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ledger
april 2015WeiserMazars LLP is an independent member firm of Mazars Group.
April 2015 | 32 | WeiserMazars Ledger
CONTENTS FOOD & BEVERAGE
With consolidation on the rise and incentives for the food and beverage sector to reduce operating costs and increase cash flow, switching to solar power has become a way for companies to accomplish both while also becoming energy efficient and environmentally responsible.
The WeiserMazars Ledger conTains arTicLes and aLerTs pubLished froM Jan. 1 - Mar. 31, 2015.
by Vincent Paolucci
Manufacturers and distributors of food and
beverage products that occupy commercial
buildings, particularly those with large roof tops,
can benefit from the installation of solar panels.
A number of pioneers such as Campbell’s Soup,
Mars Snackfood, US Foods and Del Monte Foods,
have already installed panels on many of their
buildings.
Various federal and state tax credits are
available to companies who install solar panels
to generate energy, allowing these companies
to quickly recapture their investment, and
making converting to solar even more attractive.
The federal government allows taxpayers a
30% investment tax credit on the net system
cost, which can be used to offset regular and
alternative minimum tax. Any unused portion of
the credit can be carried forward to future years.
In addition, certain states allow a tax credit
against income tax and property taxes. Solar
panel installation costs can also be depreciated
over 5 years using an accelerated depreciation
method against the approximately 25 year
determined life of a solar panel.
Other various rebates and incentives are
available to businesses based upon the
production levels of solar power. Many
businesses actually receive payments from their
local utility provider due to “net metering” – the
process of putting energy back into the power
grid when the solar panels produce more than
the building uses. Rebates and incentives vary
state to state but these can be predetermined by
the installer prior to any outlay of expenses.
While commercial solar power is not for
everyone, it is worth considering and often
provides a strong return on a minimal
investment. If you believe solar energy is an
option for your business, please contact us for
more information and to discuss the applicable
tax credits available in your area.
VincenT is a parTner in our Long isLand pracTice. he can be reached aT 516.282.7265 or aT VincenT.paoLucci@WeiserMazars.coM.
3 | Solar Power – A Good Investment for Manufacturers and Distributors
4 | Technology Presents Possible Solutions to Major Water Industry
Challenges
6 | 2014 Media Barometer - 3rd Edition Survey
6 | The Road From Principles to Practice: Today’s Challenges for Business
in Respecting Human Rights Survey
7 | Sales Tax Nexus and the Internet – A New Landscape
8 | The True Face of Innovation
10 | Successfully Navigating the Stages of Technology Company
Funding
14 | Changing Asian Shipping Patterns and Current Supply Chain
Disruptions
16 | Israeli Debt-Based Financing for Real Estate
18 | New York State Sales and Use Tax Classifications of Capital
Improvements and Repairs to Real Property
20 | The Trusted Advisor: Going beyond expectations.
For Good.
21 | Top 10 Changes to the Federal Financial Institutions Examination
Council (FFIEC) 2014 Bank Secrecy Act/Anti-Money Laundering (BSA/
AML) Examination Manual
24 | What Does the Strengthening Dollar Mean to the Worldwide
Economy?
26 | Ensuring Sustainability: Top 6 areas of focus for Not-for-Profit
Organizations
28 | How to Avoid a Last Minute or Late Form 5500 Filing
30 | Five Hidden Items Critical to the Success of a New Business
32 | Weak IT Security Programs May Spell Disaster for Healthcare
Organizations’ Bottom Lines
34 | Measuring Internal Audit Performance
40 | Continuous Auditing - A Delicate Chemistry
45 | Trends and Issues for the 2015 Busy Season
50 | WeiserMazars Tax Alerts
54 | WeiserMazars Not-For-Profit Alerts
APRIL 2015 - ISSUE 8
Solar Power – a Good InveStment for manufacturerS and dIStrIbutorS
April 2015 | 54 | WeiserMazars Ledger
technology Presents Possible Solutions to major water Industry challengesBy Robert K. Wilson
This article was originally published in the
February 2015 issue of Water Technology
magazine.
Respondents to the WeiserMazars LLP 2014 US Water Industry Outlook, who came from both private and public companies, identified three key challenges for the US water industry. • Aginginfrastructure • Agingandpooravailabilityofmanagerialandplantworkers • Needforasimplifiedrateapprovalprocess
We found that the water industry is doubly challenged by aging
infrastructure and aging managerial and plant workers/lack of
available workers. This general lack of critical resources is making
it very difficult for the industry to increase operational performance,
reduce cost, and improve customer service.
Of these three primary challenges, the value of Smart Water
Metering (SWM) and Automated Meter Reading (AMR) in addressing
aging infrastructure and an aging, shrinking workforce has
become increasingly clear as both private and public water utilities
throughout the country continue to deploy these technologies.
Some of the key benefits gained from SWM and AMR are:
§ Enhancement in leak detection and repair prioritization.
§ Reduction in water theft through enhanced detection
techniques.
§ Enhanced workforce management, leading to a reallocation of
staff from manual meter reading to more impactful areas of
the operations.
§ Improvements in customer service and satisfaction.
§ Ability to provide off-cycle meter reading to support the
movement of customers.
§ Streamlined billing process, including the elimination of
estimated billings and improvement in billing cycles from
Quarterly to Monthly.
§ Execute remote service disconnects if required and allowed by
local statute.
§ Better customer awareness and understanding of water usage
leading to increased conservation and reduction in bills.
§ Remotely checking meter status leads to better workforce
management.
As you can see, SWM and AMR provide benefits for both the water
system operator and the consumer.
Aging InfrastructureAs in previous years, aging infrastructure was of particular concern
to respondents, with 32% stating that $100-$300 million would be
needed to modernize and upgrade their facilities and infrastructure.
Infrastructure is critical because it has a large impact on the overall
performance of water treatment and distribution systems and it
will likely continue to be the number one challenge moving forward.
Also of concern is the amount of non-revenue water being pumped
within the system. Non-revenue water represents the difference
between the water produced and sent into the distribution system
and the amount of water actually billed to a customer.
WeiserMazars’ 2014 US Water Industry Outlook found that 67%
of respondents had non-revenue water in excess of 10% within
their system and 26% had greater than 20% non-revenue water.
It is clear from these numbers that a large percentage of water
operations are faced with the challenge of reducing the non-
revenue water component of their operations and they are further
pressured by regulators who are limiting cost recovery rates to a
defined amount of non-revenue water in many locations.
This high level of non-revenue water is another product of the
aging infrastructure of water systems and implementing SWM and
AMR can be an effective first step in addressing the problem.
SWM technologies provide operators with the ability to identify and
target both main and customer water leaks. By better identifying
system leaks, operations can target limited staff and resources on
the areas that will have the greatest impact on the system. This
proactive approach to leak management enhances both customer
service and system reliability, while reducing the potential for non-
revenue water. These changes will significantly improve overall
operational efficiency.
Aging WorkforceA major challenge for the water industry is the increasing
average age of managerial and plant workers, many of whom are
approaching retirement. At the same time, operators are finding
it difficult to replace these valuable employees with new blood.
In the 2014 Outlook, respondents identified improved workforce
management as a top priority in responding to this challenge.
Increased adoption of technologies such as SWM and AMR can
help this situation be allowing for better
workforce management within the field
service and customer service areas,
essentially giving an organization the
ability to do more with less. They also
create technology job opportunities, which may attract individuals
who had never considered a career in the water industry.
Broadening the industry talent pool will be a step in the right
direction in terms of filling the talent void that will be created
in the next 10 years as existing workers retire and will position
the industry more competitively in searching for new talent with
technology skills.
The implementation of smart water meters and advanced meter
reading technologies can help address two of the key challenges
“Swm technoloGIeS ProvIde oPeratorS wIth the abIlIty to IdentIfy and tarGet both maIn and cuStomer water leakS.”
ENERGY & UTILITIES
April 2015 | 76 | WeiserMazars Ledger
featured SurveyS
2014 Media Barometer - 3rd Editionby WeiserMazars LLP and Mazars Group Over the last ten years, the media industry has seen revolutionary changes, particularly in the areas of consumer behavior, the rise of global internet connectivity, developments in mobile telephone and tablet usage and a marked increase in user-produced content. Media companies seized the opportunities presented by this new wave of digitalization, rethinking their business strategies to ensure steady growth. The third edition of our annual media barometer discusses changes in this fast-moving industry, analyzing performance in three key areas: revenue, profitability and cash. Scan the barcode to view entire survey!
The Road From Principles to Practice:Today’s Challenges for Business in Respecting Human Rights by The Economist Intelligence Unit, and sponsored by WeiserMazars LLP and Mazars Group The study explores the views of businesses worldwide on their responsibility to respect human rights and the ways in which this obligation is carried out. It draws on two main sources for its research and findings: a global online survey of 853 senior corporate executives and 9 in-depth interviews with independent experts (specialists from Harvard, Human Rights Watch, and the Institute of Human Rights) and senior executives of major companies (Coca-Cola, UBS, and Anglo American). Scan the barcode to view entire survey!
facing the water industry today. Simultaneously, development of
creative business solutions that will allow more water utilities to
take advantage of these technologies will bring improvements that
will drive sustainability of our water infrastructure well into the
future.
While industry and regulatory groups are pushing for the
installation of advanced metering nationwide, it will not be easy to
get these technologies in place without concerted effort because
of the fragmentation of the water industry. If the industry is to
effectively address its challenges, it must begin implementing SWM
and AMR as soon as possible.
roberT is a parTner in our neW York pracTice. he can be reached aT 732.205.2016 or aT roberT.WiLson@WeiserMazars.coM.
CONSUMER PRODUCTS
SaleS Tax NexuS aNd The INTerNeT – a New laNdScape
by Robert A. Goldstein and Matthew Dopkin
It is estimated that the U.S. now generates almost
$400,000 of e-commerce every thirty seconds. On-line
sales made through Amazon, Overstock, eBay, and the
like create a challenge for many state taxing authorities;
how to impose an obligation to collect tax on out-of-
state sellers? Historically, states have been limited by
a physical presence nexus standard. If a retailer had an
in-state physical presence, then nexus was established
and sales tax had to be collected at the point of sale. This
physical presence requirement was satisfied by a store,
warehouse, other physical location or when a business
had employees conducting activities within a state. The
physical presence requirement was originally detailed by
the U.S. Supreme Court in the 1960s, and was revisited
by the Court again in the 1992 ruling Quill Corp. vs. North
Dakota (“Quill”). Quill held that out-of-state sellers do
not have the requisite nexus to collect sales taxes on
their transactions in states where they lack a physical
presence.
Fast forward to our present environment where
states seem to be side-stepping the physical presence
requirement of Quill in an effort to address budget
shortfalls. New York and Illinois led the charge against
internet retailers by imposing a sales tax collection
responsibility on out-state-sellers lacking a direct in-state
physical presence. This was done by applying concepts of
agency law to create a new nexus concept called “click-
through nexus.” Approximately 25 other states now either
have, or are considering, statutes similar to New York’s.
New York and Illinois specifically targeted Amazon’s
business model whereby unrelated associate entities
received commissions in the form of a percentage of
Amazon’s on-line sales related to the click-through
referral from the associate’s website. Under the New York
and Illinois “Amazon Laws,” the associate is considered to
be an agent of Amazon. As such, the associate’s in-state
presence is imposed upon Amazon, and the out-of-state
seller is treated as having the in-state physical presence
of their associate. Accordingly, out-of-state sellers were
required to register with New York and Illinois for sales tax
purposes and to collect state and local sales taxes on all
in-state sales despite lacking a direct physical presence
within these states.
The Amazon Laws were challenged in both New York
and Illinois, resulting in the Illinois statute being struck
down by the state’s Supreme Court, although the New
York statute survived several appeals. The distinguishing
element between the New York and Illinois statutes was
the fact that New York’s statute created a rebuttable
presumption of nexus, while the Illinois statute did not.
Amazon appealed New York’s holding to the U.S Supreme
Court, but cert was denied. The prior reluctance of the
U.S. Supreme Court to address the physical presence
matter may change, however, based upon recent
comments by Justice Anthony Kennedy. In a just-issued
concurring opinion to an otherwise technical ruling,
Justice Kennedy invited a challenge to the Quill decision.
The Justice said he believes the Quill decision is outdated
based upon the huge increase in remote sales, and
the resulting impact on the states, since that case was
decided. Furthermore, the Senate has just re-introduced
a bipartisan bill aimed at making it easier for states to
Five years after the Great Recession blasted large holes in government budgets, many states are still struggling to balance their books. 16 states are expected to have significant budget deficits over the next two years in the face of the rising costs of education, Medicaid, health care, and pensions and retirement benefits. Unlike the federal government, states generally can’t run at a deficit. 49 states have constitutional or statutory provisions requiring a balanced budget. These deficit challenges have resulted in states scrambling to find new sources of revenue - with the taxation of internet based sales perceived as a “pot of gold” by some states.
April 2015 | 98 | WeiserMazars Ledger
How can we go beyond buzz words, to create true innovation?
Following are specific examples of ways companies have truly
innovated, which can serve as inspiration for us all.
Expanding the Innovation Pool by Using the World’s Intellectual CapitalAccording to the United States Census Bureau, the world population
exceeded seven billion people in March 2012. With so many
people in the world, why do we often look internally for innovative
ideas? Mass collaboration between individuals located within and
outside of an organization, often referred to
as crowdsourcing, can be extremely effective
if used properly. General Electric (“GE”) has
shown that using this crowdsourcing technique
can lead to a significant increase in its ability
to innovate. GE recognizes that it cannot
always create the best ideas. By collaborating
with experts in various fields worldwide, the
company can help solve some of the world’s
most important problems. For example, in June
2013 GE created the 3D Printing Quest, a world-
wide public challenge to design a light-weight
bracket and hangers for jet engines via 3D
printing. The best designs were manufactured
by GE and the creators received prize money. Instead of tasking its
own engineers with this request, GE tasked the public and in doing
so received designs from individuals from over fifty-six different
countries. This expanded the overall intellectual capital available
for this project and helped the company achieve the best possible
outcome.
Implementing Successful Ideas from Unrelated IndustriesInnovations can be as simple as process changes that are made
to help a company become more efficient. Jim McNerney, CEO
of Boeing, looked to technology giant Apple to help innovate
Boeing’s process for developing new aircraft. In the past, Boeing
has looked to develop the most technologically advanced aircraft,
and in doing so has created completely new products. During the
2014 annual investor meeting, McNerney said that he would like
Boeing’s product strategy to be similar to Apple’s, where products
are developed in incremental steps with new products being
similar to old products, plus added innovations. In following this
process, Boeing will be undertaking less risk of cost overruns on
new products, which occurred in the production of the Boeing 787
Dreamliner.
Fusing Historical Successes with Contemporary IdeasHistorically, the bazaar is a marketplace of shops where goods and
services are sold. It originated in the Middle East and remains a
popular concept in some areas of the world today; however many
industrialized cities have replaced the bazaar with shopping malls.
A group of organizations including Juno Property Group, PWP
Asset Based Value Strategy, Glimcher Capital Group, and Caesars
Entertainment, agreed that the bazaar, if appropriately modernized,
could be an extremely successful endeavor in the United States
and created the Grand Bazaar Shops in Las Vegas, Nevada. The
Grand Bazaar Shops adopt the concept of the ancient open air
marketplace, rather than the contemporary shopping mall in an
attempt to compete with the ever-growing online retail industry.
The goal is to create a more interesting and interactive shopping
experience than a consumer could replicate online or in a standard
shopping mall. It combines bartering and negotiation, which are
rare in the twenty-first century American shopping experience,
with interactive customization, which is only possible with current
technology. The creation of the Grand Bazaar Shops illustrates
that there are many different places an organization can look for
innovative ideas as it looks to create a competitive advantage.
Innovation is a key word for any organization; however it can be
overused and at times is so broadly defined it can be perceived
as meaningless. We often create intra-organizational groups and
task them with the goal of formulating innovative ideas that will
take our organization to the top, but in doing so we are forgetting
the way that truly innovative ideas are created. We need to look
past ideas that are already implemented in our industry and look
for inspiration elsewhere, using all available resources including
people throughout the world, unrelated organizations and history to
help innovate and maximize competitiveness. The journey to create
true innovation must begin now!
Jason is an audiT Manager in our neW York pracTice. he can be reached aT 646.435.1573 or aT Jason.sLiVka@WeiserMazars.coM.
