2014 kansas city cfo breakfast series
DESCRIPTION
A copy of the presentation from the 2014 Kansas City CFO Breakfast Series.TRANSCRIPT
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2014 KC CFO Breakfast Series
Quarter 4: 2014 Accounting & Tax Update
October 30, 2014
PRESENTED BY: CBIZ & MAYER HOFFMAN MCCANN PC
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Agenda
• Welcome
• Tax Panel
– Tangible Property Regulations
– State and Local Taxes
– Tax Minimizing Strategies
– IRS Statistics & Other Interesting Tax Facts
• Accounting Updates
• Questions and Closing
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Don’t Try This At Home…
The information in this presentation is a brief
summary and may not include all the details
relevant to your situation.
Please contact your CBIZ MHM service provider to
further discuss the impact on your financial
statements.
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Tangible Property Regulations
Jo An Ketchum, Tax Director
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Today’s Agenda
1. Background and current developments
2. Opportunities under the Tangible Property
Regulations
3. Compliance with the Tangible Property Regulations
4. Nuances of the Tangible Property Regulations
5. Implementing the Tangible Property Regulations
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BACKGROUND & CURRENT
DEVELOPMENTS
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Background
• The IRS has long been interested in getting some clarity
in whether an expenditure related to tangible property
should be: – Capitalized: Fixed asset
– Deducted: Repair & maintenance or materials & supplies
• Tangible property includes real property (not just personal
property).
• Up until 2006, this area was driven by Court cases
• In 2006 and then in 2008, the IRS issued proposed
regulations which were highly criticized
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Timeline of Regulations & Guidance
2011
2012
2013
2014
December 2011
Temporary regulations issued
March 2012
Implementation guidance issued (Rev. Procs. 2012-19, 2012-20)
November 2012
Implementation delayed to 2014 (optional adoption in 2012/2013 permitted)
September 2013
Final regs. issued re: acquisition, production, improvements & repairs
Proposed regs. issued re: dispositions
January 2014
Implementation guidance on final regulations issued (Rev. Proc. 2014-16)
February 2014
Implementation guidance on proposed regulations issued (Rev. Proc. 2014-17)
August 2014
Final disposition regulations and related implementation guidance
Final rules
must be
followed
beginning
with 2014
tax years
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Why Are These New Rules Important
• Example actions required many taxpayers:
– Review and validate current capitalization policies.
• Critical for de minimis safe harbor
– Consider tax accounting method changes for 2014 along
with impact on taxable income.
– Consider annual tax return elections.
– Consider financial statement implications.
• Some book conformity required
• Effect on deferred taxes
– Evaluate materials and supplies accounting.
– Review prior year treatment of expenditures.
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OPPORTUNITIES UNDER THE
TANGIBLE PROPERTY
REGULATIONS
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Opportunities Under Tangible Prop. Regs.
Late Partial Disposition Election
Routine Maintenance Safe Harbor
De Minimis Safe Harbor
Previously Capitalized Repairs
Depreciation Review / Other
Beneficial Methods
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Partial Disposition Election
• 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 a cost
basis of disposed property, but regulations to provide
some simplified methods to reasonably calculate.
– Write-offs should generate an ordinary deduction.
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Late Partial Disposition Election
• 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.
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Partial Dispositions – Examples
• Client acquired a building on 3/1/03, depreciable over 39 years
• Client spent $781,000 to replace some elevators in 2012/2013
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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Partial Dispositions – Examples
• Group of several restaurants
• Client had made numerous replacements over several years – HVACs, roofs, signage, ceilings, flooring, etc.
• 10 – 12 replacements per restaurant
Facts
• 20 late partial disposition accounting method changes
• Cumulative write-off approx. $500,000
• Tax savings approx. $200,000
Results
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Partial Dispositions – Action Steps
• 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.
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Routine Maintenance Safe Harbor
• Maintenance taxpayer expects to perform more than
once during asset’s ADS class life (or 10-year period
of a building).
• Expenditures to keep unit of property in its ordinarily
efficient operating condition. – Example: Replacing parts
• Such expenditures can be immediately deducted.
• Automatic accounting method change to write off
routine maintenance expenditures capitalized in
previous years.
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Routine Maintenance Safe Harbor- EX.
• Client manufactured and transported water purification chemicals
• Containers used to store chemicals reconditioned 2 – 3 times during their class lives (new valves, liners, etc.)
Facts
• Automatic accounting method change to write off $1
million of previously capitalized costs
• $400,000 tax savings
Results
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De Minimis Safe Harbor
• De minimis safe harbor – an annual tax return
election that permits a taxpayer to currently deduct
otherwise capital expenditures (including materials &
supplies) if the taxpayer: – (1) has an “accounting policy” (as of the beginning of the tax
year) that treats as an expense for book purposes (a) property
that costs no more than a specified dollar amount, or (b) property
with an economic useful life of 12 months or less and
– (2) elects to apply that policy for book purposes
• “Safe Harbor” avoids the issue in an IRS
examination; however taxpayers can continue to
use higher amounts but do not have protection of
the safe harbor
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De Minimis Safe Harbor cont…
Taxpayer with AFS Taxpayer without AFS
Must have written capitalization
policy
Must have accounting procedures
(not required to be written)
Amount paid for property that does
not exceed $5,000 per invoice (or
per item as substantiated on the
invoice) is eligible
Amount paid for property that does
not exceed $500 per invoice (or per
item as substantiated on the
invoice) is eligible
• De minimis safe harbor – an annual tax return
election that permits a taxpayer to currently
deduct otherwise capital expenditures (including
materials & supplies) if the taxpayer:
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De Minimis Safe Harbor cont..
