Update on Accounting
Hot Topics
August 31, 2011
Your Discussion Leaders

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Nichols Cauley & Associates, LLC – Certified Public
Accountants and Advisors – Atlanta, Dublin and Warner
Robins
William Sammons, CPA, PFS, CIA, CFP®, Managing
Partner – Atlanta Office
Ian Waller, CPA, CIA
Audit Partner – Atlanta Office
David Musser, CPA, CIA, CFP®
Tax Partner – Atlanta Office
Bill McDevitt, CPA
Tax Manager – Atlanta Office
Fraud
Customers
Employees
Officers
Third Parties
Vendors
ACFE Fraud Statistics



The typical organization loses 5% of annual
revenue to fraud resulting in global losses of
more than $2.9 trillion
Median loss caused by occupational fraud
was $160,000
Smaller organizations are disproportionately
victimized
ACFE –Association of Certified Fraud Examiners
Disproportioned Losses
More Statistics



U.S. Department of Commerce (DOC)
estimates that 25% to 40% of all employees
steal
DOC linked internal theft as the primary
contributor of one out of five business
failures
10-10-80 rule: 10% of people will never steal,
another 10% will steal at any opportunity, and
80% can go either way
Recessionary Fraud

National White Collar Crime Center noticed a
spike in arrests for fraud during recessions
–
–

Following the savings and loan crisis in 1990,
white-collar fraud arrests increased 52%
Following the Internet bust in 2000, arrests
jumped 25%
ACFE polled 500 Certified Fraud Examiners
and reported 55% saw an increase in fraud
cases during the previous 12 months
Fraud Detection

Fraud sustained for a median of 18 months before detection
Current Economic Conditions and
Technology - Influence on Fraud

In uncertain economic times, companies are forced to do more
with less – opportunity

As conditions worsen, employees and companies rationalize
benefits of cheating
Fraud is more likely to occur when employees and companies
are feeling outside financial pressures
Making the current economic conditions a proverbial “Fraud
Fertilizer”
EFT Fraud – Becoming more and more common – hijacker
obtains access to Company computer through some apparent
“legitimate” means.
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Technology – EFT Fraud


Attack is not centered on the Bank but is most often
centered on the Company’s computer which would
initiate the transaction.
EFT Fraud basically has 3 steps:
–
–
–

Hijacker illicitly acquired the login credentials.
Covertly gains access to the victim’s computer to avoid the
Bank’s security features which is activated when the Bank’s
system does not recognize the electronic fingerprint.
Transfer the Company’s funds to the hijackers account.
EFT Fraud – Typically must be reported within a few
hours of the transaction or victims funds may be lost.
Occupational Fraud and Abuse



Occupational Fraud is defined as the use of one's
occupation for personal enrichment through the
deliberate misuse or misapplication of the
organization's resources or assets
Occurs when an employee commits fraud against
his/her employer
Usually consists of corruption, misappropriation of
assets, and financial statement fraud
Occupational Fraud vs. Economic
Conditions

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

As more and more financial pressures build on
individuals and companies, the more susceptible to
fraud an organization becomes
Strong internal controls must be implemented and
maintained even through reductions of workforce
It is imperative that leaders within the company and
organization set a positive “Tone at the Top” and
establish strong company values
Awareness/Education of employees is imperative
How to Maintain Strong Internal Controls in
Today’s Understaffed Workplace

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Assess the risks which may exist in the functionality of your
company
Address the risks through appropriate implementation of control
procedures
Continuously MONITOR the effectiveness of controls
Allow for effective communications of controls and risks for all
levels of the organization
Always modify or update your control structure to maintain the
efficiency and effectiveness as it pertains to the evolving risks
of your industry
–
Risk is ever present and always changing
Internal Controls
Internal Controls
o
What should companies think about regarding internal
controls?
o
As you undertake new opportunities, you will always face a
level of risk. As you know, without risk, there is no reward.
o
Carefully designed internal controls can provide a means to
minimize and mitigate the risks these new opportunities bring to
your company.
Designing Internal Controls
o
The process of identifying and implementing these controls
should be incorporated in your risk assessment procedures
o
The process will also serve to further your knowledge and
understanding of the business and its related risks
o
These internal controls should be carefully designed and
communicated to all levels of the organization (part of the
education/awareness program)
o
Controls are only effective if everyone in the company follows
them
Designing Internal Controls
o
To ensure everyone is on board, lead by example and set a
tone at the top that highlights the importance of the controls
o
Tie in the big picture by aligning it with and relating it to the
company’s strategic vision
o
Implementing, following, and reviewing an effective set of
internal controls today will position your company to capitalize
on the unique opportunities presented to you during this
economic season of growth
Methods of Detecting Fraud


Small businesses are particularly vulnerable to fraud
due to limited staff and resources
While effective internal controls are a great deterrent
to fraud, it will likely not prevent all frauds
–