MANUFACTURING & DISTRIBUTION
The True Face oF INNovaTIoN
Oftentimes, we feel that the best way for our organization to improve is to replicate the successes of other organizations within our industry. While following these best practices may lead to some success, it can also severely limit our ability to achieve a competitive advantage as industry leaders have already implemented these ideas.
by Jason Slivka
collect sales taxes on online purchases – the Marketplace Fairness
Act passed the Senate in 2013 but was stalled in the House. If
enacted, the Marketplace Fairness Act of 2015 would give states
the option to require out-of-state businesses, such as those selling
online or through catalogs, to collect sales and use taxes.
Retailers should monitor and review their business plans,
state statutes, a possible Supreme Court challenge to Quill and
potential Marketplace Fairness Act legislation to ensure they are in
compliance with sales tax collection responsibilities as a result of
selling on the internet.
roberT is a parTner in our neW York pracTice. he can be reached aT 212.375.6579 or aT roberT.goLdsTein@WeiserMazars.coM.
MaTTheW is a senior Manager in our pennsYLVania pracTice. he can be reached aT 267.532.4330 or aT MaTTheW.dopkin@WeiserMazars.coM.
“accordInG to the unIted StateS cenSuS bureau, the world PoPulatIon exceeded Seven bIllIon PeoPle In march 2012. wIth So many PeoPle In the world, why do we often look Internally for InnovatIve IdeaS? maSS collaboratIon between IndIvIdualS located
wIthIn and outSIde of an orGanIzatIon, often referred to aS crowdSourcInG, can be extremely
effectIve If uSed ProPerly. ”
April 2015 | 1110 | WeiserMazars Ledger
At this stage of financing, companies need to focus
less on their products and focus more on revenue
and sales. The sophisticated investor understands the
market for your product or technology. Companies
need to demonstrate, in a quantifiable way, how they
can capture that market share.
Key metrics to focus on in the investor pitch are
Monthly Recurring Revenue (MRR) (or Annual
Recurring Revenue (ARR) if your business operates
with a year-long contract model), bookings and related
sales funnel, cash burn, churn projection and LifeTime
Value/Cost to Acquire ratio (LTV/CAC). A common
mistake for company management in preparing these
metrics is using disparate data points. Companies that
show bookings on an annual basis, churn on a monthly
basis and cash burn on a quarterly basis demonstrate
a lack of understanding on the key metrics and how
they relate to each other. It also makes it difficult for
investors to determine the exit value of a company,
and once a pitch deck becomes difficult for potential
investors to understand, they quickly lose interest.
Bookings and the related sales funnel should be one
TECHNOLOGY
SucceSSFully NavIgaTINg The STageS oF TechNology compaNy FuNdINg
by Nicole DiGiorgio
Startup companies may go through various stages of
external funding throughout their lifecycle. Typically,
the first stage consists of seed funding, which is usually
earmarked for developing the company’s product or
technology and achieving marketplace fit. Seed stage
companies usually raise $500,000 to $1,500,000 and
typically do not have institutional capital or venture
funding. Seed funding is generally easier to raise, due to
the smaller investment size and lower risk profile to the
investor.
Series A funding is significantly more difficult to raise
due to the larger round of financing required and higher
risk profile. Typically, investors in this round are focused
on the management team, progress made with the seed
capital, and revenue projections and financial metrics.
A typical Series A company has developed a repeatable
sales process and achieved product or technological
market fit. They generate revenue, but are not normally
profitable. Companies ready for Series A financing have
a strong understanding of their unit economics (users,
licenses, or whatever other non-financial data drives
their growth) and can develop and forecast revenue
projections. Typical Series A rounds generally range
from $1 million to $7 million, depending on how capital
intensive the company is. Series A rounds also normally
have higher valuations, which leads to increased
expectations during the investor pitch.
“compaNIeS Need To demoNSTraTe, IN a
quaNTIFIable way, how They caN capTure ThaT
markeT Share.”
April 2015 | 1312 | WeiserMazars Ledger
uPcomInG webcaStS
featured vIdeo
Food & Beverage Forum Hosted by WeiserMazars LLP, the Food & Beverage Forums
are the premier CEO networking events in the New York metropolitan area for professionals in the food & beverage
industry. Scan the barcode below to view video!
We are pleased to announce the launch of our WeiserMazars Online
Insights webcasts! These informative sessions, led by our service line
and industry segment leaders, are designed to educate our connections
on the latest developments in the accounting industry and the technical resources needed in today’s business environment. Scan the barcode below
to view the 2015 schedule and register!
Reengineering a Company’s Distribution NetworkDate & Time: TBD
Led by: Jeffrey M. Cascini, WeiserMazars LLP
aPrIl 2015
“ltv/cac ratIo can be conSIdered the moSt ImPortant metrIc In a PItch becauSe It PutS the revenue and coSt to acquIre that revenue In context.”
TECHNOLOGY
of the first items presented as this is
the basis for all other metrics. Bookings
should start with a sales funnel that
takes a top down approach and clearly
demonstrates leads->qualified leads-
>opportunities->closed sales. Pitches that
only have sales targets but no quantifiable
process on how the company gets there
are not reliable and demonstrate a lack
of maturity. Actual marketing data and
assumptions applied to how this can work
at scale should be included. The company
should also have demonstrated that it
understands its sales cycle and simply
needs more capital to increase the inputs
at the top of the funnel.
Information on the recurring revenue
model should follow this, as sales are
the driver for the recurring revenue
model. Traditionally, software as a service
(“SaaS”) companies have used monthly
recurring revenue, or MRR, as the key
metric for measuring their business. More
recently, companies have begun using
annual recurring revenue, or ARR. This
reflects a move away from the traditional
monthly subscription model to an annual
subscription model. A general rule of
thumb is, if your company utilizes annual
contracts, be sure to present the revenue
in an annual recurring model format.
MRR is also typically used to predict cash
break even. In a business that focuses on
ARR and upfront billing, cash break even
comes at a much earlier point than in the
MRR model.
Another key element is gross and net
cash burn. Gross cash burn represents
total cash out of the company, while net
cash burn represents the net of cash in
and cash out of the company. This figure
is typically netted when presented to
investors, but showing it grossed up can
be favorable for a company that leverages
negative working capital. Negative
working capital in this sense relies on
customers paying annually or quarterly
upfront rather than in arrears.
Due to the fact that early SaaS companies
used the monthly model, the standard
metrics are always stated in terms of
monthly recurring revenues, monthly
cashflows, and monthly churn. Later
iterations of SaaS companies began
the shift towards the annual contract
model/annual billing/annual churn
which allowed companies to recoup their
investment in the cost to acquire and
cost of service during the contract period,
giving companies a chance to break even
or become profitable on a customer by
customer basis, before the customer had
the opportunity to churn.
Churn should be presented on the same
basis as sales and revenue, which is
monthly, annual, or sometimes quarterly.
A typical SaaS company with annual
contracts should expect to have a churn
of no more than 10%, and approximately
5% projected churn should be the
goal. Investors are extremely focused
on churn and will analyze your churn
number closely. Companies at this stage
should have enough data to make strong
assumptions of the churn at scale,
and use those assumptions to predict
the expected life of the customer. A
predicted churn of 8% translates into a
customer life of 12.5 years as opposed to
a predicted churn of 5%, which translates
into a customer life of 20 years. The
expected life of a customer is the driver in
the LTV calculation and small variances in
churn make a significant difference in the
ultimate value of the customer.
LTV/CAC ratio can be considered the
most important metric in a pitch because
it puts the revenue and cost to acquire
that revenue in context. For instance, if
your LTV/CAC ratio is 10/1, that means
that company revenue increases $10 for
every $1 spent on customer acquisition
costs. A LTV of $100,000 per customer
is essentially meaningless without an
understanding of the cost to acquire that
customer. The higher the CAC ratio, the
easier to reason that additional capital
will fuel growth at a favorable margin and
show venture capitalists that they will
receive a higher return on investment.
This is the item to spend the most amount
of time on during the investor pitch, as
a strong LTV/CAC ratio will definitely get
the attention of any potential investor. The
nuances of the LTV/CAC ratio merit their
own article, but all successful SaaS-based
businesses will have a strong LTV/CAC
ratio.
One of the biggest mistakes that
companies make is underestimating how
long fundraising takes and that raising
capital is a huge investment of time and
energy for the management team. Expect
this process to take at least 4-6 months
for a Series A round and plan to have
enough runway to get the actual wires
in the company’s bank account, not just
to a term sheet. Nothing is final until the
money is in the bank.
nicoLe is a Manager in our neW York pracTice. she can be reached aT 212.375.6817 or aT nicoLe.digiorgio@WeiserMazars.coM.
April 2015 | 1514 | WeiserMazars Ledger
Most goods imported from Asia today flow through West Coast
ports, and then are moved eastwards, overland, by intermodal and
truck. The expanded canal, larger ships, Eastern port dredging
and other port improvements will reduce the overland flow,
allowing more goods from Asia to enter through Gulf and East
Coast ports. These changes will provide an economic boost to
these areas.
HOW MUCH WILL CONTAINER VOLUME GROW ALONG THE GULF AND EAST COAST? A recent Journal of Commerce article1 predicts that when the
new Panama locks open in early 2016, there will be double digit
percentage growth in container shipments via the canal the first
year, followed by an ongoing five percent year over year growth
thereafter. If these projected growth rates are realized, by 2020
additional containers handled by Gulf and East Coast ports as a
result of the Panama Canal expansion would grow by more than
1.3 million a year2. Other projections foresee even higher traffic.
There are two primary considerations to balance: transit times
and cost savings. The additional transit time to ship from Asia to
the East Coast through the Panama Canal, adds anywhere from
two to ten days in comparison to West Coast ports, depending
on the destination. However, there are also delays in the current
method of shipping. The ports of Los Angeles and Long Beach,
the largest West Coast ports, are at or near capacity and are
experiencing serious congestion and labor issues, adding cycle
time and inventory carrying costs, as well as negatively affecting
inventory availability and delivery downstream. Furthermore,
congestion in the high volume Chicago rail yards frequently
adds a day or two of delay for every container shipped through
the city. The cost difference to ship via the Panama Canal is the
major driver for change since each new large vessel can allocate
its operating costs across three times as many containers as
current ships, therefore significantly reducing the landed cost
per container. Rail and road costs to support the East will also be
lower.
PLANNING FOR THE PRESENT SUPPLY CHAIN DISRUPTIONThe landscape painted above sounds very promising. However,
until this becomes reality, the supply chain disruptions being
experienced today in Long Beach and L.A. will most likely continue
in some form. This congestion is being magnified by the backlog
of ships waiting to be unloaded and, even when purged, delays
occur. Presently, companies that have not planned for this type of
supply chain disruption are faced with increased cycle times, lack
of inventory and increased shipping costs. It is estimated that it
will take months to free up the pipeline. Downstream, customer
service is and will continue to be negatively affected with respect
to fill rate and delivery times.
The number of companies that have a top down, formal, effective
Supply Chain Risk Management Program is surprisingly low.
Companies that analyze their entire supply chain network and
develop contingency plans based on
itemized, potential disruption events are
better prepared for the present disruptions.
A flexible network that allows for quick
response to changing conditions would
be able to handle sudden changes like the current slowdown
through an established operational, cost and service plan.
Analysis and understanding of potential solutions such as prior
pipeline fill, out of network shipping, use of alternate ports,
expedited transportation modes, lead time compression, and
alternate supplier sourcing, as well as the resultant service and
cost implications, is critical in today’s ever-changing world-wide
business network.
Now is the time to plan for inevitable future supply chain
disruptions. Make no mistake, they will occur in some form and a
well-structured contingency plan is vital.
JeffreY is a Managing direcTor in our neW York pracTice. he can be reached aT 212.375.6637 or JeffreY.cascini@WeiserMazars.coM.
kerrY is an independenT suppLY chain consuLTanT. she can be reached aT 517.862.6820 or kfreY@LYTegroup.neT.
1 Journal of Commerce, “Drewry: Canal expansion will boost Panama transshipments by
double digits”, 19 January, 2015
2 Growth rates projected against 2012 West Coast port container volumes published by the
U.S. Maritime Administration, “US Port Calls 2012”
chaNgINg aSIaN ShIppINg paTTerNS aNd curreNT Supply chaIN dISrupTIoNS
Gradual changes in the costs of international shipping over the last decade are beginning to have a profound impactontheentireNorthAmericaneconomy.Thegoodnews is that the underlying cost of moving containerized goodsfromAsiatotheEasternhalfofNorthAmericawill drop over the next few years. In addition, congestion intheLongBeachandL.A.portswillbereduced.Theseeffects will become more apparent when the expanded PanamaCanallocksopeninearly2016.Althoughnotdirectly related, the present labor issues in California will hopefully be resolved soon, thereby improving delays currently being experienced at those ports.
By Jeffrey Cascini
and Kerry Frey“the number of comPanIeS that have a toP down, formal, effectIve SuPPly chaIn rISk manaGement ProGram IS SurPrISInGly low.”
TRANSPORTATION & LOGISTICS
April 2015 | 1716 | WeiserMazars Ledger
REAL ESTATE
By Shahab Moreh
Prominent real estate owners and developers are sourcing a new form of capital—bonds issued and traded on the Tel Aviv Stock Exchange (TASE). It’s a creative concept, with benefits for both sides of the transaction. The funding technique is also attractive to technology companies, looking for capital to expand with a less-onerous due diligence process than U.S. securities funding often demands.
It’s a massive market—and growing. In 2013, nearly $9 Billion of real estate financing was completed. In 2014, more than $14 Billion was sold. Owners and developers crave affordable funding for their projects, and traditional U.S. credit sources, beset by problems from the real estate meltdown that peaked in 2008, are understandably cautious. That caution gets expressed through high rates,1 reams of paperwork, and arduous regulatory hurdles.2 In Israel, an abundance of liquidity and yield-starved investors seeking diversification into U.S. real estate, coupled with a favorable exchange rate between the shekel and dollar, have helped to push the Tel Aviv Bond 40 Index to a near-record high.
Funding costs for U.S. owners and developers frequently run
between 10%-11%.3,4 Compared to paying a fixed coupon of
less than 5% to garner credit through Israeli bonds. Bonds that
are locally rated A with 5 year terms are currently trading It’s a
massive market—and growing. In 2013, nearly $9 Billion of real
estate financing was completed. In 2014, more than $14 Billion
was sold. Owners and developers crave affordable funding for their
projects, and traditional U.S. credit sources, beset by problems from
the real estate meltdown that peaked in 2008, are understandably
cautious. That caution gets expressed through high rates,1
reams of paperwork, and arduous regulatory hurdles.2 In Israel,
an abundance of liquidity and yield-starved investors seeking
diversification into U.S. real estate, coupled with a favorable
exchange rate between the shekel and dollar, have helped to push
the Tel Aviv Bond 40 Index to a near-record high.
Funding costs for U.S. owners and developers frequently run
between 10%-11%.3,4 Compared to paying a fixed coupon of less
than 5% to garner credit through Israeli bonds. Bonds that are
locally rated A with 5 year terms are currently trading with a
fixed coupon of 4%-4.5%. Global supply and demand metrics have
pushed U.S. high quality bond yields to less than half that rate in
recent years. The bonds can be issued without collateral and with
limited covenants (i.e. debt to capital ratio, dividend policy and
coverage ratios). However, the company must maintain a rating
and certain financial criteria. If the bonds are issued with collateral,
rating may not be needed.
Typical funding size for Israeli bond deals is between $150 Million
to $500 Million, collateralized by commercial properties such as
shopping centers or commercial office buildings. A deal of that size
is considered small by U.S. underwriters, but is attractive to Israeli
investors, and thereby encourages medium-sized developers to
seek the benefits of debt-based financing on the TASE. A typical
structure will be for a 5 year term with semi-annual coupon
payments. The costs of these bond deals approximate 50 to 75
basis points per year.
These deals are not without risk, and borrowers must be prepared
for what can be an unfamiliar and complicated process. You
typically have privately owned operators and developers of real
estate companies contemplating this financing structure, and
they are not used to the regulatory and continuous reporting
responsibility. To begin with, the regulatory environment is different.
Rather than adhering to the U.S.’s Generally Accepted Accounting
Principles (GAAP standards), Israeli bond financing must comply
with International Financial Reporting Standards (IFRS), and
overcome a different set of compliance hurdles. For example, IFRS
requires reporting for several quarters and years on a comparative
basis.
Another issue is the way in which assets are reported on the
financial statements. Under GAAP, real estate is reported on the
balance sheet at its historical cost, with depreciation applied for
wear and tear. Conversely, under IFRS, real estate is reported
at fair value, reflecting a more accurate representation, and
construed to be more informative to investors in terms of its true
performance. It can often be higher than the historical cost method
used for GAAP.