• If book policy is less than $5,000/$500 ceiling then
the lower amount is the amount allowed for tax
– Ex. Taxpayer with AFS has $2,500 capitalization policy-
Taxpayer can rely on the de minimis safe harbor for
property up to $2,500
• If book policy is more than $5,000/$500 ceiling then
the $5,000/$500 amount is the amount allowed for
tax
– Ex. Taxpayer with AFS has $10,000 capitalization policy –
Taxpayer can rely on the de minimis safe harbor for
property up to $5,000
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De Minimis Safe Harbor cont..
• The de minimis safe harbor is effective for tax years
beginning on or after 1/1/14.
– Since the de minimis safe harbor requires the policy to be
in existence at the beginning of the tax year, to utilize this
rule the policy needed to be prepared in 2013 for 2014 tax
years.
– Taxpayers without a policy on 1/1/14 should institute a
policy in preparation for 2015.
• No provision to apply safe harbor in earlier years
using an accounting method change.
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De Minimis Safe Harbor cont..
• Gather an understanding of the accounting policy
and determine if it satisfies the de minimis safe
harbor regulation – May need to modify policy to fit the regulation
• Ensure the book treatment is consistent with the tax
treatment for items under the dollar ceiling.
• Attach the annual election to the timely-filed tax
return.
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Deducting Previously Capitalized Repairs
• Under the new rules concerning improvements to tangible
property, taxpayers may have capitalized expenditures in
the past that can now be deducted as repairs
• An automatic accounting method change allows the
taxpayer to:
– Conform treatment of similar expenditures in the future to the new
definitions
– Write off prior year expenditures that had been capitalized but that
now qualify as repairs
Caution: Change goes both ways- could have to
capitalize expenditures previously deducted as repairs
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Depreciation Review
• Depreciation calculations have become increasingly
complex over the last 10 years due to: – 50% or 100% bonus depreciation
– Expanded Sec. 179 expensing election
– 15 year recovery for certain real property improvements
• A review of tax depreciation records may discover
situations where assets have been under-depreciated. – Natural extension of engagement to review fixed asset
records for partial dispositions, previously capitalized
repairs.
– May be able to catch up depreciation via automatic
accounting method change.
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NUANCES OF THE TANGIBLE
PROPERTY REGULATIONS
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Improvement and Unit-of-Property
• Improvements to buildings
– Determine if an expenditure to a building improves
the building structure itself or a building system:
• HVAC,
• Plumbing systems
• Electrical systems
• Escalators
• Elevators
• Fire protection and alarm systems,
• Security systems,
• Gas distribution systems
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Improvements & Unit-of-Property, cont.
• Improvements to personal property – Functional interdependence is the test – the placing in
service of one component is dependent upon the
placing in service of another component.
– For plant property there is a smaller level to consider;
need to measure the expenditure against each
component that performs a discreet & major function.
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Improvements to Tangible Property
• Critical tax compliance area
• What is a Capitalized Improvement vs. a Deductible
Expense?
Capitalized
Improvement
Betterment
Restoration
Adapt to New
or Different
Use
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Improvements, cont..
• Betterment: In general, an expenditure is a Betterment
and must be capitalized if it has a “material” impact on
the unit-of-property.
– Improves a material defect, is for a material addition, or a
material increase in capacity or quality.
• Restoration: In general, an expenditure is a Restoration
and needs to be capitalized if:
– It is for the replacement of a major component or returns the
unit-of-property to its ordinarily efficient operating condition after
its class life.
• Facts of Circumstances, no bright-line tests but many
examples in the Final Regulations.
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Improvements, cont..
• Restoration examples in the regulations provide some
interesting results of expenditures that do not need to be
capitalized:
– Replacement of 30% (3 out of 10 units) of HVAC units does not
involve a significant portion of the major component (all HVAC
units) or a large portion of the physical structure of the unit (the
HVAC system).
– Replacement of 30% of the wiring in a building electrical system
is not a significant portion of the major component (all the wiring)
or a large portion of the physical structure of the unit (electrical
system).
– Replacement of 40% of the sinks (not the piping) in a building
does not involve a significant portion of the major component (all
the sinks) or a large portion of the physical structure of the unit
(the plumbing system).
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Improvements, cont..
• Restoration examples continued
– Replacing 10% of the floors in a building does not involve
either a significant portion of the major component (all the
floors) or a large portion of the physical structure of the
building structure (the unit)
• On the other hand, replacing 40% of the floors in a building
does involve replacement of a significant portion of the major
component (all the floors)
– Replacement of 25% of the elevators in a building does
not involve a significant portion of a major component (as
each elevator does not perform a discrete and critical
function) or a large portion of the physical structure of the
unit (the elevator system)
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Improvements – Actions Steps
• Significant expenditures from prior years should be
reviewed: – Previously deducted expenditures: look at all open tax
years.
– Capitalized items: look at any fixed assets currently on the
tax depreciation records.
• Taxpayers can apply these new rules to prior year
expenditures – An accounting method change may be allowed whereby
the taxpayer can currently write off that capitalized amount
from the prior year since under these new rules it could be
a deductible expense (and vice versa).
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COMPLIANCE WITH THE
TANGIBLE PROPERTY
REGULATIONS
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Other Compliance Issues
• Other situations may require accounting method
changes:
– To capitalize improvements that don’t qualify as
repairs (or qualify for safe harbors) under new rules
– To conform to definition of, and rules for, materials
and supplies:
• Deducting incidental supplies in year purchased
• Deducting non-incidental supplies in year consumed
• $200 threshold (may not be necessary if using de minimis
safe harbor)
– To conform to unit of property definition
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Benefits of Filing Accounting Method
Changes under Current Guidance
• Automatic change
– No user fee
– Due with tax return vs. at end of tax year
• Audit protection for years prior to year of change.
