarding procedures Design and implement a vendor due diligence strategy that includes

existing foreign vendors Develop a withholding solution or functionality Evaluate reporting infrastructure and anticipated needs Practically, the WA’s reliance on the exceptions will vary Collecting all W-8BEN-E forms may prove easier than determining

various exemptions

FATCA: Action Steps

FATCA compliance is important to Financial Statement Impact from a Due Diligence and FAS 5/Contingent Liability perspective!

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Effective July 1, 2014, FATCA imposes a 30% withholding tax on “withholdable payments” made to non-compliant entities

Unless the WA can reliably associate the payment with documentation for exemption

IRS Notice 2014-33: 2014 and 2015 will be regarded as a “transition period” to

extent rules were modified by temporary coordination regs For purposes of IRS enforcement and administration of the

due diligence, reporting, and withholding provisions IRS will consider whether FFIs, NFFEs or WAs have made

good faith efforts to comply

FATCA: Reporting deadlines

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New regulations allow taxpayers to use the ASC on amended returns

In cases where the taxpayer had not claimed the R&D credit for those years

Eliminates need to substantiate expenditures and costs for the base period

Revenue might have been too high to meet traditional threshold requirements in the past

ASC Calculation: 14% of qualified research expenses (QRE) that exceed 50% of the

average QRE for the 3 preceding years If no QRE for last 3 years, then credit is 6% of the current year QRE

Alternative Simplified Research Credit (ASC) on Amended Returns

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Under prior rules, if a taxpayer disposed of a portion of an asset (e.g., a roof that had been replaced), it had to continue to depreciate the old roof as well as the new one.

Under the proposed regulations, a taxpayer can elect to dispose of a portion of an asset. Common examples – roof, elevators, HVAC, engine of an

airplane May need a Cost Segregation study to determine cost basis

of disposed property but proposed regulations provide some simplified methods (CPI Rollback) to reasonably calculate

Write-offs should generate an ordinary deduction.

Partial Disposition Election

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The partial disposition provision is an annual election, i.e. generally only available in the year the asset is partially disposed of

Taxpayers have a limited opportunity to file an automatic accounting method change to make a late partial disposition election for assets partially disposed of in prior years.

Only available on 2012–2014 tax returns

Late Partial Disposition Election

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Client acquired a building on 3/1/03, depreciable over 39 years Client spent $781,000 to replace some elevators in 2012/2013

Partial Dispositions - Examples

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Facts

Client is making a late partial disposition election to write off

approx. $460,000 of undepreciated basis allocable to the original elevators

Should result in nearly $200,000 tax benefit (fed & state)

Results

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Review additions of real property (including land improvements) for additions in current and prior years.

Determine if these additions were improvements or replacements of already existing capitalized real property or land improvements.

If so, there may be a loss available under a partial disposition election.

Partial Dispositions – Action Steps

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“Tax extenders” refer to legislation to extend the package of expiring tax provisions that typically get temporarily extended by Congress. The extensions tend to be for short periods of time (e.g., one – two years).

Many feel that the extension of many of these provisions is being “tied” up by Congress as they await a more comprehensive tax reform.

Regarding tax reform: SFC Chair Wyden and Ranking Member Hatch reinforced

their commitment to overhauling the nation’s broken tax code through comprehensive tax reform.

Will hold a series of hearings beginning with education tax incentives, privacy issues and corporate taxation

“Tax Extenders” – Expiring Tax Provisions

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“Tax Extenders” – Expired Business Provisions

Business tax provisions that expired 12/31/13 include: Research and experimentation credit Work opportunity tax credit Increase in expensing to $500,000/$2,000,000 and expanded

definition of §179 property Bonus depreciation Exceptions under Subpart F for active financing income Look-through treatment of payments between controlled foreign

corporations (CFC) Special rules for qualified small business stock Reduction in S corporation recognition period for built-in gains tax 15-year straight line cost recovery for qualified leasehold,

restaurant, and retail improvements

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Extender Legislation

Senate Finance Committee approved the “Expiring Provisions Improvement Reform and Efficiency (EXPIRE) Act” Extends nearly all of the incentives through 2015 at a cost of

$85 billion Numerous extenders, including expanded WOTC, enhanced

employer credit for activated military reservists, exception under Subpart F for active financing income, look-through treatment of payments between controlled foreign corporations, extended 50% bonus depreciation to qualified property purchased and placed in service before 1/1/16, expansion of R&D tax credit, increase Sec. 179 expensing to 2013 levels ($500,000)

Also, modifies energy efficient commercial building deduction and extends several alternative and biodiesel incentives

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Extender Legislation, continued:

Senate Bill, EXPIRE, stalled in Senate on May 15; Sen. Harry Reid indicated that further action would likely wait until after the mid-term November elections.

But, Wyden proposed yesterday, June 25, to add these extenders to the Highway Bill; scheduled for markup today.

House approved the American Research and Competitiveness Bill of 2014: Permanently extends the R&D tax credit

House approved two bills to make permanent certain expired tax extenders: HR 4453, “America’s Small Business Tax Relief Act of 2014”:

Sec. 179 expensing: $500,000 allowance and $2 million investment ceiling Expensing of computer software Expensing of qualified real property (L/I, restaurant and retail improvement prop)

HR 4457, “Permanent S Corporation Built-in Gains Recognition Act of 2014”: The S Corp built-in-gain (BIG) holding period: Permanently reduces from 10 to 5 years the

period during which the BIG is subject to tax Basis adjustment rule for charitable contributions by S Corps; basis reduction limited to

pro-rata share of adjusted basis of contributed property

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Bonus Plans

IRS released guidance warning that many bonus plans may not be structured properly to allow deductibility of the bonus amounts in the year of accrual

Many bonus plans, while formula driven, do not meet the “fixed liability” test, and are subject to some action after year-end that disallows accrual.

Examples: Reservation of right to modify or cancel bonuses Required approval of bonus by comp committee after year-end Bonuses based on performance appraisals completed after

year-end Employers should review their bonus plans to determine if they

meet the tests for tax accrual as of year-end.

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Questions?

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Join us for these courses: 7/24: Repeat broadcast 8/6, 8/12 or 8/13: Quarterly Business Tax Update 9/11: Third Quarter Update 12/11: Fourth Quarter Update

Read these related publications: Development Stage Entities Removed From U.S. GAAP Final Revenue Recognition Standard Issued FASB’s Proposed Changes to the Reporting of Discontinued

Operations Accounting Election for Common Control Leasing Arrangements FASB Endorses Application of VIE Guidance to Common Control

Leasing Arrangements

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