These deals require a degree of specialization and contacts with
which U.S.-based companies may be unfamiliar. A successful
transaction requires an accounting firm with expertise in both
Israeli and U.S. taxation, as well as experience to complete the
audit in accordance with IFRS. In addition, appraisals are required,
and structuring the deal to minimize its tax impact makes it vital
to have tax advisors and local Israeli CPAs familiar with both
countries’ tax laws. It also demands an investment banker or
underwriter with experience marketing the transaction through
Israel’s TASE.
Before an owner, developer (or company) enters into an Israeli
debt-based funding transaction, he must understand the value of
the asset in relation to the market opportunity on TASE. He will
want to evaluate key performance indicators to determine whether
a deal makes sense. That’s where a valuation expert, in the form of
an MAI appraiser certified to render real estate values, can make an
important difference. An accounting firm may have these experts
in house, but independence rules preclude them from performing
both the audit and the valuation. In that case, a third-party
appraiser is needed.
We are seeing several companies contemplating Israeli debt-based
financing as an attractive alternative to obtaining capital, whether
for real estate development or to fund acquisitions. Technological
advancements in Israel have created an enormous appetite for
yield, diversification, and expanding their international reach. But it
demands specialized expertise to meet the burdens of the complex
regulatory and compliance environment. Any company entering
into such a transaction must be prepared for the additional scrutiny
that a public debt offering engenders. Working with a firm that has
boots on the ground in Israel should be step one.
shahab is a parTner in our neW York pracTice. he can be reached aT 212.375.6791 or shahab.Moreh@WeiserMazars.coM.
1 http://www.recapitalnews.com/us-developers-vying-piece-israeli-bond-market/ (paragraph 15)
2 Ibid. (paragraph 12)
3 http://www.globes.co.il/en/article-2-us-real-estate-firms-to-raise-nis-400m-on-tase-1000983917
(paragraph 2)
4 http://www.rew-online.com/2014/08/27/lower-yields-draw-new-york-developers-to-israeli-bonds/
(paragraph 3)
ISraelI debT-baSed FINaNcINg For real eSTaTe
April 2015 | 1918 | WeiserMazars Ledger
REAL ESTATE
§ It substantially adds to the value of the real property, or
appreciably prolongs the useful life of the real property.
§ It becomes part of the real property or is permanently affixed
to the real property so that removal would cause material
damage to the property or article itself.
§ It is intended to become a permanent installation.
If a contractor performs a capital improvement on real property
and if the property owner submits a properly completed Form ST-
124, Certificate of Capital Improvement to the contractor, no sales
tax is required to be collected from the customer. This executed
form is evidence that the work to be performed will result in a
capital improvement to real property.
However, when a contractor performs a job that is considered
a repair, maintenance or installation service to real property,
sales tax must be collected from the property owner unless the
contractor receives a properly completed Form ST-119.1, Exempt
Organization Certification.
In general, the addition of a mobile home to real property is never
a capital improvement, regardless of how it is installed. In addition,
there are special rules regarding the installation of a floor covering
which are further discussed in New York State Publication 862,
Sales and Use Tax Classifications of Capital Improvements and
Repairs to Real Property.
The definition of a capital improvement for New York State sales
and use tax purposes differs from the definition for federal income
tax purposes, which confuses many taxpayers. Taxpayers should
be aware of this and make sure to research the rules for each
jurisdiction.
The term real property in the definition of a capital improvement
mentioned above means real property, property or land as defined
in the Real Property Tax Law and includes but is not limited to:
§ Land and vegetation growing on the land such as trees, shrubs,
bushes, and grass;
§ Buildings and structures erected upon, under, or above land, or
affixed to the land;
§ Utility lines, wires, and poles;
§ Mains, pipes and tanks for conducting steam, heat, water, oil,
gas and electricity; and
§ Boilers, heating, ventilating, or lighting apparatus, and
plumbing.
In the case of a capital improvement, if you are a property owner
who:
§ Purchases materials and supplies only and you perform your
own labor, you pay tax to the supplier on the materials and
supplies.
§ Purchases materials and supplies and hires a contractor to
perform the labor, you pay tax to the supplier on the materials
and supplies, but you do not pay tax to the contractor for the
labor.
§ Purchases materials and supplies and labor from the
contractor, you pay no tax.
In the case of capital improvements, if you are a contractor who
purchases materials and supplies, you pay tax to the supplier and
you do not collect any sales tax from your customer.
In the case of a job that constitutes repair or maintenance, if you
are a property owner who:
§ Purchases materials and supplies only and performs your own
labor, you pay tax to the supplier on the materials and supplies.
§ Purchases materials and supplies and hires a contractor to
perform the labor, you pay tax to the supplier on the materials
and supplies and to the contractor for the labor.
§ Purchases materials and supplies and labor from a contractor,
you pay tax to the contractor on the total charge.
In the case of a job that constitutes repair or maintenance, if you
are a contractor who:
§ Purchases materials, you pay tax to the supplier, even though
you are also required to collect tax from your customer.
However, you are entitled to a refund or credit of the tax that
you paid on the materials that you transferred to the customer.
§ Purchases supplies, you pay tax to the supplier
For more information, refer to New York State Publication 862,
Sales and Use Tax Classifications of Capital Improvements and
Repairs to Real Property.
donaLd is a parTner in our Long isLand pracTice. he can be reached aT 516.620.8420 or donaLd.bender@WeiserMazars.coM.
Jennifer is a senior Managing in our Long isLand pracTice. she can be reached aT 516.620.8464 or Jennifer.safran@WeiserMazars.coM.
“the defInItIon of a caPItal ImProvement for new york State SaleS and uSe tax PurPoSeS dIfferS from the defInItIon for federal Income tax PurPoSeS, whIch confuSeS many taxPayerS.”
new york State SaleS and uSe tax claSSIfIcatIonS of caPItal ImProvementS and rePaIrS to real ProPerty real eState
By Donald Bender
and Jennifer Safran
For contractors and property owners it may be difficult to distinguish whether services performed are a capital improvement to real property or if they constitute repairs, maintenance, or installation services to real property. Depending on how the service is classified, contractors must follow the rules set forth by New York State to collect and/or pay sales and use tax. For New York sales and use tax purposes, a capital improvement is any addition or alteration to real property that meets all three of the following conditions:
April 2015 | 2120 | WeiserMazars Ledger
by Jules Reich
A trusted advisor is genuinely interested in and focused on their
clients’ needs, standing out from other hired experts. While
their knowledge must be broad enough to cover a wide range
of potential client requirements, they must also have access to
a deep bench of qualified backup talent to handle those areas
where the advisor can enhance his or her services with additional
expertise. Short-term considerations or solving a single issue
cannot be the drivers of the client/provider relationship. By making
the relationship all about the long run, the trusted advisor proves
his commitment to the client’s success and strengthens their
bond.
Finally, trusted advisors must be passionate and enthusiastic
about their work. That passion drives a commitment to ethics and
integrity, all essential components of a good relationship. These
qualities help guide the advisor to making the right decisions, both
for the client and for society at large. Trusted advisors want to be
relied upon for the quality of their expertise, their relationship to
clients and their credibility in the market. They act in a transparent
way with clients, ensuring that all business information is accurate
and anything of concern is communicated quickly and clearly. If
they show true commitment, the advisor can deliver services that
go beyond the engagement terms, meeting higher expectations
and fostering integrity in the marketplace.
How WeiserMazars Plays Our PartWeiserMazars was recently retained to perform a tax structuring
on a selling transaction. In order to better assess our client’s
needs and business activities, we started working with their
lawyers on tax issues. It rapidly became evident that the business
had major flaws. Although the buyer was ready to purchase the
business in that state, we believed that the time for the transaction
was not right and that both parties would not get the most out of
it. The business needed time to recover and be at a better stage
before it could be sold at a good price.
As a result, we presented different options to our client, including
advising them not to proceed with the deal because it was against
every stakeholder’s best interest to do so. Consequently, the client
stopped the deal and chose to try to turn his business around.
Although this mean that we lost the transaction engagement we
were originally hired to perform, the client subsequently retained
us to advise him on ways to finance the business moving forward.
As a trusted advisor, our commitment to the client was not merely
to provide tax structuring expertise, but to make sure that in the
long run all stakeholders of the deal would be better off.
JuLes is a parTner in our neW York pracTice. he can be reached aT 212.375.6523 or aT JuLes.reich@WeiserMazars.coM.
FINANCIAL ADVISORY SERVICES
A trusted advisor delivers benefits that make them sought out by decision-makers. They understand the challenges faced by their clients, from industry-specific features to unique day-to-day operational issues. He is a reliable, consistent and credible partner for his clients due to a collaborative approach on client challenges. collaborative approach on client challenges.
The TruSTed advISor: goINg beyoNd expecTaTIoNS. For good.
BANKING
by Steven G. Lewis
A number of changes were recently made to the Bank
Secrecy Act/Anti-Money Laundering Examination Manual.
Below, we present the “Top 10” revisions to the Manual
along with our analysis
1. Scoping and Planning – Clarified that the independent
testing of the BSA Program need not be performed by an
“auditor,” whether internal or external.
coMMenTarY: This clarification stresses substance over
form. The person (not necessarily an “auditor”) performing
the testing must be independent - that is not “involved”
in the bank’s BSA/AML compliance program and must
present his or her report to the Board of Directors or a
Board committee comprised of outside directors.
2. Customer Due Diligence – Added a footnote reference
to FIN-2010-G001, 2010 “Guidance on Obtaining and
Retaining Beneficial Ownership Information” issued in
May 2010. The Guidance consolidated existing regulatory
expectations for obtaining beneficial ownership
information for certain accounts and customer relationships.
coMMenTarY: The Guidance retained risk based CDD, which may include identifying and verifying beneficial
owners. The Guidance also retained private banking account beneficial ownership verification requirements.
Note that an ownership threshold was not specified. However, FinCEN’s Notice of Proposed Rulemaking (August
4, 2014), “Customer Due Diligence Requirements for Financial Institutions,” does specify a threshold of 25%. This
Notice is not included or otherwise referred to in the Manual, presumably since it is still in the proposal stage.
3. Suspicious Activity Reporting (SAR) – Established new guidance on controls over banks’ BSA monitoring
systems. Specifically, bank policies and procedures should clearly document the authority to “establish or
change expected activity profiles” used to detect unusual activity. In addition, controls should ensure limited
access to the monitoring systems and access privileges in the system must be appropriate under the
circumstances. Furthermore, any changes should require the review and approval of the BSA compliance
officer as well as senior management. The Manual also added a requirement that management tests the
“filtering criteria” in the monitoring system. Previously management only had to “review” the criteria, now it has
to “review and test.” Management, however, should still be able to “document and explain” the models in the
system. Finally, an “independent validation” of the system’s “programming methodology and effectiveness” to
TOP 10 CHANGES TO THE FEDERAL FINANCIAL INSTITUTIONS EXAMINATION COUNCIL (FFIEC) 2014 BANK SECRECY ACT/ANTI-MONEY LAUNDERING (BSA/AML) EXAMINATION MANUAL
April 2015 | 2322 | WeiserMazars Ledger
ensure that the models are detecting potentially suspicious activity
has always been required. Now the scope of the independent
validation has been expanded to “verify” the surveillance
monitoring policies/procedures and management’s compliance
with such policies.
coMMenTarY: BSA systems’ filtering criteria, parameters, rules and
programming methodology are all considered part of the models
used to detect potentially suspicious activity. Therefore, the April
4, 2011, Supervisory Guidance on Model Risk Management (issued
by the Board of Governors of the Federal Reserve System and the
Office of the Comptroller of the Currency) with its requirement on
model documentation and validation also applies.
4. OFAC – The Manual added OFAC’s “encourage[ment]” for banks
to take a risk-based approach when implementing their OFAC
programs.
coMMenTarY: The most interesting part of the Manual as it relates
to OFAC is what it does not contain. While the Manual was
issued in November 2014, it does not include OFAC’s “Revised
Guidance on Entities Owned by Persons Whose Property and
Interests in Property Are Blocked” (August 13, 2014). This Revised
Guidance aggregates ownership interests of SDNs in an entity. If
the aggregate direct or indirect ownership of SDNs in an entity
reaches 50% or more, then the entity becomes blocked (known as
a “shadow” or “deemed” SDN). In other words, if blocked persons
own directly or indirectly 50% or more of an entity, then that entity
itself
becomes blocked. Thus, financial institutions are expected to
obtain beneficial ownership information on all entity accounts
and many banks already do so. However, that still leaves open the
question of what ownership thresholds to use when identifying
beneficial owners. FinCEN’s Notice of Proposed Rulemaking
dated August 4, 2014, “Customer Due Diligence Requirements for
Financial Institutions,” would seem to indicate that a 25% threshold
would be acceptable. However, OFAC’s Q+A #401 implies that a
10% threshold is appropriate, although the actual regulations have
yet to be issued. Also, the Internal Revenue Code (FATCA) generally
specifies a 10% threshold for foreign entities. Ultimately, which
threshold to adopt becomes a risk based decision although banks
should be prepared to justify their decision.
5. BSA/AML Compliance Program Structures – Added a caution on
restricted transparency across the organization and the need to
ensure AML controls are appropriate under the circumstances.
coMMenTarY: This seems consistent with FIN-2010-G001, 2010,
“Guidance on Obtaining and Retaining Beneficial Ownership
Information, which called for implementing CDD/EDD procedures
on an enterprise-wide basis and AML staff “crosschecking”
information with other departments.
6. Correspondent Accounts (Foreign) – Added a risk mitigation
measure that U.S. banks should determine whether their foreign
correspondents have acceptable AML programs, including
customer due diligence practices, suspicious activity identification
processes, and recordkeeping documentation. This also includes
understanding the effectiveness of the AML regime of the foreign
jurisdictions in which their foreign correspondent banking
customers operate.
coMMenTarY: Based on Appendix H, under Foreign Correspondent
Account Recordkeeping, Reporting and Due Diligence, this would
also seem to apply to a U.S. bank’s accounts with its foreign
branches.
7. Prepaid Access – This section underwent major changes. Of
particular interest, banks now need to review the prepaid access
third party service providers’ BSA compliance programs as well
as their BSA monitoring capabilities. Also, banks need to obtain
transaction activity from the providers and review transactions for
potentially suspicious activity.
coMMenTarY: In accordance with the Manual’s guidance on Nonbank
Financial Institutions, providers and sellers of prepaid access are
now considered MSBs, subject to specified thresholds/exclusions
such as the type of prepaid card (open vs. closed loop), amount
(maximum value per device per day), potential usage (domestic
vs. international) and method of reloading (depository vs. non-
depository source).
8. Third-Party Payment Processors – Added various risk
mitigation measures, most notably that banks should “audit” their
third party payment processing relationships. Such audits should
encompass checking that the processor is fulfilling its contractual
obligations and verifying the legitimacy of its merchant clients.
coMMenTarY: This reflects increased recognition that Third-Party
“The most interesting part of the manual as it relates to OFAC is what it does not contain.”
uPcomInG eventSPhilly I-day | april 9, 2015 | Philadelphia, Pa
Business leaders and executives from across the region will focus on social, economic and financial trends influencing the risk management and insurance industries at this annual conference presented by the Insurance
Society of Philadelphia and the Philadelphia CPCU Society Chapter.
acG InterGrowth | april 13-15, 2015 | orlando, fl We are a proud partner and Growth Supporter of ACG InterGrowth. For more than 40 years, InterGrowth has been the middle market’s primary source for networking and deal flow, bringing together M&A professionals from across the
globe and all industry segments to offer attendees three key benefits: capital, connections and deals.
the rooftops conference nyc 2015 | april 24, 2015 | new york, ny Our own Ron Ries will be speaking at The Rooftops Conference NYC 2015, the fifth annual symposium for the not-for-profit sector focused on the role of real estate — owned, leased, or hosted physical space — in the operations, financial performance, and achievement of mission by not-for-profit organizations of all sizes and mission types.
targetmarkets Spring 2015 | may 3, 2015 | atlanta, Georgia Our Financial Services Consulting Team will be located at Table 39 at TargetMarget’s (TMPAA)’s 2015
Mid-Year Meeting. The team will be sharing solutions to core issues facing the industry today such as expense management initiatives, infrastructure rationalization, control remediation and process optimization.
Payment Processors are generally considered high risk.
9. Currency Transactions Reporting Exemptions – Added
marijuana-related businesses to the list of businesses ineligible
for exempting from CTR filing requirements. Also, added a footnote
reference to FinCEN’s Guidance: “BSA Expectations Regarding
Marijuana-Related Businesses, FIN- 2014-001,” February 14, 2014.
coMMenTarY: As the number of marijuana businesses increases
– particularly in Colorado - the Federal Government has taken a
“laissez faire” approach to regulating them. Nevertheless, banks
need to be aware that, notwithstanding state law, it is a violation
of Federal law “to manufacture, distribute or dispense marijuana.”