• Waiver of scope limitations that typically apply to
taxpayers under exam or who have made similar
changes within last 5 years.
• Some positive & negative 481(a) adjustments don’t need
to be netted.
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IMPLEMENTING THE
TANGIBLE PROPERTY
REGULATIONS
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Strategic Tangible Property Analysis
• Comprehensive, multi-phase engagement to help
taxpayers comply with, and take advantage of, all
provisions of the tangible property regulations.
• Phases
– Assessment
– Detailed Analysis
– Implementation
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Timeline of Implementation January 1
Capitalization policy must be in place to use de minimis safe harbor
March 15 / April 15
2013 tax return filing deadline for early adopters of method changes / elections
September 15
Extended 2013 tax return filing deadline for early adopters of method changes /
elections
January 1
Capitalization policy must be in place to use de minimis safe harbor
March 15 / April 15
2014 tax return filing deadline for final adoption of method changes
September 15
Extended 2014 tax return filing deadline for final adoption of method changes
2014
2015
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Summary
• These rules may provide opportunities for tax
deductions.
– Requires analysis of various policies, procedures,
records…
– 2014 tax year is a must implementation year.
– Limited time to search for deductions for prior year
capitalized expenditures.
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Summary Cont.
• Some of these rules will require filing if one or more
Forms 3115 (Application for Change in Accounting
Method) or attach annual elections to their tax
returns.
• Form 3115 is used to request an Automatic Change. – Original Form 3115 is filed as an attachment to the
income tax return and a copy sent to the IRS.
• Critical to take advantage of the automatic change
provisions now to avoid risk of IRS making changes.
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The Time is NOW!
Expectation is that after the transition period
for making these changes (tax years
beginning 1/1/15) the IRS will begin heavy
examination activity in this area
Compliance is REQUIRED by the end of 2014
Some opportunities are for a LIMITED TIME only
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State and Local Taxes
Michael Moore, Managing Director
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State General Fund Balance
Kansas1 Missouri2
FYE 2009 66,492,000 1,258,241,000
FYE 2010 1,000 1,202,095,000
FYE 2011 227,911,000 1,415,751,000
FYE 2012 540,340,000 1,163,593,000
FYE 2013 764,786,000 1,446,419,000
FYE 2014 435,269,000 1,167,990,0003
1 Department of Administration accounting records with the Office of Chief Financial Officer,
Audit & Assurance, Finance Integrity Team.
2 Missouri Office of Administration, Division of Accounting, Fiscal Year Comprehensive Annual
Financial Reports (for each fiscal year noted).
3 Missouri Office of Administration, Division of Accounting, Financial Summary – All Funds –
June 30, 2014 (estimated).
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State Revenues (net) v. Budget (billions)
Actual Budget Variance Percent
Kansas1
FYE 2013 $6,341,125 $6,250,414 $90,711 101.45%
FYE 2014 $5,653,197 $5,986,481 ($333,283) 94.43%
FYE 2015
(September)
$1,350,571 $1,374,040 ($23,469) 98.29%
Missouri2
FYE 2013 $8,082,688 $7,691,700 $390,988 105.08%
FYE 2014 $8,003,289 $8,310,500 ($307,211) 96.30%
FYE 2015
(September)
$2,026,897 NA Increase of
$80 M from
PY
4.1%
Increase
1 Kansas Division of the Budget, Comparison Report (for each fiscal year noted)
2 Missouri Office of Administration, Division of Accounting, Fiscal Year Comprehensive Annual
Financial Reports.
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Population and Growth Projections
Kansas1 Missouri2
2000 2,688,824 5,596,687
2005 2,745,299 5,781,293
2010 2,853,118 5,979,344
2015 2,916,705 6,184,390
2020 3,003,691 6,389,850
2025 3,071,541 6,580,868
2030 3,137,345 6,746,762
1 U.S. Bureau of the Census, Statistical Abstract of the United States, various issues; Population
Division (2014); CEDBR, Wichita State University.
2 Missouri Office of Administration, Budget and Planning
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Unfunded Pension Liability (in billions)
Kansas Missouri
Moody’s (2013) 1 $2.8 $6.5
State Budget Solutions (2013) $32.9 $72.7
Milliman Public Pension Funding
Study (2012)
$9.2 $9.3
Harvard Kennedy School (2012) $25.7 $61.6
1 Moody’s Investors Service, Median Report: Adjusted Pension Liability Medians for US States, June 27, 2013.
2 State Budget Solutions, Promises Made, Promises Broken – The Betrayal of Pensioners and Taxpayers, September 3, 2013
3 Milliman, Inc., Milliman 2013 Public Pension Funding Study, 2013
4 Harvard Kennedy School, Mossavar-Rahmani Center for Business and Government, Underfunded Public Pensions in the United
States; The Size of the Problem, the Obstacles to Reform and the Path Forward, 2012
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Personal Income Tax Rates (2014)
Kansas Missouri
Married filed jointly ■ taxable income not
over $30,000: 2.7 %
■ taxable income over
$30,000: $810 plus
4.8% of excess over
$30,000
1½% on the first $1,000, plus
½% for every $1,000
increment up to $9,000.
Then 6% on Missouri taxable
income exceeding $9,000.
Residents, other ■ taxable income not
over $15,000: 2.7%
■ taxable income over
$15,000: $405 plus
4.8% of excess over
$15,000
Same for all individual
taxpayers.
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Kansas Income Exclusion
Kansas now provides a subtraction modification for three categories of
income. By allowing these three categories of income to be subtracted
from federal adjusted gross income to calculate Kansas adjusted gross
income, this income is made exempt from Kansas income tax (and they
are cumulative, not exclusive.