Either from occurring or detecting once the fraud has taken
place
Two major reoccurring red flags for fraudsters is
–
–
Financial difficulties/ vices
Expectations/ pressures
Additional Methods of Detecting Fraud
in the Workplace
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While strong internal controls and positive leadership provide
the most effective ways of deterring fraud, other methods have
also proven useful
Anonymous tips are an effective weapon in preventing and
detecting fraud
Respondents to the ACFE survey were asked to identify how
the frauds were first discovered. Nearly half of the cases in the
2010 study were uncovered by a tip or complaint from an
employee, customer, vendor, or other source
Effective communication discussed in the previous slide is only
useful if a channel exists which allows individuals to
communicate
–
Hotlines and employee support programs
Initial Detection of Occupational Frauds*
* The sum of percentages in this chart exceeds 100% because in some cases respondents identified more than one detection method.
Criminal History of Perpetrator
Conclusion of Fraud

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Establish the tone at the top and
communicate
Economic pressures and reduced workforce
increases the risk of fraud
Implement solid internal control and monitor
Look for alternative means of effective
communication of fraudulent activity (i.e.
hotlines or employee support program)
Conclusion of Fraud

Organizations tend to over-rely on external and
internal audits for fraud detection
–
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Fraud detection occurs more from controls developed
internally
Employee education/awareness is the foundation of
preventing and detecting occupational fraud
Surprise audits are an effective, yet underutilized,
tool in the fight against fraud
–
The threat of surprise audits increases employees’
perception that fraud will be detected and thus has a strong
deterrent effect on potential fraudsters
Accounting for Leases
Proposed Amendments
and Updates
Lease Accounting Rules

Previous lease standards have been criticized for
failing to meet the needs of financial statement users
–

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Omit relevant information about rights and obligations that
meet the definitions of assets and liabilities
FASB and the IASB initiated a joint project to
develop a new approach to lease accounting that
would ensure that assets and liabilities arising under
leases are recognized
This is a byproduct of the AICPA/IASB Convergence
Project
FASB and IASB Response
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New standard would effectively eliminate all
operating leases and require leases to be capitalized
on the company's balance sheet
More extensive financial statement disclosures
The new approach ensures assets and liabilities
arising under leases are recognized in the financial
statements
No grandfathering – leases in effect at date of
implementation will need to be reflected.
New Recognition Standards

Lessee Accounting
–
–
–
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Initially recognize a liability to make lease payments
“obligation to pay rentals” and a “right-of-use” asset which
will both be measured at the present value of the lease
payments plus initial direct transactions costs (excluding
operating expenses such as property taxes).
Subsequently measure the liability to make lease payments
using the effective interest method.
Amortize the right-of-use asset on a systematic basis that
reflects the pattern of consumption of the expected future
economic benefits.
Lease term is the longest possible lease term.
New Recognition Standards

Lessor
–
Two methods of accounting
1.
Performance Obligation Approach

2.
Used when significant risks or benefits associated with
the underlying asset are retained by the lessor
Derecognition Approach

Used when significant risk or exposure are not retained
by the lessor
New Disclosure Requirements

Lessee
–
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Identify and explain the amounts recognized in
the financial statements arising from leases
Describes how leases may affect the amount,
timing, and uncertainty of the entity's future cash
flows

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Including the nature of the lease agreement
Information about the principal terms of any significant
lease which has not commenced
New Disclosure Requirements

Lessor
–
–
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Information about exposure to risks or benefits
associated with the underlying asset
Information related to the decision to treat the
lease using the performance obligation approach
or the derecognition approach
Information related to impairment losses
New Disclosure Requirements

Lessor
–
A rollforward of the opening and closing balances for

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Rights to receive lease payments
Lease liabilities arising from leases to which it applies the
performance obligation approach
Residual assets arising from leases to which it applies the
derecognition approach
Information about the nature and amount of each class of
residual asset arising from leases to which it applies the
derecognition approach
Information about the nature of significant service
obligations related to its leases
Update to Proposed Amendment
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
July 2011, IASB and FASB agreed unanimously to
re-expose revised leasing proposal (May delay
issuance of new lease standards until well into next
year). Effective date is projected not to be earlier
than 2013.
Re-exposing will provide interested parties with an
opportunity to comment on revisions
The boards reaffirmed the major change to lease
accounting, which is to report lease obligations and
the related right-to-use on the balance sheet
Update to Proposed Amendment

At the July 2011 meeting, the boards discussed and
tentatively decided lessee presentation and
disclosure requirements
–

Apply a single accounting approach for all leases
Further, the boards tentatively decided lessors
should apply a “receivable and residual” accounting
approach
–
Excluding leases of investment property measured at fair
value and short-term leases

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Continue to recognize and depreciate asset
Recognize lease income over the lease term
Conclusion of Lease Accounting



No more operating or capital leases
Lessor must determine whether the lease will
be recognized under the performance
obligation method or derecognition method
Leased assets/obligations are broken out
separately for reporting purposes with
enhanced disclosures
Lease Accounting – Things to
Consider
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Deferred Tax Consequences
Property Tax Issues
Administration of Leases and Controls over
leases – What will be the cost?
Ability to meet Loan Covenants – there will
be changes in earnings presentation as well
as cash flows.
??????
Health Care Reform 2010
What it means for you,
your business, and your
clients
Introduction