Therefore transactions with marijuana related business will
require SAR filings – Limited, Priority and/or Termination filings,
depending on the bank’s consideration of the legality of the
customer’s activities, detection of potentially suspicious activity
and compliance with the Cole Memo (U.S. Department of Justice,
“Memorandum for All United States Attorneys: Guidance Regarding
Marijuana Enforcement,” August 29, 2013, authored by James M.
Cole, Deputy Attorney General).
10. Nonbank Financial Institutions – In addition to defining
providers and sellers of prepaid access as MSBs (see Prepaid
Access above), the Manual also considers administrators and
exchangers of virtual currency to be MSBs (specifically, a money
transmitter) and thus banks are expected to apply appropriate BSA
monitoring procedures similar to those for money transmitters.
coMMenTarY: Virtual currency (such as Bitcoin) administrators
are now considered MSBs and their accounts should be monitored
accordingly.
Please contact Steven Lewis for a copy of our complete “Overview
of Changes” document and visit www.ffiec.gov to access the
Manual.
sTeVen is a senior Manager in our neW York pracTice. he can be reached aT 646.656.1942 or sTeVen.LeWis@WeiserMazars.coM.
BANKING
April 2015 | 2524 | WeiserMazars Ledger
WHAT DOES THE STRENGTHENING DOLLAR MEAN TO THE WORLDWIDE ECONOMY?
For nearly ten years, the U.S. dollar took a back seat to the euro.
Record-high federal deficits, soaring commodity prices, and a
weak economy all extracted their toll. Three rounds of quantitative
easing (QE) to stem the effects of the global fiscal crisis resulted in
punitively low interest rates for savers.
In July 2014, economist David Malpass called for change, claiming
that a stronger dollar and lower oil (and other commodity prices)
would strengthen the U.S. economy and engender world peace.1
As though on cue, the dollar has risen 18% against the euro since
June 2014, and oil prices have fallen nearly 40% due to both lower
global demand and increased U.S. supply. U.S. interest rates, by
no means robust, are still higher than those in other countries,
thereby attracting capital inflow. GDP is also improving, and the
Federal Reserve is hinting at raising interest rates by summer. The
federal deficit is shrinking, and the shale oil revolution is reducing
the U.S. trade deficit.2
While the U.S. has terminated its quantitative easing program, the
Bank of Japan and the European Central Bank (ECB) are expanding
theirs. ECB Chairman Mario Draghi launched a massive bond
buying program of €1.1 Trillion ($1.3 Trillion)3 to spur Europe’s
stagnant economy and lure foreign investment.
Since the late 1970s, the U.S. stock market investor has seen
the stock market perform twice as well during dollar bull
markets than during dollar bear periods.4 But, while Americans
may be enjoying fatter portfolios and greater spending power,
multinational U.S. corporations who depend on exports to Europe
are dealing with the revenue fallout. Not only do they have to
handle lower levels of exports thanks to U.S. goods being more
expensive in Europe, their profits shrink even further when those
revenue dollars are repatriated, because income earned in euros
is worth less when converted to dollars. Just a few months ago,
American corporations anticipated double-digit earnings growth
for 2014.5 As the actual numbers are posted, expectations have
been tempered downwards, and energy, materials, utilities, and
consumer staples are slated to post negative growth rates for
Q42014.6 For example, McDonald’s predicted that the higher dollar
could cause a $.09 per share hit to fourth quarter earnings7 and
Procter & Gamble and Pfizer both predicted profit hits because
of negative currency impact - $1.8 Billion and $2.8 Billion,
respectively.8
By Louis Osmont and Jules Reich
FEW AMERICAN CONSUMERS LAMENT THE RETURN OF A STRONG dOLLAR. THEY SEE THE REWARdS IN THEIR GAS TANk ANd WHENEvER THEY BUY FOREIGN-PROdUCEd PROdUCTS. BUT THE REST OF THE WORLd, PARTICULARLY EUROPE, ARE NOT AS SANGUINE.
INTERNATIONAL SERVICES
But benefits also can accrue on both sides.
For one, European imports cost less for
U.S. consumers. Therefore, European
manufacturers, capitalizing on subsequent
increased demand in the U.S., will reap the
rewards of greater revenue and stronger
balance sheets. In addition, foreign
investors seeking higher returns than what
may be achievable in their own financial
markets are again investing in the U.S.,
where the yield on 10-year U.S. Treasury
bonds hovers slightly below 2% compared
to just .46% for 10-year German bonds.
This trend is expected to continue. In fact,
in 2013 (the latest numbers available),
seven of the top ten foreign investors in the
U.S. were European.9
A stronger dollar also has direct, positive
ramifications for U.S. mergers and
acquisitions (M&A) activity in Europe, as
long-term players who’ve had an eye
on making European investments can
now purchase them less expensively.
The private equity market, known for its
propensity to follow growth, rather than to
lead the charge into unproven economic
waters, is witnessing resurgence.
Conversely, Euro Zone companies seeking
U.S. investments may put those plans on
hold, as the eroding euro means it will cost
more to buy companies here.
Europe’s tourism industry should also
gain, as U.S. travelers bearing dollars
flock to foreign hotels and restaurants.
Similarly, Euro Zone companies with U.S.
manufacturing subsidiaries should see an
uptick to their bottom line.
Our European-based clients are optimistic
about the strengthening dollar. Their U.S.
subsidiaries purchase goods from the
European parent, who in turn, invoices the
U.S. companies in dollars, which then flow
to the company’s bottom line. The U.S.
subsidiaries realize higher profits via lower
costs, creating a win-win situation.
A word of caution: it takes more than
currency manipulation to strengthen an
economy, something to which Japan can
attest. Countries must fix their underlying
economic problems, which may require
austerity, commitment to job creation, and
other tough measures. Sudden currency
moves can also create market instability,10
or at the least, high volatility, as we have
seen in the gyrations of the S&P 500
Index since the beginning of the year.
Mohammed El-Erian, former CEO of PIMCO
and now Chief Economic Advisor at Allianz,
suggests that
sharp currency
shifts could be
characterized
as a currency
war, prompting a
retaliatory policy response,11 if not a fiscal
one.
In summary, Europe has seen Japan and
the US derive benefits from a weakened
currency that allowed them to grow
their economies through exports. The
U.S. economy has gained traction in an
environment of greater global cooperation.
A stronger dollar transfers demand to
other economies, and once they are on
firmer footing, they can again purchase
U.S. goods. Healthy global economies
ultimately are positive both for the US and
for its trading partners.
Louis is a parTner in our neW York pracTice. he can be reached aT 212.375.6944 or Louis.osMonT@WeiserMazars.coM.
JuLes is a parTner in our neW York pracTice. he can be reached aT 212.375.6523 or JuLes.reich@WeiserMazars.coM.
1 http://www.forbes.com/sites/
currentevents/2014/07/02/peace-through-weakness-the-
u-s-and-japan-sputter/
1 http://online.barrons.com/articles/3-ways-a-strong-
dollar-impacts-the-global-economy-1413236429
2 http://online.barrons.com/articles/3-ways-a-strong-
dollar-impacts-the-global-economy-1413236429
3 http://www.bloombergview.com/quicktake/europes-qe-
quandary
4 http://www.marketwatch.com/story/heres-why-
a-stronger-dollar-wont-suck-the-wind-out-of-
stocks-2014-09-24
5 http://www.spokesman.com/stories/2015/jan/17/
strengthening-dollar-hurts-us-corporations/
6 S&P Capital IQ Consensus Report, January 30, 2015
7 Buck up, Profits Down: High Dollar Dents US Company
Earnings, WASHINGTON — Jan 16, 2015, By PAUL
WISEMAN and STAN CHOE AP Business Writers,
Associated Press
8 http://www.wsj.com/article_email/stocks-get-a-dollar-
hit-1422404608-lMyQjAxMTE1NTI4ODUyMDg3Wj
January 27, 2015
9 Content First, LLC, Foreign Direct Investment in the
United States, 2014 Report, www.contentfirst.com
10 http://d21uq3hx4esec9.cloudfront.net/uploads/pdf/
OTB_Nov_13_2014.pdf
11 Ibid.
“a word of cautIon: It takeS more than currency manIPulatIon to StrenGthen an economy, SomethInG to whIch JaPan can atteSt.”
“A stronger dollar also has direct, positive ramifications for U.S. mergers and acquisitions (M&A) activity in Europe, as long-term players who’ve had an eye on making European investments can now purchase them less expensively.”
April 2015 | 2726 | WeiserMazars Ledger
§ Risk Management and Reputational Risk Reputational risk holds special significance for the not-for-
profit sector, whose public persona often determines their
ability to successfully serve their constituents and access
necessary funds.
Recent surveys of management and Boards of not-for-profit
organizations, as well as members of the public who monitor,
donate or volunteer their services, rate reputational risk as the
top governance priority for not-for-profits.
§ Cybersecurity Cybersecurity has long been a top concern for the
private sector and government agencies, but not-for-
profit organizations are now realizing the importance of
cybersecurity to their operations.
Compromised security has both short term and long term
effects on not-for-profits – resulting in loss of confidence of
donors, program participants and other third parties going
forward.
§ Internal controls on fiscal and other areasMany not-for-profit organizations believe that internal control
systems and policies are not operationally critical, are
satisfied with the controls already in place, or believe their
team members are trustworthy. They are further deterred
by the cost to implement more formal controls. However, a
good internal control system is a powerful component of a
successful organization.
Strong internal control systems can deter fraud, which assures
financial information reliability – something that is increasingly
important in this era of greater transparency and oversight.
To handle non-fiscal risks, organizations should implement an
Enterprise Risk Management process, which evaluates all of an
organization’s inherent risks on operational issues.
§ Revenue RecognitionMany organizations continue to struggle with accountability
for the timing, classification and utilization of unrestricted and
restricted revenues.
§ Budgeting and effective forecasting Benchmarking actual results against budgeting and forecasting
is more critical than ever in this environment of increasingly
constrained revenue.
§ Governance between management, Board and third partiesGovernance properly administered is the bedrock of today’s
not-for-profit organization. The way in which management
and Boards serve an organization, and their commitment
to excellence in good governance, plays a significant role in
setting a tone of integrity and ensuring the ultimate viability of
organizations and their programs.
The not-for-profit industry has recently become a focal point
for additional oversight and control by funding agencies
and government entities. It is vital that all not-for-profits
make effective, transparent governance a key aspect of their
operations.
As time goes on, these challenges will not go away – they will
only become more acute. It is imperative to establish an effective
response to them in order to ensure the sustainability of any not-
for-profit. If you think your organization may need to reconsider
its priorities in a given area, please reach out to one of our
knowledgeable professionals to discuss the best steps for moving
forward.
MiTch is a parTner and noT-for-profiT pracTice Leader in our neW York pracTice. he can be reached aT 212.375.6723 or MiTch.LeWis@WeiserMazars.coM.
ron is a parTner in our neW York pracTice. he can be reached aT 212.375.6782 or ron.ries@WeiserMazars.coM.
eThan is a parTner in our neW York pracTice. he can be reached aT 212.375.6794 or eThan.kahn@WeiserMazars.coM.
hoWard is a parTner in our neW York pracTice. he can be reached aT 212.375.6587 or hoWard.cohen@WeiserMazars.coM.
eNSurINg SuSTaINabIlITy: Top 6 areaS oF FocuS For NoT-For-proFIT orgaNIzaTIoNSThereismuchanxiety,concernandtrepidationcurrentlyinthenot-for-profitindustry due to a number of factors both internal and external.
AsCPAs,wefocusourattentionnotonlyonbasicservicessuchasauditandtax,butalsoonmanagement-relatedissuesthatimpactourclients,including:
“Governance ProPerly admInIStered IS the bedrock of today’S not-for-ProfIt orGanIzatIon”
By Not-for-Profit Group
NOT-FOR-PROFIT
April 2015 | 2928 | WeiserMazars Ledger
THUS FAR, THERE HAvE BEEN APPROxIMATELY 191,000
2013 CALENdAR YEAR ENd FORM 5500 FILINGS. OF THOSE
FILINGS, APPROxIMATELY 47,000 (25%) WERE RECEIvEd
WITHIN THE LAST 3 dAYS OF THE ExTENdEd OCTOBER
15TH dUE dATE OR AFTER THE dUE dATE. ALTHOUGH I
CAN’T SAY FOR CERTAIN WHY THOSE NUMBERS ARE SO
HIGH, BASEd ON PREvIOUS ExPERIENCE, I CAN POINT
TO THREE COMMON AREAS THAT CAUSE dELAYEd OR
LATE FILINGS ANd OFFER TIPS ON HOW TO AvOId THESE
how To avoId a laST mINuTe or laTe Form 5500 FIlINg
Three common pitfalls to look out for:
1. Not knowing your participant count as of January 1st This is the key determining factor as to whether you will
need an audited financial statement of your plan to attach
to the Form 5500. The need for an audit increases the
length of time it will take to prepare for your Form 5500
filing. The magic number to keep in mind is 120 eligible
participants. A common reason that this is missed is, when
people informally evaluate this number, they think in terms
of employees currently at their company, such as there are
only 100 employees who work here, therefore there cannot
be 120 eligible participants. What they do not consider is
that an eligible participant includes individuals who no longer
work at their company but hold a participant account balance
within the plan. If there is a high degree of turnover or the
plan has been in existence for a number of years, the number
of eligible participants who fall into this category can sway
the count significantly.
Another factor that often causes an error in the eligible
participant count is a misconception that the count as of
January 1, 2012 is the same as the end of year number that
was on the Form 5500 at December 31, 2011. This is often
not the case, as participants can become eligible on January
1st based on the entry dates and other factors outlined in
the plan document. Monitoring this number and the data
being used to generate this number, as well as discussing the
details with your service providers, can save you time and
money. The earlier you know about the need for the audit, the
more likely you are to avoid a delayed or late filing.
By Kristen Walters
“If there was a compliance error or other issue during the plan year and you are aware of such noncompliance, you should be communicating with your service providers to correct the operational failure.”
2. Not communicating with service providers timelyService providers typically request information from plan sponsors
throughout the year, but these requests are often not addressed
until right before a filing deadline, which can lead to surprises.
Example requests include the compliance questionnaires that
are sent out by third party administrators, requests for data for
nondiscrimination testing, and reviews of fidelity bond coverage.
These administrative items often uncover compliance issues and, if
not addressed timely, can cause filing delays.
3. The Plan Sponsor is not monitoring complianceThere can be a number of plan operational failures that are not
monitored properly or there can be a perception that the third
party administrator is monitoring these issues when they are
not considered responsible to do such. When these situations
are discovered, they typically create a lot of administrative
work. Common operational failures include whether the correct
definition of compensation is being used, the correct calculation
of employee and employer contributions, whether contributions
are being remitted timely to the custodian, and proper execution
of changes in employee deferral percentages. If there was a
compliance error or other issue during the plan year and you are
aware of such noncompliance, you should be communicating with
your service providers to correct the operational failure. If you are
not monitoring these issues, you should consider implementing
processes to do so.
By addressing these common pitfalls, you will develop a good
set of best practices and help you to move your filing timeline up
drastically. It is also important to communicate regularly with your
service providers.
krisTen is a senior Manager in our neW JerseY pracTice. she can be reached aT 732.205.2003 or aT krisTen.WaLTers@WeiserMazars.coM.
EMPLOYEE BENEFITS
April 2015 | 3130 | WeiserMazars Ledger
FIve hIddeN ITemS crITIcal To The SucceSS oF a New buSINeSS
When starting a new business, there are several hidden costs, whether monetary or not, that many entrepreneurs do not take into consideration. Having an understanding of these five hidden costs can largely impact the success of the business.
by Kimberly Wirzman and Jeffrey Ratkowski
This article was originally published in the March 2015 issue of MidJersey Business magazine.
ENTREPRENEURIAL BUSINESS GROUP
REGISTRATION Before a company can begin business, it must first register
with federal and state authorities and apply for an employer
identification number. For state filing purposes, some states also
will require an annual filing fee, minimum tax, franchise tax, regular
tax rates, or a combination of filing fees and taxes. Each state has
different filing requirements and how it taxes the entity. A new
business should be mindful of these cash outflow implications.
ENTITY STRUCTURE Entrepreneurs should consider the tax and legal aspects of the
various entity structures available. Below are some highlights:
* Sole proprietorship or single-member limited liability company
(SMLLC). Sole proprietors report their self-employed income on
their personal tax return and are subject to self-employment and
Medicare taxes. A sole proprietor needs to be mindful that there is
not the protection of personal assets in the case of bankruptcy that
is offered by a corporation. An SMLLC is taxed similarly but does
allow for the protection of personal assets that is not provided by a
sole proprietorship.