Categories are:
(1) income that is net profit from a business (e.g. “flow-through”);
(2) income from certain entities or of certain types; and
(3) farm income.
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Kansas Personal Income Tax Revenues
Actual1 Budget1 Variance
FYE 2012 $2,908,029,408 $2,955,000,000 ($46,970,592)
FYE 2013 $2,931,167,870 $2,862,181,000 $68,986,870
FYE 2014 $2,218,238,892 $2,525,000,000 ($306,761,108)
1st Qtr. 2015 $524,367,067 $578,000,000 ($53,632,936)
1 Kansas Division of the Budget, Consensus Revenue Estimates (for each fiscal period noted)
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STATE INCOME
APPORTIONMENT
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Nexus for State Income Tax
Nexus is the connection between the corporate activity and the taxing
state that allows the state to impose its taxes on an entity. Any one of
the following activities may establish nexus:
1) Owning or leasing property or employing capital or property in the
state;
2) Having employees in the state; or
3) Deriving income from sources in the state.
The Interstate Income Tax Act (P.L. 86-272) places restrictions on the
imposition of a state income tax (but not other taxes). It provides that
mere solicitation is not enough to establish nexus for corporate net
income tax purposes.
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Sourcing Sales of Tangible Personal
Property (TPP)
Delivery Address
State Imposes No
Income Tax
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Throwback Rule Implications
Many states provide that the sale of tangible personal
property that is shipped from an office, store, warehouse,
factory, or other place of storage within their jurisdiction is
“thrown back” to their state if the taxpayer is not taxable in
the state of the purchaser.
Sales to the United States government sometimes fall in
this category as well.
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Joyce v. Finnigan Implications
Throwback of sales is also complicated by reporting requirements of
combined filing unitary states and the definitions of “taxpayer”. Joyce
counts throwbacks on a separate company basis. Finnigan counts
throwbacks on a combined reporting or unitary method.
The terms "Joyce" and "Finnigan" come from two court cases in
California, Appeal of Joyce, Inc., Cal. State Bd. of Equalization, Nov.
23, 1966, Dkt. No. 66-SBE-070 and Appeal of Finnigan, Cal. State Bd.
of Equalization, Aug. 25, 1988, Dkt. No. 88-SBE-022, on reh'g, Jan. 24,
1990.
As a perfect example of complexity, California initially followed the
Joyce rule, then later switched to the Finnigan rule, then back to Joyce,
and effective January 1, 2011, back to Finnigan.
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Throwback Rule (TPP Sales)
Throwback Rule/
Finnigan
State Imposes No
Income Tax
Throwback Rule Not
Available
Throwback Rule/
Joyce
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Sourcing Sales of Services
Market Based
State Imposes No
Sales/Use Tax
Cost of Performance
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Industries with “Unique” Apportionment
• Airlines
• Construction Contractors
• Financial Institutions
• Insurance Companies
• Mutual Fund Service Providers
• Pipelines and Natural Gas
• Professional Sports
• Railroads
• Regulated Investment Companies
• Telecommunication Companies
• Trucking Companies
• TV and Radio Broadcasting
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NATIONAL SALES TAX
ACTIVITY
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Total State Spending by Fund Source1
1 State Expenditure Report, Examining Fiscal 2011-2013 State Spending, National Association of State Budget Officers
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Sales Tax Revenue v. Retail Sales
Retail Sales Sales Tax Percent
1990 2,000,000 154,000 7.70%
2000 3,287,537 252,147 7.67%
2010 4,307,947 344,522 8.00%
2012 4,869,032 378,288 7.77%
2013 5,066,255 392,715 7.75%
This chart provides U.S. retail sales and total sales tax collections.
Amounts are in millions of dollars and were taken from the U.S.
Bureau of the Census’ on-line information portal.
If the 8.00% rate average for 2010 is considered with the 2012 and
2013 retail sales, the result is a decline in sales tax revenue of
$11,198,773,600 and $12,665,637,500 respectively.
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Implications – Click Through Nexus
• A click-through nexus policy requires sales and use
tax be collected and remitted by out-of-state vendors
that compensate residents of that state for sales made
via links on their websites.
• Conclusions of nexus in this arena often ignore Due
Process, the Commerce Clause, various judiciary
rulings (state and federal) and sometimes the state’s
own statutes.
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“Click Through” Nexus (With Caveats)
Nexus
State Imposes No
Sales/Use Tax
Nexus May Exist
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Internet Tax Freedom Act (“ITFA”)
• Federal law passed in 1998 that prevents
federal, state and local governments from taxing
internet access (the service; not applicable for
sales occurring over the internet).
• Some states had already implemented sales/use
taxes on these types of transactions, and those
were grandfathered in.
• Current expiration is November 1, 2014…
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Marketplace and Internet Tax Fairness
Act (“MFA”)
• Passed in Senate in 113th Congress on 5/6/13.
Authorizes states to require that all sellers not
qualifying for the small seller exception to collect
and remit sales and use taxes on remote sales.
– Small Seller Exception – gross annual receipts in the
U.S. in the preceding year less than $1,000,000.
No other taxes are considered for this compliance. Not
passed in the House.
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Lame-Duck Session
• Senate Majority Leader harry Reid (D-Nev.) has
implied that he will do “whatever it takes to get that
done.”
• Supporters are trying to pair MFA and ITFA.
• Speaker John Boehner (R-Ohio) and House
Judiciary Committee Chairman Bob Goodlatte (R-
Va.) oppose MFA in its current form.
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Tax Minimization Strategies
Kathy Rhodes, Tax Managing Director
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Domestic Production Activities Deduction
(DPAD)
• Available to qualified taxpayers and limited to lesser
of 9% of taxable income or qualified production
activities income (QPAI) or 50% of W-2 wages
related to qualified production activities.
• Qualified Production Activities Income is equal to the
taxpayer’s domestic production gross receipts less
cost of goods sold and allocable other deductions.
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DPAD
• Domestic Production Receipts (DPGR)
– Derived from sale, lease, rental, license of qualifying
production property that is manufactured, produced,
grown or extracted by the taxpayer in whole or
significant part within the U.S.
– Construction of real property in the U.S. by a taxpayer
engaged in the active conduct of a construction trade
or business.
– Engineering or architectural services performed in the
U.S. with respect to the construction of real property
in the U.S.
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DPAD
• Qualifying production property (QPP) is any tangible
personal property, computer software or sound
recordings.
• Manufactured, produced, grown or extracted
(MPGE) includes: – Manufacturing, producing, growing, extracting, installing,
developing, improving and creating QPP.
– Making QPP out of scrap or salvage, as well as new raw
material.
– Cultivating soil, raising livestock, fishing and mining
minerals.
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DPAD
• The “in significant part” requirement is met if the
MPGE is substantial in nature, including relative
value added by the taxpayer.
– Safe harbor – if the taxpayers U.S. conversion costs
(direct labor and overhead) are 20% or more of the
total cost of goods sold.
– Overhead includes costs required to be capitalized
under UNICAP (263A).
– Does not include R&D.
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QPAI
• DPGR less COGS and allocable other costs.
• DPGR required to be calculated on an item-by-item
basis.
– Generally does not include receipts for the
performance of services, unless embedded services
and not charged for separately.
– All receipts can be DPGR if non-DPGR are less than
5% or total receipts.
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QPAI
• DPGR excluded receipts:
– Sales to related parties.
– Retail food and beverages.
– Gross receipts from sale, lease or rental of land.
– Gross receipts from services, except for embedded
services.
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Research & Development Credit
• Expired in 2013 – legislation pending to extend.
• Can claim on amended returns for prior open years.
• Is calculated separately for incremental credit and
credit for contract research payments.
• Component of general business credit so carries
back and forward.
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R&D Credit
• Calculated based on in-house research expenses and
contract research expenses.
• In-house research expenses include wages for
employees involved in research, supplies used in
research, and payments for computer time used in
research.
• Contract research expenses are paid to an unrelated
party to perform research and count at 65% of the cost.
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R&D Credit
• Qualified research expenditures
– Experimental or laboratory sense,
– For purpose of discovering information technical in
nature and to develop a new or improved business
component; and
– Substantially all of activities which constitute a
process of experimentation,
– Includes development of pilot model, process,
formula, invention or similar property.
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R&D Credit
• Incremental credit – 20% of qualified research
expenditures (QRE) over a base amount.
– Base amount is fixed base % times average of last 4
years annual gross receipts.
– Fixed base % is based on 1984-1988 if in existence.
– Fixed base % starts at 3% for startups after 1994 and
is calculated in later years.
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R&D Credit
• Alternative Simplified election – 14% of qualified
research expenditures exceeds 50% of the prior 3
year average qualified research expenditures.
• Annual election to claim smaller credit and no
reduction to R&D expense deduction.
• Tier 1 audit issue.
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Other Federal Credits
• Small Employer Health Credit (Sec. 45R)
– Eligible small employers with less than 25 employees
and meeting certain wage limitations and phases out
for more than 10 employees.
– Employer makes non-elective contribution to qualified
health plan (must be exchange in 2014).
– Only available for 2 consecutive years after 2013.
– Credit is generally 50% (30% for tax-exempts) of
amount paid to qualified health plan.
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Other Federal Credits (cont’d)
• Work Opportunity Credit – expired in 2013 but
legislation pending to reinstate.
• Qualified workers previously included veterans, ex-
felons, qualified SSI recipients, qualified needy
recipients, long-term out of work individuals and long-
term family assistance recipients.
• Consider continuing to qualify workers in classes that
qualify.
• Must be screened prior to starting work.
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Other Federal Incentives
• Section 179D – Energy Efficient Commercial
Buildings Deduction expired in 2013, but legislation
pending. – A deduction is available for energy efficient
commercial building property that meets certain 50%
or more energy reduction standards.
– Applies to interior lighting systems; heating, cooling,
ventilation or hot water systems; or the building
envelope.
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Other Federal Incentives (cont’d)
• Section 179D provides for a deduction up to $1.80
per square foot ($.60 per system if not all qualify as
energy saving).
• Deduction claimed by owner but must reduce
depreciable basis.
• However, can be claimed by designer of building on
certain government owned buildings.
• Subject to recapture rules.
• Can be claimed on amended returns.
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Interest Charge Domestic International
Sales Corporation (IC-DISC)
• Tax savings opportunity for domestic sellers of U.S.
manufactured, grown or extracted property for
foreign destination sales.
• Sale must be ultimately to a foreign destination.
– Distributors qualify.
– Sales to distributors who can provide details on
ultimate destination qualify for the manufacturer.
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IC-DISC
• IC-DISC must be a C corporation.
• Must make timely election.
• Must at all times meet certain requirements,
including:
– 95% of all sales are qualified export receipts
– 95% of all assets are qualified export assets
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IC-DISC
• IC-DISC is not taxable and shareholders are taxable
on distributions of the IC-DISC which allows for a
potential 20% tax savings.
• If accumulated income not distributed, can be
interest charge or can disqualify the IC-DISC.
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IC-DISC
• Savings achieved by manufacturer or distributor
paying commission to IC-DISC.
• IC-DISC does not pay tax and shareholder receives
taxable dividend distribution from IC-DISC.
• As a result, manufacturer/distributor gets a
deduction for commission at ordinary rates and
shareholder then has dividends taxed at dividend
rates – overall group saves up to 20%.