* Corporations. A corporation is a separate legal entity which
reports its net income or loss at the corporate level. Shareholders
own stock in the corporation and only report a gain or loss when
they sell their stock. The downfall to a corporation is the concept of
double taxation, as income is taxed at the corporate level and again
when money is taken out of the corporation by a stockholder (i.e.,
in the form of a dividend). An “S” corporation is a small business
corporation, which is organized under the subchapter S section
of the Internal Revenue Code. There are certain requirements in
order to qualify as an S corporation. An S corporation is considered
a pass-through entity, meaning the net income or losses will
be reported to each shareholder based on his or her percent
ownership and the operating agreement. Shareholders will pay
taxes on an individual level based on the net income or loss that is
reported to them for the period.
* Partnerships (general and limited). Partnerships consist of two
or more owners, and the income, losses, and credits pass through
to the partners at the individual level. Depending on the type of
business activity the partnership is involved in, the partners also
might be subject to self-employment tax. Partnerships can have
special allocations of income, losses, and credits depending on
what the partnership agreement states, unlike other entities. A
limited partnership must consist of at least one general partner.
Limited partners are generally not liable for the obligations
of the partnership unless they participate in the control of the
partnership.
VALUATION OF THE BUSINESS Funding comes primarily in the form of debt and/or equity. Usually
in start-ups, equity is the main source of funds, which needs to
be evaluated and documented in writing. Initially undervaluing
the company to attract investors and capital can lead to giving
away too much ownership that may take significant compensation
to buy back when the company grows and expands. Conversely,
overvaluing the company can detract from finding investors and
obtaining necessary capital.
BACK-OFFICE PROCESSES Businesses that have employees need to be in
compliance with various laws and regulations,
including Forms W-4 and I-9, as well as quarterly payroll tax
returns. Failure to comply with these filing requirements can lead to
substantial penalties that can have disastrous implications on the
company’s cash flows. Consideration also should be given to how
payments will be received and setting up accounts receivable and
determining whether the service or product is taxable. Managing
the timeliness of cash receipts will help paying vendors, and timely
payments can lead to purchase discounts.
ACCOUNTING SOFTWARE The best way to manage the back-office processes and the overall
productivity of the company is by utilizing a suitable accounting
software package. There are several options, from boxed packages
to customizable software systems. The more customized the
software system, the more expensive it can become to implement
and maintain. But when properly utilized, these systems can lead to
more informed decisions and, ultimately, more money.
The start-up phase of a business can be exciting, scary, and
stressful, but with professionals guiding the decision-making on
the above items, it is possible to eliminate hidden costs while
allowing the entrepreneur to focus on the operational aspects of
the business. These partnerships can further lead to long-term
friendships and, most importantly, to a successful and profitable
company.
kiMberLY is a Manager in our neW York pracTice. he can be reached aT 732.205.2024 or aT kiMberLY.WirzMan@WeiserMazars.coM.
JeffreY is a senior accounTanT in our neW JerseY pracTice. he can be reached aT 732.475.2116 or aT JeffreY.raTkoWski@WeiserMazars.coM.
“It IS ImPortant to keeP In mInd that, when It comeS to overhead rateS, ‘one SIze doeS not fIt all.”
April 2015 | 3332 | WeiserMazars Ledger
weak It Security Programs may Spell disaster for healthcare organizations’ bottom linesBy William Ahrens and
Marc Grossman
Recentsuccessfulcyberattacksagainstlarge,well-knownhealthcare
organizations–suchasthewidelydiscussedAnthemsecuritybreach–areforcing
organizations of all sizes across the continuum of care (health systems, hospitals,
physicianpractices,IPAs,andpayers)togiveITsecurityincreasedattentionand
investment. Cyber attacks can wreak havoc on an organization’s reputation and
have a significant negative impact on its bottom line.
SeveraltrendspointtoadifficultfutureforthehealthcareindustryintermsofIT
security:
§ Thenumberandsophisticationofcyberattacksonhealthcareorganizations
isincreasingatadramaticrate.Arecentsurveyfoundthatover90%of
healthcare organizations reported at least one data breach over the last 2 years.
HEALTH CARE
§ An increased reliance on information technology (partially
mandated by the HITECH Act). An average hospital has 300+
systems plus electronic monitors, which presents a huge (and
ripe) attack surface for would-be hackers.
§ HIPAA and Meaningful Use regulations require healthcare
organizations to make electronic protected health information
(e-PHI) both accessible and secure.
§ “Bring Your Own Device” (BYOD) policies enhance physician
workflow, but potentially expose e-PHI and pose a challenge
for IT security staff and anti-malware tools.
§ Patient information stored in EMRs includes date of birth, SSN,
credit card numbers, addresses, and medical information,
making it significantly more valuable than other types of online
data. Recent estimates put a value of $40 - $250 for a patient
medical record vs. $.35 - $4 for a credit card record.
§ Both the size of HIPAA fines and the number/frequency of
HIPAA audits are increasing. One large health system paid
$4.8M in fines; the total cost resulting from another’s breach
was reportedly $150M.
§ CMS audits are expected to increase in 2015. One facet of the
audit may require submission of the Security Risk Analysis
documentation; one hospital is already expecting to return
$900K in MU Stage 1 payments because their risk assessment
was not completed during the year covered by the CMS audit.
Compromised security has long-term effects on healthcare
organizations due to bad press; potential HIPAA and credit card
company fines for failure to comply with security requirements;
patients suffering identity theft; and, the loss of patient confidence
and loyalty. Healthcare organizations have already spent nearly
$1.4 billion to notify more than 6.9 million individuals affected by
compromised electronic records in 2013.
While in the past, healthcare organizations often felt cyber attacks
would not happen to them, the increasing number of data breaches
over the past few years is beginning to make cybersecurity and
data privacy a Board-level governance concern. It is important
that Board members, executives and directors recognize cyber
risks as part of their duty to review risk practices, business
continuity planning, and disclosure of material risks. Healthcare
organizations handle significant amounts of sensitive information
– extremely valuable to cyber thieves – and all of this data must be
protected.
Failing to take adequate cybersecurity measures and a subsequent
data breach can lead to loss of public trust in an organization.
Unfortunately, healthcare organizations often have limited
resources to invest in information security, leading to IT systems
and security appliances that may be outdated - resulting in high
vulnerability.
Organizations must approach cybersecurity holistically, as
they would handle their financial health. It is the collective
responsibility of everyone in an organization to protect it from
cyber attacks.
preVenTaTiVe sTeps Organizations should take all necessary precautions to avoid being
the next headline and negatively impacting their bottom line.
§ Develop an IT security management program
§ Proactively address known and potential threats
§ Continuously monitor for and address human error
§ Assess the relationship between physical security and
cybersecurity
§ Maintain a security awareness program about various types of
malware threats and take action to address vulnerabilities in
your IT environment
§ Acquire and implement good defensive technologies to protect
electronic Patient Health Records
§ Develop, maintain, and enforce appropriate security policies
and procedures
§ Be ready to face a breach with an incident response plan
3rd parTY VuLnerabiLiTY assessMenTs - cosT-effecTiVe and essenTiaL § Minimize vulnerability to cyber attacks
§ Reduce impact of and shorten recovery time from an incident
§ Ensure compliance with HIPAA and MU regulatory
requirements
§ Improve system performance
§ Reduce the impact on staff by implementing more automated
tools
§ Avoid large fines and/or loss of data
WeiserMazars has substantial experience implementing privacy
and security initiatives, including performing vulnerability
assessments that meet the requirements of HIPAA and Meaningful
Use. We help you and your organization to implement the
appropriate security measures to protect against cybersecurity
threats and potential damage to your reputation.
WiLLiaM is a senior Manager in our neW York pracTice. he can be reached aT 212.375.6662 or aT WiLLiaM.ahrens@WeiserMazars.coM.
Marc is a principaL in our neW York pracTice. he can be reached aT 212.375.6526 or aT Marc.grossMan@WeiserMazars.coM.
April 2015 | 3534 | WeiserMazars Ledger
GOVERNANCE, RISK AND COMPLIANCE (GRC)
meaSurINg INTerNal audITperFormaNce - whaT are The ImporTaNT meTrIcS?by WeiserMazars LLP’s Governance, Risk and Compliance (GRC) Group
backgroundIn today’s environment of increased regulation and focus on
governance and risk management, the true “value add” of the
Internal Audit (IA) function is very much a topic of scrutiny for
Boards, audit committee members, senior executives (Chief
Executive Officer, Chief Financial Officer) and virtually all IA
stakeholders. In many instances, the IA function is also being
asked to do more with fewer personnel and to leverage technology
in all their activities. While many Chief Audit Executives (CAEs)
regularly report the number of audits completed vs. planned,
the number of high risk issues identified, actual audit hours vs.
budgeted hours, and actual function costs vs. budgeted costs, the
question remains whether these measures are truly the most
meaningful. Are they enough to show that consistent value is
provided to a company?
In order to arrive at meaningful metrics, the first step is to gain
an understanding of the true “mission” of IA. While this may be
described in an IA mission statement, it is critical for the function
to adhere to best practices, generally governed by the Institute of
Internal Auditors International Professional Practices Framework
(IPPF). The IPPF, which includes the International Standards for
the Professional Practice of Internal Auditing (Standards,) is a
conceptual framework which organizes authoritative guidance
promulgated by the Institute of Internal Auditors (IIA). While
adoption of the IPPF is not mandatory, adherence to it indicates an
IA function is following the best practices in internal auditing. In
addition to including the Standards and requiring internal auditor
adherence to the IIA Code of Ethics, the IPPF includes a Definition
of Internal Auditing. This Definition and/or its key components is
generally included in the audit charter and/or mission statement
of IA functions.
This Definition states:
“Internal auditing is an independent, objective assurance and
consulting activity designed to add value and improve an
organization’s operations. It helps an organization accomplish its
objectives by bringing a systematic, disciplined approach to evaluate
and improve the effectiveness of the risk management, control and
governance processes.”
While the Definition generally drives the focus of many IA
functions, in today’s regulatory environment - and for global
organizations - there are additional requirements that IA examine
specific areas of a company and, in some instances, report out
their overall results. It is these additional requirements, as well as
other areas to which the audit committee and senior management
may direct IA’s focus, which drives actual and perceived IA value.
As many recent IA surveys have shown, audit committees and
senior management struggle with gaining comfort that true “value”
is consistently provided by IA functions. It is imperative that the
true mission of IA is understood and communication of the results
of IA activities be aligned to that mission. In this regard, identifying
the “assurance” and consulting/advisory role of IA is imperative.
For many stakeholders, it is in the consulting/advisory role that
they believe most IA value is provided. While other stakeholders
may see IA as primarily an “assurance” provider that may not have
the skills to provide consulting/advisory services.
In today’s environment, while the IA assurance function is still
important and will always continue, there is a growing trend of IA
also providing consulting/advisory services. In short, no matter
how the IA function is perceived - as assurance provider and/or
consultant/advisor, it is imperative that the CAE communicate key
metrics that are aligned in these areas.
RECOGNIZING STAKEHOLDERSWith the mission of the IA function clearly understood in order to
determine what metrics will assist in showing IA value, the various
stakeholders of IA must be identified. While we have previously
alluded to audit committee and senior executives figure 1.1 below
depicts the many stakeholders of IA.
Because the CAE is clearly a stakeholder, he or she wants to make
sure that the metrics show that the IA function has a clear mission,
includes best practices in the field of internal auditing and the IA
output will be perceived to provide consistent value to stakeholders.
While the audit committee’s goals should be aligned to the CAE, as
with management there may be specific areas where it believes a
great deal of value resides. These can include feedback and focus
on Information Technology and emerging risks, the review of an
organization’s risk management processes, or the ability to have
risk-focused IA personnel move into other areas of an organization.
Individual auditees are often focused on having consistent
recommendations that will assist in meeting their operational and
strategic objectives. In addition, the external auditor is generally
concerned that competent IA personnel will assist not only in
completing key control audits, but also in completing external audit
assistance work – which helps with their attestation needs.
When we recently discussed expected IA value with audit
committee members, executive management and auditees, all
responses included important aspects of an IA function’s mission.
Just some of these included:
§ “The value of Internal Audit to me is I don’t want surprises,
Internal Audit assists in reducing regulatory, reputational
and financial surprises.”
§ “Internal Audit helps set a tone of accountability throughout
the organization.”
§ “Internal Audit helps reduce the external audit fee and
provides a level of assurance that we have proper controls
in place and that they are operating effectively.”
§ “A key value Internal Audit provides is the issues they identify
April 2015 | 3736 | WeiserMazars Ledger
and how they partner with management to arrive at viable actions to address those issues.”
§ “In today’s world, I look not only for Internal Audit to provide assurance over controls but to also provide input to help our
organization achieve our objectives and overall strategy.”
§ “A successful Internal Audit function is made up of people with the right skills, who are business partners with management and
provide insight into identifying and addressing risks of the company, including emerging risks. It is this incubator of risk-focused
people who we also look to enter the business and assist the company in achieving its long term objectives.”
keY MeTricsWhile there may be different areas of focus and corresponding priorities for various stakeholders, a common measure for IA value
should also address:
§ Presence of robust IA policies and procedures which drive IA activities
§ Skillsets, abilities and relationships of IA personnel
§ Evidence that the IA focus and results are aligned to the organizational primary risks
Having a true “Balanced Scorecard” which addresses the areas noted, shows IA focus, and one that is used to communicate results,
helps demonstrate the consistent value of IA. Some of the key measures in each of the three areas are summarized in figures 1.2, 1.3
and 1.4.
Figure 1.2-Robust Internal Audit Policies and Procedures
*in The beLoW charTs – X represenTs a prioriTY area for The appLicabLe sTakehoLder.
Figure 1.3-Skillsets, Abilities and Relationships of Internal Audit Personnel
Figure 1.4-Alignment of Internal Audit to Organizational Primary Risks
GOVERNANCE, RISK AND COMPLIANCE (GRC)
April 2015 | 3938 | WeiserMazars Ledger
presence of robusT inTernaL audiT poLicies and procedures Which driVe inTernaL audiT acTiViTies
For CAEs it is imperative that they
have written policies and procedures
that are aligned to the IPPF, including
internal quality control procedures, and
the completion of an External Quality
Assessment Review (QAR). While the
QAR has been a requirement for many
years, a number of organizations have
either not had QARs completed, or they
are not always completed within the
required 5 year time frame. Another
key area is assuring that all regulatory
IA requirements are memorialized and
completed on a timely basis.
Other core metrics include having an
established process under which any
“High” rate audit issues/recommendations
are addressed within a reasonable
timeframe (e.g. 60 days of report issuance)
and that all report issues are addressed
with management actions within no longer
than 30 days from target completion date.
One item many auditees, senior
management and audit committee
personnel look at is the number of audit
issues addressed before the final report
is issued. When this is done, evidence of
true partnering by IA with management is
evident.
There is also an increased focus on being
able to deliver methods and tools that
the organization will be able to re-use
independently moving forward. Generally
in these instances, using automated tools
and/or a designed program, IA establishes
a process to identify/analyze risks to an
organization (review and analysis of third
party data, etc.) that can be implemented
by the business and therefore allowing
the “process” to be examined by IA in the
future.
Some other key metrics include;
§ Reports issued within XX days (e.g.
45 days) of fieldwork
§ Actual annual audit plan hours vs.
budgeted hours
§ Number of completed audits vs.
planned audits
§ Consistent use of surveys at the
completion of each audit to obtain
and report on auditee management
feedback
§ Consistent use of Computer
Assisted Audit Techniques (CAATs),
continuous auditing and related
reports produced to show value in
identifying anomalies within entire
populations
skiLLseTs, abiLiTies and reLaTionships of inTernaL audiT personneL
Two highly useful means of helping
CAEs in carrying out IA activities include
not only having personnel with various
certifications (CIA, CISA, CRMA, CFE, etc.),
but also maintaining a matrix of areas
of expertise by person and a related gap
analysis. This gap analysis is a driver
for filling internal audit positions and it
uncovers any need to seek outsourcing
of Subject Matter Experts. Moreover, an
important value add to organizations is
the development of relationships between
IA personnel and company management.
This enhances the IA personnel’s
understanding of the business and their
ability to add value. Measurement of
formal feedback from management on
each auditor is obtained on an annual
basis.
An excellent measure of IA value is the
number of personnel that
have been transferred from
IA to other positions in an
organization. Having IA
serve as a talent incubator
for the organization as a
whole is a consistent positive
for many organizations.