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IC-DISC
• Example
Manufacturer Total Sales $35,000,000 Manufacturer Foreign Sales $6,000,000
Manufacturer COGS 10,000,000 COGS for Foreign Sales 1,800,000
Manufacturer Wholly US
Expenses 3,000,000
Allocable Foreign Other
Expenses 3,428,571
Manufacturer Other Expenses 20,000,000 Foreign Taxable Income $771,429
Manufacturer Taxable Income $2,000,000
Commission Options
4% of Foreign
Sales $240,000
50% of Combined Profit $385,714
Potential Tax Savings $77,143
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Other International Considerations
• Companies expanding significantly and willing to
leave money off-shore can structure global
organization to lower overall global tax burden.
• Controlled foreign corporation planning.
– Certain income can be deemed repatriated
– Required reporting
• Other required foreign reporting considerations.
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State Incentives
• Both states attempting to reduce or restructure state
tax incentives.
• Kansas significantly revamped state incentives over
last several years and have eliminated or
reduced applicability of some programs.
• Missouri has consolidated some of its popular
incentive programs into one new program to
compete.
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State Incentives
• Promoting Employment Across Kansas (PEAK), provides for
potential retention of employee withholding by company if
certain requirements are met.
• High performance Incentive Program (HPIP) provides for
sales tax exemption and potential investment and
training credits to certain businesses significantly
expanding and paying greater than average wages to
employees.
• Employer health insurance contribution credit for certain
amounts paid on behalf of eligible employees for health
insurance in a small plan or contributions to HSA’s – C-
Corps only.
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State Incentives (Kansas cont’d)
• PEAK
– New employees of a Kansas qualified company
• New employees include relocated employees from out
of state
• Must be Kansas employees not leaving the state (i.e.
transportation or delivery)
• Greater than 20 hours per week
– Qualified company makes available to full-time
employees adequate health insurance and pays at
least 50% of the premiums
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State Incentives – Kansas (cont’d)
• HPIP – Employer must pay above average wages to its
employees.
– Make a significant investment in the training of
employees.
– Be either a manufacturer or able to document that
most of its sales are to Kansas manufacturers and/or
out-of-state businesses or government agencies.
– A headquarters or back-office operation of a national
or multi-national corporation can qualify.
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State Incentives - Missouri
• Missouri Works Program – Must be applied for before publicly announced,
employees hired, or any site work is started.
– Allows for employer retention of employee’s
withholding for a period of years if creates new jobs: • 10 or more new jobs and 90% or more of average
wage.
• 2 or more new jobs, 90% or more of average wage and
adding $100,000 of investment.
• 2 or more new jobs in enterprise zone, 80% or more of
average wage and $100,000 of investment.
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State Incentives – Missouri (cont’d)
• Missouri Works Training Program
– Train net new or existing employees (or both) over a
12 month period.
– Training topics should be job specific but can now
also include OSHA and customer service training.
– Capital investment should equate to 20% or more of
total request (e.g. $100k in investment for $20K
training grant request).
– Funding typically capped at $50,000 per project, with
average award of about $15,000 per project.
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IRS Statistics &
Other Interesting Tax Facts
Jeff Stolper, Senior Associate
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Number of Returns Filed
C or other Corp 2,248,000
S Corp 4,566,000
Partnership 3,683,000
Individual 145,996,000
Estate and Trust 3,192,000
Tax Exempt 1,463,000
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How Were They Filed?
• Paper – 10,036,510
• Electronically – 151,114,490
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Collections By Type of Tax
Business Income Taxes
Individual, Estate and Trust Income
Employment Taxes
Estate and Gift Taxes
Excise Taxes
Amount
$ 270,424,731,000
$ 1,250,130,812,000
$ 891,471,426,000
$ 18,782,819,000
$ 59,895,910,000
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Examination Coverage
• Types of Exams
– Correspondence Audit
– Office Audit
– Field Audit
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C Corp Returns
• Under $250,000 in assets – 0.8%
• $250,000 - $1,000,000 in assets – 1.3%
• $1,000,000 - $10,000,000 in assets – 1.5%
• Over $10,000,000 in assets – 15.8%
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Nontaxable Returns
• Partnership Returns – 0.4%
• S Corp Returns – 0.4%
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Individual Returns
• Less than $200,000 Total Income
– No Schedule C, E or F – 0.4%
– With Schedule C, E or F – 1.0%
• $200,000 - $1,000,000 of Total Income
– Non-Business Returns – 2.5%
– Business Returns – 3.2%
• Over $1,000,000 of Total Income – 10.8%
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QUESTIONS
???
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Accounting Update
Mark Winiarski, Senior Manager
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Agenda
• Financial Reporting Changes for 2014
• Private Company Accounting
• Look to the Horizon – Accounting in the Next Year
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FINANCIAL REPORTING
CHANGES FOR 2014
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New Standards Everywhere
• For calendar year end private companies, there are:
– Eight standard effective for December 31, 2014
financial statements.
– 15 standards effective for periods after December 31,
2014, but that can be early adopted.
– An additional two standards effective for periods after
December 31, 2014.
The standard setters are probably not done yet…
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Reclassifications from Accumulated
Other Comprehensive Income (AOCI)
• Private Companies will now be required to:
– Present parenthetically in the income statement or
disclose amounts that are reclassified in full from
AOCI to the income statement.
– Disclose information about items that are reclassified
to the balance sheet prior to affecting the income
statement, such as amortization of defined benefit
pension items.
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Internal Controls:
COSO 20 Years in the Making…
The 1992 COSO framework is superseded as of
December 15, 2014.
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Control Environment
Risk Assessment
Control Activities
Information &
Communication
Monitoring Activities
Update articulates principles of effective
internal control 1. Demonstrates commitment to integrity and ethical values
2. Exercises oversight responsibility
3. Establishes structure, authority and responsibility
4. Demonstrates commitment to competence
5. Enforces accountability
6. Specifies suitable objectives
7. Identifies and analyzes risk
8. Assesses fraud risk
9. Identifies and analyzes significant change
10. Selects and develops control activities
11. Selects and develops general controls over technology
12. Deploys through policies and procedures
13. Uses relevant information
14. Communicates internally
15. Communicates externally
16. Conducts ongoing and/or separate evaluations
17. Evaluates and communicates deficiencies
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Update describes important characteristics
of principles, e.g.,
• Points of focus may not be suitable or relevant, and others may be
identified
• Points of focus may facilitate designing, implementing, and conducting
internal control
• There is no requirement to separately assess whether points of focus are in
place
Control Environment 1. The organization demonstrates a commitment to
integrity and ethical values.
Points of Focus:
• Sets the Tone at the Top
• Establishes Standards of Conduct
• Evaluates Adherence to Standards of Conduct
• Addresses Deviations in a Timely Manner
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Update describes how various controls
effect principles, e.g.,
Control Environment
1. The organization demonstrates a commitment to integrity and
ethical values.
Component
Principle
Controls
embedded in
other
components
may effect this
principle
Human Resources
review employees’
confirmations to
assess whether
standards of conduct
are understood and
adhered to by staff
across the entity
Control Environment
Management obtains
and reviews data
and information
underlying potential
deviations captured
in whistleblower hot-
line to assess quality
of information
Information &
Communication
Internal Audit
separately evaluates
Control Environment,
considering
employee behaviors
and whistleblower
hotline results and
reports thereon
Monitoring Activities
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• If 1992 Framework has been appropriately applied to each of
the five components of internal control, the transition should
not result in significant changes or incremental efforts.
• Mapping of principles to controls (using points of focus) may
reveal “gaps” in design.
• A fresh look may reveal opportunities to re-design or remove
controls to enhance effectiveness or efficiency.
• Points of Focus should assist in the mapping, evaluation and
controls identification process.
If you use COSO…
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PRIVATE COMPANY
ACCOUNTING
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Private Company Accounting Alternatives
within US GAAP
The Private Company Council (PCC) has two principal
responsibilities:
The PCC will determine whether exceptions or modifications to existing non-governmental U.S. Generally Accepted Accounting Principles (U.S. GAAP) are required to address the needs of users of private company financial statements.
The PCC will serve as the primary advisory body to the Financial Accounting Standards Board (FASB) on the appropriate treatment for private companies for items under active consideration on the FASB’s technical agenda.
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Without the Alternative
• Goodwill is indefinitely lived
• Three-step impairment test
performed annually at the
reporting unit level:
1. Optional qualitative
assessment
2. Fair value test of the
reporting unit
3. Measurement of
impairment loss
With the Alternative
• Elect to amortize goodwill
• 10 year period (or shorter)
• Amortize all goodwill
• Simplified impairment test
only if a triggering event
occurs
• Elect to perform the
impairment test at the
entity or reporting unit
level
ASU 2014-02 Accounting for Goodwill
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• Must amortize all goodwill, including goodwill arising from an equity method investment.
• Must elect whether to perform an impairment test at the entity or reporting unit level.
• Must determine the amortization period.
• Evaluate whether an impairment test is required for the year of adoption.
• Additional disclosure.
Goodwill - Requirements and Elections
117
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Goodwill - Implementation Challenges
Evaluating the impact of amortization on covenants and other contracts
Determining the amount of goodwill related to an equity method investment
Allocating the impairment loss when it occurs
Potential reversal of the election if your company no longer qualifies as a Private company as defined for accounting purposes.
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U.S. GAAP Today
• Contemporaneous
documentation of the
hedge
• Required effectiveness
testing
• Fair value
With the Alternative
• Documentation of six
criteria before the end of
the reporting period
• Elect to record and
disclose the swap at
settlement value instead
of fair value
ASU 2014-03 Simplified Hedge Accounting
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The standard may be adopted for interest rate swaps that meet the following criteria:
1. Debt (hedged cash flows) and swap use the same index and reset period.
2. “Plain-vanilla” swap, any floor or cap on the variable interest rate of the swap must be comparable to the same term in the debt.
3. Re-pricing and settlement match or differ by no more then a few days.
4. Fair value of the swap at inception is at or near zero.
5. Swap notional value is equal to or less then the principal of the related debt.
6. All interest payments occurring on the borrowing during the term of the swap are designated as hedged whether in total or in proportion to the amount being hedged.
Simplified Hedge Accounting - Requirements
120
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Swaps - Implementation Challenges
121
Must meet very specific criteria to use this accounting alternative. Only allowed for certain plain-vanilla interest rate swaps
If entity plans on changing the instrument or major terms of the instrument in the future, should think about whether this alternative should be elected
The election may need to be reversed if an entity becomes a public entity
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Variable Interest Entity and Common Control
Leasing Arrangements (ASO 2014 -01)
• The accounting alternative permits the following:
– A qualifying private company does not have to evaluate a
qualifying lessor entity for consolidation under the VIE model.
– The alternative is applied to all qualifying lessor entities.
– Applied retrospectively -> restate prior financial statements for
the effect of the election.
– Include enhanced disclosures.
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Requirements:
– 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
– If the private company explicitly guarantees or provides
collateral for obligations of the lessor entity, then the principal
amount of the obligation must be less then the value of the
asset at inception of the guarantee.
Variable Interest Entity and Common
Control Leasing Arrangements
123
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VIE – Implementation Challenges
124
Evaluating the impact of the adoption on financial covenants, contracts and expectations of users of the financial statements.