Also gaining momentum
in many organizations are
rotation programs where specialized,
skilled personnel from other departments
transfer into the IA function for 12 to 24
months. In many organizations, another
value indicator is the number of “special
requests” relating to key initiatives
on which management asks for IA
involvement.
Finally other key metrics include the
number of auditors per number of
employees as well as the number of
auditors per annual revenue dollars.
eVidence ThaT ia focus and resuLTs are aLigned To The priMarY organizaTionaL risks
The final area for measuring IA value is
the daily focus of the IA function. That
is, helping an organization accomplish
its objectives by assisting management
in improving the effectiveness of the risk
management by focusing on the primary
risks of an organization, while at times
might not be easily measured, should be a
key driver of IA activities. While this may be difficult to quantify, given IA’s technical abilities and their forum to drive change in an organization
it is imperative that IA consistently communicates to all stakeholders how they contribute to identifying risks and assuring they are
sufficiently addressed.
One of the main deliverables that assist in this process is a formal reconciliation of Internal Audit, Sarbanes Oxley, Risk Management,
Compliance and external audit risks and coverage. Some companies complete this via a formal document which is updated on a regular
basis. This document details organizational risks, as well the processes in place to address the risks. Linking each IA report finding to major
risk areas of the organization is a clear indication of value received. This linkage may include highlighting the impact of the audit issue and
overall audit result to the risk as a whole. This includes identifying risks that exist in attaining an organization’s strategic objectives.
Since IA is uniquely qualified in that they understand the risks of the organization, any audits that directly review an organization’s risk
management process or Information Technology risks (cybersecurity, etc.) should be highlighted to all stakeholders. Moreover, with the
increased emphasis on emerging risks and fraud, any audit committee or senior management update on emerging risks and statistics on
number of fraud related report findings is also a value add to key IA stakeholders.
SUMMARYWhile many IA functions provide consistent value to organizations, the process of measuring and communicating this value is not “one
size fits all.” As such, to ensure both the reality and perception of consistent value being provided, IA needs to be focused on their mission
as well as how they serve and report results to their various stakeholders. Attending to the needs of the stakeholders should assist in the
communication and level of detail showing consistent IA value. A balanced approach is recommended where updates and related statistics
are maintained and communicated, focusing on measures that relate to adherence to robust IA policies and procedures, the abilities of IA
personnel and IA’s focus on the company’s primary risks. If this is done, evidencing IA value will surely be more straightforward and better
measured!
biLL is a parTner in our pennsYLVania pracTice. he can be reached aT 267.532.4328 or aT biLL.MeLLon@WeiserMazars.coM.
“two hIGhly uSeful meanS of helPInG caeS In carryInG out Ia actIvItIeS Include not only havInG PerSonnel wIth varIouS certIfIcatIonS (cIa, cISa, crma, cfe, etc.), but alSo maIntaInInG a matrIx of areaS of exPertISe by PerSon and a related GaP analySIS.
GOVERNANCE, RISK AND COMPLIANCE (GRC)
April 2015 | 4140 | WeiserMazars Ledger
CONTINUOUS AUDITING - A DELICATE CHEMISTRY
conTinuous audiTing Vs. conTinuous MoniToring The concept of CA has been around for many years. The AICPA
report “Special Committee on Assurance Service” mentioned it
for the first time in 1995. The necessity for continuous auditing
arises from a need for daily reporting and a demand for
more reliable, valid and just-in-time information for effective
decision-making.
Continuous Auditing - The automatic method used by persons
who are able to provide assurance such as an internal auditor or
an independent auditor, to perform control and risk assessments
and to collect auditing evidence on a frequent basis. Continuous
audit activities heavily rely on technology to automate the
identification of exceptions or anomalies, analyze patterns,
review trends, and test controls. Real-time continuous auditing is
especially useful for high-risk enterprise processes
Continuous monitoring, in comparison, is a process under
Operational management used to ensure that management’s
policies, procedures, and key business processes are operating
effectively. CM is used as part of the control structure in
the monitoring role promoted by COSO. CM detects and
corrects process irregularities and helps implement process
improvements (adequacy and effectiveness of internal
controls). This permits ongoing insight into the effectiveness
of controls and the integrity of transactions. For instance,
management may identify critical control points and implement
automated tests to determine, on a continuous or frequent
basis, if these controls are working properly.
There are certainly similarities between Continuous Auditing
and Continuous Monitoring as they both use the same
automated techniques, but they are two different processes,
with two different, complementary approaches. The primary
difference is related to ownership of the process. Continuous
monitoring is management driven (first two lines of defense)
while continuous audit is audit driven (third line of defense).
Although many of the continuous monitoring techniques used
by management are similar to those performed by internal
auditors, continuous auditing enables auditors to evaluate the
By WeiserMazars LLP’s Governance, Risk and Compliance (GRC) Group
CONTINUOUS AUdITING (CA) HAS BEEN IN THE MINdS OF AUdIT COMMITTEES ANd CHIEF AUdIT ExECUTIvES
(CAE) FOR MORE THAN TWO dECAdES. WHILE THE OvERALL CONCEPT IS WELL UNdERSTOOd, SOMETIMES IT
IS CONFUSEd WITH CONTINUOUS MONITORING (CM). A dISTINCTION BETWEEN THESE TWO HAS TO BE MAdE
TO UNdERSTANd HOW CA COMPLEMENTS CONTINUOUS MONITORING ANd THE UNIqUE BENEFITS OF CA. THE
PARTICULAR APPROACH A CAE TAkES IN CONTINUOUS AUdITING WILL BE INFLUENCEd BY THE MATURITY ANd
SOPHISTICATION OF THE ORGANIzATION, REqUIRING A CERTAIN LEvEL OF TAILORING TO ACHIEvE MAxIMUM
vALUE. WE WILL ALSO dISCUSS THE STEPS TO SUCCESSFULLY IMPLEMENT A CONTINUOUS AUdITING INITIATIvE.
adequacy of management’s monitoring function and identify
and assess risk areas. As the reliance by Internal Audit (IA) on
the CM process increases, the assessment is not necessarily
performed on a continuous basis, but more periodically as any
other audits.
Another difference is in the type and sufficiency of evidence
generated by continuous monitoring systems. Information
provided by continuous monitoring systems can give auditors
significant information about a process, system or data, but
due to its indirect nature, that information alone would not be
sufficient in a continuous auditing engagement. The IIA, in its
GTAG (Global Technology Audit Guide) related to Continuous
Auditing, details the CA/CM inverse relationship in regard to the
amount of effort that management and the audit function put,
respectively, into CM/CA. In many instances, IA led a continuous
auditing initiative that was later transferred to management to
become part of the continuous monitoring process. The auditor
would not be part of this new control function as, in that case,
his independence would be impaired.
An organization can obtain great benefits in implementing CM
and CA together.
benefiTs of conTinuous audiTing
While continuous auditing and its benefits have been known for
many years, actual implementation by the audit function has
been low, although formal demands have often been made by
management and audit committees. With CA, the role of the auditor
can go beyond auditing procedures in which irregularities are
investigated. However, this requires detailed auditing processes
involving value judgments and professional skepticism.
Periodic audits no longer fit the need for continuous assurance in
today’s fast paced business environment. In order to adapt to this
changing environment, internal audit, pushed by audit committees
and supported by management, has to move to a more dynamic
risk-based approach - assessing changing levels of risk on an
ongoing basis, being more actively involved in risk management
throughout its assessment and acting as its implementation
advocate. CA results in more comprehensive and continuous
assurance with greater coverage across the organization as long
as the CA implementation is done consistently across primary and
secondary processes. It will also enable greater accountability of
the management and business owner.
Technology enables internal audit to analyze large volume of data in
less time, more efficiently, while improving quality. Some practical
benefits are a deeper audit for the same cost, review of exceptions
only, more alternatives in choosing the approach and an increase in
transparency for the auditees. To maximize its value at the earlier
stages of implementation, real time CA should focus on high risk
areas. The immediate benefits of CA implementation are more
cost effective audits that free up resources that can be dedicated to
other, more valuable areas.
This dynamics approach to risks and control as well as the
redistribution of responsibilities establishes a new relationship
between the audit function and management, improving the
perception of the added value brought by internal audit. A better
understanding of audit and management’s respective priorities on
risk and control issues can also be a benefit of a sound CA.
In terms of continuous auditing associated with continuous
monitoring, improved areas include providing reasonable
assurance that objectives of COSO ERM around reliability of
reporting and compliance with laws and regulations will be
met (Sarbanes-Oxley and beyond) ; better business efficiencies
GOVERNANCE, RISK AND COMPLIANCE (GRC)
“Technology enables internal audit to analyze large volume of data in less time, more efficiently, while improving quality.”
April 2015 | 4342 | WeiserMazars Ledger
improving the bottom line; and increased management insight
regarding risk. It also supports audit independence by ensuring
that auditors have sufficient access to, and understanding of, key
business information systems.
Finally, a proper implementation of CA, with clear objectives,
extensive understanding of data, and properly defined outputs
helps in discovering and analyzing patterns, anomalies and
outliers that increase the probability of detecting fraud.MaTuriTY and sophisTicaTion MaTTers Which conTinuous audiTing
Once continuous auditing has been included as an important
aspect of the Internal Audit (IA) plan, with the support of
management; the CAE needs to determine which point of the
spectrum of continuous auditing is the most suitable for the
organization. This is primarily based on the sophistication and
maturity of the organization in terms of its two first lines of
defense.
An organization with limited or scattered continuous monitoring
will put more emphasis on continuous controls assessment
as part of continuous auditing following IIA Attribute Standard
2130, which requires Internal Audit (IA) activity that assists the
organization in maintaining effective controls. The continuous audit
activities for this type of organization will most likely be control
based, using detailed or transactional real-time or near real-time
financial data. The objective is to provide control assurance to
management and the audit committee. The continuous control
assessment addresses not only the identification of control
deficiencies, but also fraud, waste and abuse detection (covered
by IIA standard 1210.A2 and AICPA SAS No 99). Because the
implementation of continuous auditing might be complex (see
following section) for an internal audit department with limited
experience, a step-by step approach is suggested. Internal audit
should start with Computer Assisted Audit Techniques (CAATs)
on some primary processes. Then, when the process is mastered
move to continuous auditing. As a result, internal audit will
leverage continuous auditing in order to strengthen the continuous
monitoring and review environment of the organization. As
many continuous auditing processes are similar to continuous
monitoring techniques, internal audit may ultimately transfer the
activity pertaining to continuous control assessment to become
part of the control monitoring owned by management. Although
the continuous auditing concept has been around for more than
20 years, many internal audit departments are still at the earliest
stage of implementation, focusing on CAATs and starting to move
to continuous control assessment.
Internal audit activities in more mature and sophisticated
organizations with strong continuous monitoring and performance
management will put less emphasis on continuous control
assessment. They will perform periodic audits on the effectiveness
of management’s continuous monitoring. A risk based approach
using continuous risk assessment will be preferred by these
organizations as discussed by the IIA Standard 2120 on the
evaluation of effectiveness and improvement of risk management
processes. Various ongoing sets of financial and operational
data will be analyzed in order to dynamically update the risk
assessment and perform audit recommendation follow-ups by
verifying their implementation. Analysis of trends and comparison
between different periods or against a baseline will provide
valuable information on risk profile evolution and identify new
risks. This data driven risk assessment will dynamically impact the
audit plan. The CAE might update the audit plan if risks in certain
areas are evolving favorably or unfavorably. Usually, continuous
risk assessment is more easily implementation when it leverages
of the ERM function.
In the absence of fraud detection activities performed by
management (Special Investigation Unit (SIU) for example in
insurance companies), these mature organizations may perform
real-time or near transactional review.
iMpLeMenTaTion of conTinuous audiTing
No matter the maturity of the organization, as with any other
process/system, the continuous auditing initiative should be
conducted following a step-by-step approach to achieve successful
implementation.
1. Strategic plan A strategic plan should be developed, identifying the key
stakeholder, the overall objectives of the initiative, and the success
criteria for measurement purposes. This document will be used for
presentations to the audit committee and management.
2. Define the scope and objectives
The implementation of the CA process has to be done with a risk-
based approach. As implementation can be long, it is mandatory
to identify the key areas in which the implementation of CA will
prove both efficient in terms of risk management and ease of
implementation. To maximize the value, CA should be used to test
controls, identify and assess risks and detect fraud. Once the areas
have been identified, the internal audit team has to determine,
with management’s assistance, the controls and any continuous
monitoring already in place. Like any other project, buy-in from
management is essential for success. These parties need to work
together to define the audit requirements, which will serve as a
basis to the development and IT teams in listing the requirements
for the technical solution.
Although the benefits of CA are substantial, the investment in terms
of time and money can be significant, especially in sophisticated
and mature organizations. As such, before starting a large project
many organizations use CAATs as a trampoline to continuous
auditing.
One major potential road block at this stage is the absence
of consensus between parties regarding the scope of the
contemplated initiative. A consensus should be obtained based on
well-defined objectives, explanation of the benefits, the return on
investment (ROI), and a realistic scope. A too-broad scope will scare
some stakeholders due to the potential for an unsustainable level
of resource diversion.
3. Defining the requirementsThe Chief Auditing Executive (CAE) and the internal audit team
have to list controls that will be implemented to address the
targeted risks. Then, the team should identify the applications
containing the data needed to implement the continuous
auditing solution and work along with the data owner to obtain
authorization to use the data. The IT department will then be able
to access the data. The access to this data will be facilitated by
the support previously given by management. The internal audit
team will need to understand the business processes and their
supporting information systems, using existing audit and technical
documentation, conducting interviews with business process
owners and the IT team. The deeper the knowledge, the better
the final understanding of risks and controls will be. The internal
team’s skills and techniques in the areas of business processes,
analysis and IT systems are equally important for the success of
the implementation. The control selected has to be in accordance
with the internal team’s technical knowledge, as well as the
development and maintenance capabilities of the IT team. The
frequency with which every control is performed can be set based
on the risk factors.
The CAE should define the objectives of the analysis; determine a
non-critical or non-complex business process that will be a pilot
for the initiative. To be successful, the CAE would require an IT
auditor with a sufficient knowledge of data analysis as well as a
solid understanding of the organization’s systems and business
processes.
In addition to control testing, IA will identify fraud risks that can be
detected by transactional continuous auditing. The requirements
and the process will be similar to controls assessment testing. The
right definition of the tests will limit the volume of false positives as
well as the volume of exceptions to be investigated.
Failing to understand the business processes or a lack of necessary
technology skills in IA could dramatically impact the outcome of the
project and lead to significant cost and time overrun.
4. Retrieving and Using DataOnce the project team has defined the scope, the objectives, and
the requirements, the next step is to retrieve and use the data. The
technology that will be used by the auditor to automate the analysis
should be carefully chosen to ensure success. The main drivers of
this selection are the type of data source (existence of interface,
ETL), the volume of data to be analyzed, format (old format or
GOVERNANCE, RISK AND COMPLIANCE (GRC)
“Although the benefits of CA are substantial, the investment in terms of time and money can be significant, especially in sophisticated and mature organizations. As such, before starting a large project many organizations use CAATs as a trampoline to continuous auditing.”
April 2015 | 4544 | WeiserMazars Ledger
proprietary), and with the recent advent of Big Data, velocity
(timely capture of data). The software should also be scalable and
flexible enough to accept new sources of data.
Access to data with the appropriate rights (read only) will be given
to the audit team. Depending on the objectives, the access level
would vary from database access (dump), to running queries,
scripting and reporting platform access.
Retrieving data from the source system should not impact
production. The auditor will ensure throughout the process the
completeness and integrity of the data retrieved, and checks will
be done before and after the transfer to the auditor. The set of
data will be analyzed through repeatable tests with a software
package such as ACL, IDEA, or SaaS. Scripts and routines should
be developed in order to speed up the analysis.
The timeliness of data as well as the frequency of the data
retrieval should be aligned with the project objectives.
Obtaining data is one of the most common challenges in
continuous auditing projects. More often than not, the auditor
is faced with data that is incomplete, inconsistent, or not
accessible due to its confidentiality (HIPPA, PII). The atomicity of
system source in case of a decentralized IT environment is also
challenging. Big Data has added another layer of complexity,
increasingthe difficulty of identifying the appropriate data and not
being overwhelmed by sheer volume.
These challenges can be overcome by precisely defining, at the
earliest stage of the project (during requirements), the data sets
that need to be accessed. This requires having a deep knowledge
of the organization’s systems, database and data confidentiality.
More importantly, data owners should be part of the team. The
IA should not seek more data than needed (i.e. excessive data
granularity that will not be necessary for the tests).