Evaluating common control and 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.
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Business Combinations
• FASB is considering an accounting alternative that
will permit a private company to not recognize the
following intangible assets in a business
combination:
– Non-competition agreements
– Customer-related intangible assets that are not capable of
being sold or licensed independently from the other assets
of a business
• Mortgage servicing rights, commodity supply contracts and
core deposits would be recognized
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AICPA Alternative
The American Institute of Certified Public Accountants (AICPA) is a professional
organization representing CPAs.
The AICPA has published its own Financial Reporting Framework (FRF) for Small to Medium-Sized Entities (SME).
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FRF for SME is separate from US GAAP & PCC
FRF for SMEs
• Not GAAP – Special
Purpose Framework
• Complementary to efforts
by FAF’s PCC – AICPA
fully Supports the work of
the PCC, FAF and FASB
to address the private
company environment
Private Company Council
• GAAP
• Modify GAAP for private
companies
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LOOK TO THE HORIZON –
ACCOUNTING IN THE NEXT
YEAR
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Simplification
• Short term projects designed to reduce complexity in
accounting standards:
– Narrow in scope.
– Improve or maintain the usefulness of information.
– Reduce costs and complexity in financial
reporting.
If issued as final standards you may have the option
to early adopt for December 31, 2015
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Simplification
Proposal (Project) Expected Impact
Simplifying Income Statement
Presentation by Eliminating the
Concept of Extraordinary Item.
Removes the need to evaluate
whether an event should be
classified as an extraordinary
item.
Simplifying the Subsequent
Measurement of Inventory.
Change Lower of Cost or
Market to be Lower of Cost
or Net Realizable Value.
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Simplification
Proposal (Project) Expected Impact
Simplifying the Presentation
of Debt Issuance Cost
Include debt issuance cost as
a contra liability in debt
instead of an amortizable
asset
Simplifying the Measurement
Date for Plan Assets
For non-calendar period ends
(i.e. 12/25) permits the use of
the end of the month (i.e. 12/31)
for measurement of plan assets
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Simplification
Proposal (Project) Expected Impact
Simplifying the Balance
Sheet Classification of Debt
Modify the rules based
approach to a principle based
on contract terms and
covenant compliance
Simplifying accounting for
Share-Based Payment
Narrow scope simplification
in the accounting for share
based compensation
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Simplification
Proposal (Project) Expected Impact
Accounting for Income Taxes:
Intra-Entity Asset Transfers.
Eliminates the prohibition on
recognizing taxes for transfers
of assets between jurisdictions.
Accounting for Income
Taxes: Balance Sheet
Classification of Deferred
Taxes.
Eliminate the requirement to
classify deferred taxes and
current and non-current and
instead require presentation
as non-current.
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New Revenue Recognition Guidance
(ASU 2014-09)
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.
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Five-Step Process
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.
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Revenue Recognition
Effective for Calendar Year Entities:
Public: December 31, 2017
(early adoption not permitted)
All others: December 31, 2018
(early adoption permitted up to the date of public
companies)
Why are we talking about this for next year?
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Deciding how to transition
• Retrospective
– Restate the prior year financial statements presented
• Apply the new guidance to 2017 sales (and earlier if
contracts extend over multiple years)
• Have the 2017 sales audited
• Modified Retrospective
– Adjust beginning equity in the year of adoption
– Disclose what the revenues and expenses would have
been had you not adopted the standard (i.e. calculate and
audit revenues twice for 2018)
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Revenue Recognition – Why 2015?
Start turning over those rocks now so there are no
surprises in on January 1, 2018.
If you start to talk about it in 2015, you can plan in
2016 and work on implementation in 2017
2015 • Learn about the new standard
2016 • Plan how you will adapt
2017 • Work on implementation
2018 • Implement!
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What could be under those rocks?
• New patterns of revenue recognition
– New evaluations of variable consideration
– Identification of new performance obligations
• Discover changes that could be needed in:
– Accounting for expenses
– Terms of contracts
– Compensation arrangements
– Processes and Internal Controls
– Computer Systems
– Reporting/disclosure (disclosures, taxes, etc)
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A Team Approach
• Establish a team to determine how it impacts your
business:
– C-Suite Champion
– Accounting
– Financing
– Sales
– Information Technology
– Legal
– Tax
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Going Concern (ASU 2014-14)
• For annual periods ending after December 15, 2016
management must evaluate if conditions and
events, in aggregate, indicate it is probable that the
entity will be unable to meet its obligations as they
come due within one year after the date the financial
statements are issued (available to be issued)
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Consolidation - Principle vs. Agent
• Expected to be issued soon.
• All entities will need to re-evaluate entities in which
they hold a variable interest upon adoption.
– Removes the deferral from the VIE model for investment
companies, but scopes out money market funds.
– Expected to expand the number of limited partnerships
that are considered VIEs.
– Narrows the circumstances when a decision maker
fee/service arrangement is a variable interest.
– Modifies the related party rules.
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Leasing
• Final standard issued in 2015?
– Lessees will capitalize leased assets and liabilities on
virtually all leases
– Lessors may experience little change from current
practice
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Additional Information
• Contact your CBIZ & MHM service provider
• Explore our thought leadership publications at
www.mhmcpa.com
• Attend our Fourth Quarter Accounting update
webinar on 12/11/14 & 12/16/14
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QUESTIONS
???
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PRESENTER INFORMATION
Jo An Ketchum Tax Director
913.234.1084
Michael Moore Managing Director
913.234.1278
Jeff Stolper Senior Associate
913.234.1879
Kathy Rhodes Managing Director
913.234.1017
Mark Winiarski Senior Manager
913.234.1656