5. Analysis and reportingBased on the sophistication and maturity of the organization, the
analysis will be conducted for the purpose of continuous control
assessment, transaction level testing for fraud detection purposes,
continuous risk assessment, or a combination of these three
elements (continuous auditing spectrum). The set for the analysis
will be defined in order to meet the objectives. It could encompass
trends, rule based exception reports, comparisons, clustering and
so on.
The results of the analysis should be prioritized base on the risk
profile. Usually, they are sent to business process owner for
investigation of the exceptions found. This process would be done
iteratively in order for the team to be increasingly conformable and
the scope expanded to other areas.
The final results is then part of the overall risk assessment,
reported to the audit committee.
Common risks at this stage are inconsistent or inappropriate
design of the analysis (inappropriate frequency, set of data, test
not aligned with objectives, etc.) or misinterpretation of the results
(false positive, misunderstanding of data, lack of understanding of
the risk). These risks are usually addressed by a proper alignment
with objectives and a deep understanding of the risks/controls to
be tested/assessed.
6. MeasurementInternal audit departments are often challenged by management
regarding the ROI of the continuous auditing initiative. As part
of the project, the team should define and implement Key
Performance Indicators in order to provide to management
objective results that will be compared will predefined criteria.
This will help demonstrate, if the continuous auditing initiative
is implemented and executed properly, the savings (costs and
time) and benefits. These criteria could include risk assessment
evolution, level of assurance per risk (manual testing vs automated
testing), number of controls tested, number of exception reported,
time saving in audits, or reallocation of time to added value audits.
concLusion
The road to a successful implementation of continuous auditing
is full of challenges. All project stakeholders need to understand
what their responsibilities are in the continuous auditing and
continuous monitoring processes and where these processes
will be implemented. While the true ROI of the initiative will not
be measured in the short term, the value of continuous auditing,
no matter the maturity or sophistication of the organization,
is demonstrated over time by measurement against objective
criteria - the early detection of fraud and the timely adaptability
by IA to emerging risks. Full buy in by management, detailed
planning and strong alignment between defined requirements
(data and resources) and organizational objectives are key to a
successful implementation. Finally, deep technology knowledge
and understanding of the organization’s information system by the
IA team is equally critical.
biLL is a parTner in our pennsYLVania pracTice. he can be reached aT 267.532.4328 or aT biLL.MeLLon@WeiserMazars.coM.
nicoLas is a principaL in our neW York pracTice. he can be reached aT 646.225.5983 or aT nicoLas.QuaireL@WeiserMazars.coM.
TAX
2015 buSy SeaSoN: whaT’S TreNdINg Now?
EveryyearthereissomechangeinthetaxlawthatmakestaxseasonunbearableforCPAs,attorneysandtaxpreparersalike.In2014,itwastheimplementationofthe3.8%NetInvestmentIncomeTax.In2015,itwillbeRepairRegulations,thelastminutepassageofthe“TaxIncreasePreventionActof2014”,ThePatientProtectionandAffordableCareActmandate,andchangesinNewYorkforestateandgifttaxplanning.Eachofthesewillrequireasuperhuman effort to simply be in compliance with the changes.
The Tangible Property and MACRS RegulationsTheTangiblePropertyandMACRSRegulations,morecommonlyreferredtoasthe“RepairRegs.”,willbeoneverytaxpreparer’smindasmanybusinessreturnsfiledthisbusyseasonwillrequireaForm3115.TheimportanceofcomplyingwiththeseRegulationscannot be understated.
By Al Colanero,
and Karen A.
Marshall
GOVERNANCE, RISK AND COMPLIANCE (GRC)
April 2015 | 4746 | WeiserMazars Ledger
TAX
the associated return, including extensions.
§ Accounting method changes related to the above Regulations
are considered an Automatic Change.
§ As a significant number of returns will require a Form 3115,
we suggest creating a template and adding it to your tax
compliance checklists.
§ Circular 230 implications: CPAs preparing a federal return
without a Form 3115 and/or certain required elections could
be in violation of Circular 230 unless not required by Rev. Proc.
2015-20.
Revenue Procedure 2015-20 On February 4, 2015, the IRS issued Rev. Proc. 2015-20 granting
significant relief to Small Business Taxpayers (SBT). A SBT is
defined as a business with total assets of less than $10 million and
average annual gross receipts of $10 million or less for the prior
three taxable years. Under Rev Proc. 2015-20, SBT are permitted to
make certain tangible property changes in methods of accounting
with an adjustment under IRS Sec 481(a) that takes into account
only amounts paid or incurred, and dispositions, in taxable years
beginning on or after January 1, 2014 without filing a Form 3115.
Effectively, SBTs making these changes in method of accounting for
the first taxable year that begins on or after January 1, 2014, may
elect to make the change on a cut-off basis.
THE TAx INCREASE PREVENTION ACT OF 2014A large number of tax provisions that expired as of the beginning of
2014 have been given a retroactive one-year extension by Congress.
Not all of the expired provisions were extended, but the ones that
were will continue to provide relief to both individual and business
taxpayers.
BackgroundThe House of Representatives passed The Tax Increase Prevention
Act of 2014 (commonly referred to as the “tax extenders”) in early
December 2014. The Senate approved the bill on December 16th
and the President signed the bill on December 19th.
Some highlights of key provisions and extensions § Section 179: the amount of qualifying property eligible for
expense remains at $500,000 and the cap on total investment
in eligible assets remains at $2,000,000.
§ 50% bonus depreciation: for certain qualifying assets
(MACRS property of 20 years or less or qualified leasehold
improvement property) an additional 50% first year bonus
depreciation is permitted.
§ 15-year straight-line cost recovery life for qualified
leasehold improvements, qualified restaurant buildings and
improvements, and qualified retail improvements
§ Discharge of indebtedness on principal residence continues to
be excluded from the borrower’s taxable income.
(A complete list can be found at: https://www.congress.gov/
bill/113th-congress/house-bill/5771)
Due to the late passage of the tax extenders, it may be prudent for
tax advisors to revisit research and advice given to clients during
the year. As these provisions were a one-year extension, effective
December 31, 2014, they have already expired. Accordingly, in 2015,
Congress will return to the negotiating table to address the recently
expired tax provisions and extensions.
On a positive note, the IRS has announced that the 2014 filing
season will not be delayed by tax extenders legislation. The IRS
has started accepting returns electronically and began processing
paper returns on January 20, 2015.
THE PATIENT PROTECTION AND AFFORDABLE CARE ACT (PPACA)Health care reform was enacted in 2010 to expand the provisions of
health insurance to more Americans. Two important provisions took
effect in 2014: the individual mandate and the premium tax credit.
The employer mandate was scheduled to take effect in 2014, but
the IRS delayed it until 2015.
Shared Responsibility for IndividualsBeginning in 2014, PPACA requires individuals to:
§ Be covered by a health plan that provides minimum essential
coverage,
§ Qualify for an exemption from the coverage requirement; or
§ Pay a shared responsibility payment (the individual mandate).
Minimum Essential Coverage An individual who is covered by health insurance that provides MEC
will not be required for the Shared Responsibility payment. MEC
includes the following:
§ Health care coverage provided by the taxpayer’s employer or
purchased by a self-employed individual.
§ Health insurance coverage purchased through the Health
Insurance Exchange.
§ Most government sponsored health coverage including
Medicare, Medicaid, and others.
§ Certain types of coverage purchased directly from an insurance
company.
ExemptionsThe statute exempts nine categories of individuals from the
requirement to carry MEC or make a payment. These include the
BACKGROUNDPrior to the issuance of new regulations, deciding whether an
expenditure was considered an ordinary repair or capital asset
was largely determined by case law such as INDOPCO Inc. v.
Commissioner and a number of Revenue Rulings. The Internal
Revenue Service and Treasury Department’s collective goal
in issuing the regulations was to reduce controversy and give
taxpayers clear guidance. Accordingly, after a long legislative
process that started in August 2006, final regulations became
effective September 19, 2013.
Policies and Methods The final regulations generally apply to taxable years beginning on
or after January 1, 2014. The regulations provide the following:
§ Materials and supplies with a cost less than $200 are now
deductible.
§ Election to capitalize materials and supplies is now limited to
rotable and temporary spare parts.
§ Materials and supplies are now protected by the deminimus
safe harbor election.
1. Safe harbor threshold is $500 for taxpayers without an
applicable financial statement and $5,000 for taxpayers
with an applicable financial statement.
2. Requires a written accounting policy.
3. Requires the same accounting treatment for both book
and tax purposes.
§ Definition of a unit of real or personal property including
major components and substantial structural parts: A unit of
property is defined in Reg 1.263(a)-3(e) and is based upon a
functional interdependence standard. However, special rules
are provided for buildings, plant property, network assets,
leased property and improvements to property.
§ The definition of improvements include: betterments,
restorations, and adaptation of tangible property which
require capitalization. In general, a taxpayer must capitalize
improvement related to the betterment, restoration, or
adaptation of a unit of property.
1. Betterment
§ Fixing a material condition or defect that existed
before the acquisition of the unit of property or arose
in the production of the unit of property.
§ Material addition, enlargement, expansion, or
extension that increases the capacity of the unit of
property.
§ Materially increase the productivity, efficiency,
strength, quality or output of a unit of property.
2. Restoration
§ Replacement of a component of a unit of property.
§ Restoration of damage to a unit of property.
§ Returning a unit of property to its ordinary efficient
operating condition.
§ Rebuilding to like new condition.
§ Replacement of a part or combination of parts that
comprise a major component or substantial structural
part.
3. Adaptation
§ When a taxpayer adapts a unit of property to a new or
different use, the taxpayer must capitalize the costs
associated.
§ Election to capitalize repair and maintenance costs: A taxpayer
may elect to capitalize repair and maintenance costs provided
the books and records reflect the same tax treatment.
§ Routine maintenance safe harbor: Under the safe harbor the
cost of performing certain routine maintenance activities
on a unit of property, including a building structure or one
of its enumerated components, are deductible as routine
maintenance.
§ Safe harbor for small taxpayers with buildings: Qualifying
taxpayers, with gross receipts less the $10 million for the
three preceding years, may elect to deduct the cost of repairs,
maintenance, improvements and similar activities if the cost
does not exceed the lesser of 2% of the unadjusted cost basis
of the eligible property or $10,000. An eligible building must
have an unadjusted basis of $1 million or less.
Form 3115, required compliance, and accounting method changes § Rev. Proc. 2014-16 provides guidance on the final repair
regulations, while Rev Proc. 2014-54 provides guidance on the
MACRS regulations.
1. Special rules exist for small taxpayers with gross receipts
of $10 million or less for the preceding three years.
§ In general, unless a method was not previously established,
taxpayers will be required to file Form 3115 to be in
compliance.
§ The Regulations and related Sec 481(a) adjustment will
generally apply to amounts paid or incurred in taxable years
beginning on or after January 1, 2014, or at the taxpayer’s
option, amounts paid or incurred in taxable years beginning on
or after January 1, 2012.
§ The due date of Form 3115 is same as the filing due date of
April 2015 | 4948 | WeiserMazars Ledger
TAX
payments would need to be paid with the taxpayer’s extension.
PPACA-related Tax Forms for 2014 § Form 1040, Line 61 – complete this line to check the box
for full-year coverage, or compute the shared responsibility
payment to include with the taxpayer’s federal return.
§ Form 8965 (Health Coverage Exemptions) – use this form to
report a coverage exemption granted by the marketplace or to
claim coverage exemption on a taxpayer’s return. In addition,
use Form 8965 to report the calculated shared responsibility
payment for months during the year that the taxpayer or
member of the taxpayer’s tax household did not have health
insurance or a coverage exemption.
§ Form 1095-A – Taxpayers will receive this form from the
Health Insurance Exchange reporting information about
the health coverage policy, including dates of coverage and
total monthly premiums for the policy in which the recipient
or family members enrolled. The Form 1095-A provides
information the taxpayer needs to complete Form 8962.
§ Form 8962 - Premium Tax Credit information required on this
form will determine if the Taxpayer is entitled to the credit.
If a Taxpayer received a Form 1095-A, Form 8962 must be
completed.
NY ESTATE AND GIFT PLANNING ISSUES As part of the 2014-2015 Budget, New York drastically changed its
Estate and Gift tax laws. New York has enacted estate tax reform
that increases the estate tax exclusion threshold, over a five year
period, from $1 million to $5.25 million. After January 1, 2019,
the basic exclusion will be indexed for inflation and calculated to
be equal to (and in the same manner as) the federal exclusion.
However, there is a catch; large estates that exceed the exclusion
by 5% will lose the exclusion entirely. As a result the exemption is
forfeited and the taxes on the full value of the estate are due.
The highest NYS Estate tax rate is 16%, which will be indexed for
inflation.
Effective April 1, 2014 New York conforms with the Federal
provisions related to alternate valuation, qualified domestic trust,
and qualified terminable interest property elections.
Effective April 1, 2014 the New York State generation-skipping
transfer tax no longer applies to distributions or terminations made
after March 31, 2014.
Effective April 1, 2014. New York’s estate and gift tax law that
requires all taxable gifts made by a New York resident after March
31, 2014, to be included as part of the gross estate for purposes of
calculating the New York estate tax.
The new law also adds a limited 3-year look back period for gifts
made between April 1, 2014 and Jan. 1, 2019. Specifically, if a NY
resident dies within three years of making a taxable gift, the value
of the gift will be included in the decedent’s estate for purposes
of computing the NY estate tax. The following gifts are excluded:
(1) gifts made when the decedent wasn’t a NY resident; (2) gifts
made by a NY resident before April 1, 2014; (3) gifts made by a NY
resident on or after Jan. 1, 2019; and (4) gifts that are otherwise
includible in the decedent’s estate under another provision of the
federal estate tax law.
CONCLUSIONComplying with the Repair Regs., Tax Extenders, PPACA and
changes to NY Estate and Gift tax law will prove to be challenging.
aL is a senior Manager in our Long isLand pracTice. he can be reached aT 516.620.8551 or aLfred.coLanero@WeiserMazars.coM .
karen is a Manager in our Long isLand pracTice. she can be reached aT 516.620.8760 or karen.goLdberg@WeiserMazars.coM
following:
§ Short coverage gap–individuals who are uninsured for 3
consecutive months or less during the year.
§ Unaffordable coverage–the lowest-priced coverage available
would cost more than 8% of the individual’s household
income.
§ No filing requirement–individuals who do not have to file a tax
return because their income is too low and below the filing
threshold.
§ Indian tribes–members of a federally recognized tribe are
eligible for services through an Indian Health Services
provider.
§ Members of a recognized health care sharing ministry.
§ Religious conscience–members of a recognized religious sect
with religious objections to insurance.
§ Incarceration–individuals either detained or jailed, and not
being held pending disposition of charges.
§ Not lawfully present in the United States–the individual is
not a U.S. citizen or a resident alien; or the individual is a U.S.
citizen who spent at least 330 full days outside of the U.S.
during a 12-month period or was a bona fide resident of a
foreign country (or countries) for a full tax year.
§ Hardship–a health insurance marketplace certifies that the
individual suffered a hardship and cannot obtain coverage or
would have to pay an excessive amount for coverage.
Calculating and Reporting the Shared Responsibility Payment/”Penalty”The required payment is determined on a monthly basis. It equals
the lesser of (1) the monthly penalty amounts for each individual
in the family (up to three individuals); or (2) the monthly national
average bronze plan premiums for the family as offered through
the exchanges.
The monthly penalty amounts are the greater of: (1) the flat dollar
amount, or (2) the excess income amount.
The flat dollar amounts are $95 in 2014, $325 in 2015, or $695 in
2016, per person up to three individuals for a family. The amounts
after 2016 will be indexed for inflation. For individuals 18 and
under, these amounts are reduced by half. The excess income
amounts are the excess of the taxpayer’s household income over
the taxpayer’s filing threshold, multiplied by a percentage:
§ 1.0 percent for 2014;
§ 2.0 percent for 2015; and
§ 2.5 percent for years after 2015
Taxpayers will be expected to report their liability on Line 61 of
Form 1040 for the 2014 tax year. The payment is payable upon
notice and demand from the IRS. It should be noted, however, that
the IRS cannot seek any criminal penalties or place a lien or levy
on the taxpayer’s property for nonpayment. Accordingly, the IRS
expects to collect these payments primarily through deduction
from refunds.
Health Insurance Premium Assistance Tax CreditIndividuals or families who purchase insurance through the
exchange and whose income is below certain levels may apply
and qualify for the premium assistance tax credit. The credit is
refundable to the taxpayer or, alternatively, the credit may be paid
in advance directly to the insurer whereas the taxpayer would pay
the difference between the premium and the credit.
The credit is computed on a sliding scale for individuals and
families with household incomes between 100- and 400-percent
of the federal poverty level (FPL) for the family size. The credit
amount is based on the percentage of income the share of
premiums represents, rising from 2% of income for taxpayers at
100% of FPL, to 9.5% of income for those at 400% of FPL.
In some cases, taxpayers may owe additional tax if they are not
entitled to all or part of the advance payment of the credit. A
taxpayer who chooses to have advance credit payments sent
to their insurer will need to: (1) file a federal income tax return
(even if otherwise not required to do so) and (2) complete Form
8962, Premium Tax Credit (PTC) to reconcile the advance credit
payments with the PTC eligible to be claimed on the return. If the
amount is less than the actual PTC, the difference will result in a
higher refund or lower tax due. On the other hand, if the advance
credit payments that were paid to the health care provider were
more than the actual credit, the difference must be paid with the
taxpayer’s return.
Penalty Relief Related to Repayment of Excess Advanced Payments of the PTC for 2014Beginning with 2014 returns, similar to reconciling tax
withholdings with a taxpayer’s actual tax liability to determine
refunds or balances due, individuals benefiting from tax credits
for Marketplace coverage will follow the same process. Normally,
taxpayers may owe a penalty for late payments or underpayment
of estimated tax. For this first year of the ACA, however, the
IRS will waive these penalties (see Notice 2015-09) for eligible
taxpayers if it is due to repayment of excess advance payments of
the PTC. Penalties will not apply to underpayment of this shared
responsibility payment, but interest will accrue for late payments.
This relief does not extend the April 15, 2015 due date. If an
extension of time is requested, repayment of any excess advance
Death for dates on or after Exclusion Amount
Exclusion Amount Phased out at
April 1 2014 – April 1 2015 $2,062,500 $2,165,625
April 1 2015 – April 1 2016 $3,125,000 $3,281,250
April 1 2016 – April 1 2017 $4,187,500 $4,396,875
April 1 2017 – January 1, 2019 $5,250,000 $5,512,500
After January 1 , 2019 Equal to the federal exclusion Federal exemption plus 5%
April 2015 | 5150 | WeiserMazars Ledger
TAXTLTETRTTTS
by Christina Immelman and Richard Barjon
Due to a sunset provision in 2011 state tax law, the Illinois Income
Tax rate for individuals, trust and estates has decreased from
5% to 3.75%effective January 1, 2015. The new rate applies to
Illinois taxable investment income, employee and unemployment
compensation, gambling and lottery winnings.
For corporations (excluding S corporations), the Illinois Income
Tax rate is decreasing from 7% to 5.25% effective January 1, 2015.
Additionally, corporations may use their Illinois net loss deduction
without limitation for tax years ending on or after December 31,
2014. This net loss deduction was limited to $100,000 for tax years
ending on or after December 31, 2012 and before December 31,
2014.
Corporate fiscal year filers must use one of two methods outlined
by the Illinois Department of Revenue to allocate their revenue
between the two rates and periods that overlap January 1, 2014.
We aren’t back to the pre- 2011 income tax rates yet, but we are
making progress. The personal income tax rate is scheduled to be
lowered to 3.25% in 2025 and the corporate rate is scheduled to fall
to the pre-2011 rate of 4.8%.
The replacement tax rates remain unchanged at 2.5% for
corporations and 1.5% for trusts, S corporations and partnerships.
Any not-for-profit entity with unrelated business income is subject
to the new rates as of January 1, 2015.
Please contact your WeiserMazars tax professional for more
information.
TAX
ILLINOIS TAx RATE CHANGEPublished on February 2, 2015
by Richard Bloom and Michael F. Rudegeair
Trustees and executors have the ability to make certain elections
on or before March 6, 2015 that could affect 2014 tax returns both
for the trusts and estates for which they are fiduciaries, as well as
the beneficiaries of those trusts and estates.
eLecTion To TreaT disTribuTions as Made in The prior TaX Year
A fiduciary of a trust or estate can elect to treat all or any part of a
distribution made within the first 65 days of any tax as having been
made on the last day of the previous tax year. The 65 day deadline
applicable to the 2014 tax year is Friday, March 6, 2015. As an
example, if a distribution is made on or before March 6, 2015, the
fiduciary can elect to treat any or all of the distribution as made in
the 2014 tax year.
In order to make an informed decision with respect to whether
or not to make this election, the fiduciary should compute the
trust’s 2014 fiduciary accounting income, distributable net income
and taxable income, and then determine the impact of additional
distributions on these three amounts and how the additional
distribution would impact the tax situation of the beneficiary.
As part of this analysis, the fiduciary must also consider the 3.8%
Additional Medicare Tax (which was new in 2013) as well as non–
tax factors such as the financial acumen of the beneficiary and the
grantor’s desire to distribute additional funds to the beneficiary.
For Example:The fiduciary determines that the trust has taxable income
subject to the 39.6% tax bracket after computing the trust’s
distributable net income and fiduciary accounting income.
TWO TIMELY ELECTIONS TRUSTEES ANd ExECUTORS SHOULd CONSIdER NOWPublished on February 20, 2015
NEW YORk CITY ANNOUNCES PROPOSAL TO REFORM THE CITY’S CORPORATE TAxby Matthew Dopkin
On January 12, 2015 Mayor de Blasio
announced a proposal to reform the City’s
corporate tax structure to bring consistency
with the changes that were passed in last
year’s New York State budget. The proposal,
which is intended to be revenue neutral,
would be retroactive to January 1, 2015.
On March 31, 2014, Governor Cuomo signed
the 2014-2015 budget which contained
dramatic changes to the state taxation of
corporations. (See our alert here.) Mayor de
Blasio’s proposal would incorporate many of
the state changes, including:
§ Merging the bank tax into the City’s
Corporate Franchise Tax.
§ A change to a single sales factor using
market-based sourcing for corporate
apportionment.
§ Adoption of an economic nexus standard.
§ Conformity with the State’s unitary
combined reporting rules.
§ Adoption of a new method of computing
net income by treating most income as
business income.
§ Targeted relief to small businesses and
manufacturers, including:
1. Excluding the first $10,000 of the
capital tax base.
2. A reduction of the tax rate for small
non-manufacturers with less than
$1 million in allocated net income
from 8.85% to 6.5%.
3. A reduction of the tax rate for small
manufacturers with less than $10
million in allocated net income
from 8.85% to 4.425%. A smaller
rate reduction will be provided
to manufacturers with income
between $10 million and $20
million.
The de Blasio administration feels these
changes will ensure corporations will not
need to maintain separate records
for City and State tax purposes, creating
consistency in taxation that will prevent
administrative burdens for both
taxpayers and the City, and moving the City
forward while protecting their long-term
fiscal health. The administration also views
the changes as reinforcing the City’s status
as the global center of commerce and
making the City more attractive for business
investment and job growth. The City is
planning to move their tax reform legislation
through the Governor’s executive budget that
is expected to be released in the upcoming
weeks.
Similar to the State changes, the City’s
proposal is geared toward corporate
taxpayers and did not address changes to the
City’s Unincorporated Business Tax.
The changes described above are only
some of the proposed tax law modifications.
Businesses should be aware of the changing
landscape in New York City and reach out to
their WeiserMazars professional for specific
guidance.
Published on January 15, 2015
April 2015 | 5352 | WeiserMazars Ledger
TAXTLTETRTTTS
TAX
TANGIBLE PROPERTY REGULATIONS FOR SMALL TAxPAYERSby Stephen Brecher, Christina Immelman, Demetri Yatrakis and Donald Zief
Recently released Revenue Procedure 2015-20 contains a simplified procedure to implement the tangible property regulations for small
taxpayers.
Small taxpayers who choose to apply the tangible property regulations prospectively to amounts paid or incurred, and dispositions, in taxable
years beginning on or after January 1, 2014 have the option of making certain tangible property changes in their method of accounting on the
federal tax return without including Form 3115. Audit protection is not given to these taxpayers for taxable years beginning prior to January
1, 2014. Additionally, no “look-back” to obtain an additional tax deduction in 2014 is available.
A “small taxpayer” is one who has (i) total assets of less than $10 million as of the first day of the taxable year for which a change in method
of accounting is effective; or (ii) average annual gross receipts of $10 million or less for the prior three taxable years for each separate and
distinct trade or business.
Taxpayers that meet the scope requirements, who want to use this revenue procedure and have previously filed a federal tax return for 2014
with a Form 3115, may file an amended federal return before the return’s due date, including extensions, to withdraw the Form 3115.
Although qualifying for the relief provided by Rev. Proc. 2015-20 obviates the requirement to file a Form 3115, taxpayers should bear in mind
that, as noted above, electing to comply with Rev. Proc. 2015-20 prevents them from claiming a negative Section 481(a) adjustment for (i)
items capitalized
in past years that could have been deducted under the tangible property regulations, and (ii) dispositions in taxable years beginning before
January 1, 2014. In addition, in both of these instances, taxpayers do not receive audit protection for taxable years beginning prior to January
1, 2014. Taxpayers also cannot make use of the late partial disposition election available in 2014 to deduct the basis of duplicative assets
still on their books that are being depreciated. Consequently, qualifying taxpayers should carefully consider the pros and cons of choosing to
comply with the provisions of Rev. Proc. 2015-20.
Please contact your WeiserMazars tax professional for more information.
TAx PRACTICE BOARD sTephen brecher
646.225.5921sTephen.brecher@WeiserMazars.coM
TiMoThY burLeY
212.375.6508TiMoThY.burLeY@WeiserMazars.coM
Published on February 24, 2015
The fiduciary also knows that the beneficiary of the trust is currently subject to the
15% tax bracket. Consequently, the fiduciary determines that it would be beneficial to
distribute additional funds from the trust to the beneficiary prior to March 6, 2015 and
elect to treat these distributions as having been made in 2014 in order to shift income
taxed in the 39.6% tax bracket to income taxed in the 15% tax bracket.
The election is made by checking the box next to Question 6 on page 2 of Form 1041 (U.S.
Income Tax Return for Estates and Trusts). If no return is required to be filed for the taxable
year of the trust for which the election is made, the election is made by filing a statement with
the Internal Revenue Service.
Fiduciaries must make note of any amounts elected under this rule for the 2013 tax year and
not treat them as current year (2014) distributions. Likewise, amounts elected this year cannot
be treated as distributions on next year’s tax returns.
eLecTion To TreaT cerTain paYMenTs of esTiMaTed TaX as paid bY The beneficiarY
A trustee may elect to treat any portion of a payment of estimated tax made by a trust as a
payment made by a beneficiary of the trust. This election may also be made by the executor
of an estate in a tax year that is reasonably expected to be the last tax year of the estate. This
election must be made on or before the 65th day after the close of the taxable year of the trust,
which is Friday, March 6, 2015 for 2014 estimated tax payments.
The election is made by filing Form 1041-T (Allocation of Estimated Tax Payments to
Beneficiaries). The election must be made (and the Form 1041-T filed) by March 6, 2015. The
Form 1041-T may be filed with the related fiduciary income tax return (Form 1041) if they are
both filed on or before March 6, 2015. Otherwise the Form 1041-T is filed separately with the
Internal Revenue Service Center where the Form 1041 will be filed.
The amount elected is treated as distributed to the beneficiary on the last day of the prior
taxable year (i.e., December 31, 2014 for amounts elected by March 6, 2015) and paid by the
beneficiary as an estimated payment on January 15 of the following year (i.e., January 15, 2015
for amounts elected by March 6, 2015). Amounts treated as distributions should be considered
by fiduciaries when considering the distributions election discussed above.
For Example:A trust made estimated tax payments during the first three quarters of a tax year. The
trust’s fiduciary then realizes that a beneficiary attained a certain age which triggered a
mandatory distribution. This mandatory distribution caused the trust’s taxable income
to be distributed to the beneficiary. Consequently, the trust is expected to owe little or no
tax, but the beneficiary would owe additional tax as a result of the distribution.
By making the election described above, the trust’s estimated tax payments could be
treated as made by the beneficiary.
Please contact your WeiserMazars tax professional for more information.
JeffreY kaTz
212.375.6816JeffreY.kaTz@WeiserMazars.coM
hoWard Landsberg
212.375.6604 or 516.282.7209hoWard.Landsberg@WeiserMazars.coM
JaMes ToTo
732.205.2014JaMes.ToTo@WeiserMazars.coM
April 2015 | 5554 | WeiserMazars Ledger
NFP A L E R T S
NEW POLICY ON ExTENSIONS OF TIME TO FILE NYS ANNUAL REPORTSby Ethan Kahn
The Great news for New York State Exempt
Organizations! The New York State Charities
Bureau has stated that they have done away
with the formal written extension process
for filing the annual form CHAR 500. Exempt
Organizations will now enjoy an automatic
180 day extension from their statutory
deadline.
Prior to March 17, 2015 the Charities Bureau
allowed a request for either a 90 day or a 180
day extension and eliminated the need for
submitting the IRS form 8868. As of March
17, 2015 the Charities Bureau has eliminated
the entire written extension process and
requires the filing to be submitted within 180
days of the statutory deadline.
As an example, consider an organization
with a June 30th year end and the deadline
for filing their CHAR 500 on November
15th. There’s no longer a need to file for an
extension for 90 days to February 15th and
then another extension filing to May 15th as
the current law provides an ‘automatic 180
day extension’ stretching from November
15th to May 15th.
It is noteworthy to mention that if the
organization has filed for an extension
with the IRS, they should maintain those
documents for at least three years.
Our experts are ready and available to
answer any further questions you may have.
Click here to read the full announcement
from the STATE OF NEW YORK OFFICE OF
THE ATTORNEY GENERAL.
NOT-FOR-PROFIT
Published on March 24, 2015
TECHNICAL UPdATE: FASB ON THE MOvE by Denise Moritz
The Financial Accounting Standards Board
(FASB) at its March 4, 2015 Board meeting
approved the issuance of an Exposure Draft
of a Proposed Accounting Standards Update
(ASU), in the very near future, representing
significant changes in standards that
have applied to the not-for-profit industry
since 1993. At that time, the FASB issued
Statement of Financial Accounting Standards
No. 116, Accounting for Contributions
Received and Contributions Made, and
Statement of Financial Accounting Standards
No. 117, Financial Statements of Not-For-
Profit Organizations.
Since the issuance of these standards, both
accountants and not-for-profit organizations
have suggested changes to further improve
not-for-profit accounting. Some of these
have already been initiated to make not-
Published on March 24, 2015
for-profit financial statements more “user friendly” and understandable, both to those in the financial community and, more importantly, to
donors, Board members and other third parties.
The forthcoming proposed amendments to the existing standards are expected to include changes in: asset classification (Unrestricted vs
Restricted), financial performance, cash flows, and other areas that FASB believes will improve and enhance the utilization of the financial
statements. In addition, FASB is also suggesting changes within the statement of activities to help users to better understand “operating
results.” Certain items are being suggested to be reported separately from operations, such as a write-off of goodwill, equity transfers, and
acquisition and disposition of certain non-capitalized assets. Many of these changes will not only be reflected within the financial statements,
but also in accompanying footnotes, which will require more detailed explanatory information.
Given recent changes to Form 990, the tax information return filed annually by not-for-profit organizations, some have jokingly suggested
that we are moving toward a similar situation to the Form 10-K applicable to the commercial public market sector. Moreover, since not-for-
profits are “public” in spirit – not publicly owned, but publicly financed - why shouldn’t reporting be as transparent as possible?
The FASB proposal is due to be issued in mid-April, with an expected comment period through the end of July. FASB will not propose either
an expected effective date for adoption or implementation time frame, but will determine what the most appropriate effective date should
be based on the feedback received from constituents through comment letters, and through the deliberation process of the proposed ASU.
During this period, the industry will have the opportunity to consider the proposal, and determine if such changes will be operational and
sufficient to meet the needs of the industry. Will the changes add or remove value? Will they enhance transparency or add complexity? Will
the proposed standard achieve FASB’s mission to “establish and improve standards of financial accounting and reporting that foster financial
reporting by nongovernmental entities that provides decision-useful information to investors and other users of financial reports?”
There is already an indication of dissatisfaction with the draft proposal among FASB members and certain other bodies within the accounting
profession, such as the American Institute of CPAs, as well as certain state CPA societies and other industry watchdogs. However, it is
premature to form a fair opinion. We patiently await the day that the Proposed ASU is exposed for comment; then the fun will begin -
feedback from constituents will be gathered for the Board to consider, and finally deliberations will start.
We will continue to keep you informed of the latest developments as this situation unfolds over the upcoming months.
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ron ries
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eThan kahn
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WeiserMazars LLP is an independent member firm of Mazars Group.
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