Health Care Reform is made up of two new laws:
Health Care and Education Affordability Reconciliation Act of 2010
– Patient Protection and Affordable Care Act (PPA)
Collectively referred to as the Affordable Care Act (ACA)
–

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The Budget Office estimates the Acts will ultimately provide
coverage to 32 million uninsured people but still leave 23
million uninsured (1/3 mostly illegal immigrants) in 2019
Most sweeping legislation on Health Care since 1965 with the
Creation of the Medicare and Medicaid Programs
Magnitude of Acts also compared to the Social Security Act of
1935 and the Civil Rights Act of 1964
Introduction

While this presentation focuses primarily on new
taxes, fees and reporting requirements, it is less well
known how the ACA changes the medical delivery
system
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Both payment and delivery methods are subject to
sweeping changes
Steps towards eliminating fee-for-service to paying for
health care services based on quality and cost targets
New emphasis on preventing acute conditions and
management of chronic diseases
Focus on securing more primary care physicians
Contribution to the creation and diffusion of health
insurance technology
Key Terms and Definitions

High Income Taxpayers
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Individual and Head of Household Filers - >$200,000
earned income
Married Couples Filing Jointly Filers- >$250,000 earned
income
Married Couples Filing Separate Filers- >$125,000 earned
income
Investment Income – interest, dividends, royalties,
rents, gains from disposing of property from a
passive activity and income earned from an activity
classified as passive.
Investment income does not include distributions
from qualified retirement plans
Key Terms and Definitions
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Qualified Small Employer – one with no more than 25 employees and
average annual wages of no more than $50,000.
“Large” Employers – generally one with more than 50 full-time
employees
High Cost “Cadillac:” Insurance (inflation adjusted) –
–
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Individuals - >$10,200
Families - $27,500
Higher thresholds apply for non-Medicare retirees age 55 or older and
certain high risk professions
Excise Tax – additional tax which is generally specific in percentage.
In the health care context it is non-deductible. The tax is often passed
on to consumers in the form of higher premiums or cost-cutting
Market Sector Fees – fees which will be assessed and allocated to
pharmaceutical manufacturers, importers and health insurance
providers. The assessed fee is non-deductible
Key Terms and Definitions
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Excise Tax – additional tax which is generally specific in
percentage. In the health care context it is non-deductible. The
tax is often passed on to consumers in the form of higher
premiums or costs
Market Sector Fees will be assessed and allocated to
pharmaceutical manufacturers, importers and health insurance
providers. The assessed fee is non-deductible
Adult Dependent – ages change basically to age 26 or 27
(depends on the employer elections). Effective based on plan
years beginning on or after October 1, 2010
Grandfathered Health Care Plan – Individual Plans or Group
Health Plans that existed on March 23, 2010. HHS and IRS
amended to lift restrictions against entering a into a new
insurance policy
How it Affects You:

Individuals
–
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All individuals will be required to maintain health
insurance or pay a tax/penalty
Medicare tax on investment income for high-income
individuals and families
Itemized deductions for medical expenses subject to
an increased floor
Unmarried dependents may stay on a parents plan
through the age of 25 (or through age 26 if selected
by the employer)
How it Affects You:

The “Individual Mandate”
–
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A new tax/penalty imposed on individuals who
have not obtained health care coverage by 2014
Phase-in over three years


Greater of $95 or 1% of income in 2014, increases to
Greater of $695 or 2.5% of gross income in 2016
–
Note this monthly penalty is 1/12 of the penalty and is
calculated per individual. Therefore if you do not have
coverage during the year you would calculate the penalty
on a monthly basis.
How it Affects You:

New Medicare Taxes
–
Beginning in 2013 a 3.8% Medicare tax will be assessed on
the lesser of:


Unearned income, or
Amount by which “modified” AGI exceeds either the $200,000
or $250,000 threshold amount
Unearned income is defined as interest, dividends, capital gains,
annuities, rents, and royalties.
The Medicare tax provisions is estimated to generate additional
governmental revenues of $210 billion from 2013 – 2019.
Note neither the $200,000 nor the $250,000 thresholds are
indexed for inflation.
How it Affects Businesses :
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Large employers will be required to provide employees with
health insurance benefits or be subject to a nondeductible fee –
“Pay or Play”
High cost, “Cadillac”, health care plans will be assessed an
excise tax.
Small employers may be eligible for a new tax credit
If your health plan offers dependent coverage, it must offer this
coverage to unmarried dependents through the age of 25 (or the
plan can opt to extend coverage to those through the age of 26)
Free Choice Vouchers
How it Affects Businesses :

“Large” Employers
–
–
Non-deductible fee if firm fails to offer adequate
coverage – “Pay or Play” – Effective 2014
Fee is computed as:

–
$2,000 x (Number of employees – 30)
“Large” employers are defined as having the
equivalent of 50 or more full-time employees.
How it Affects Businesses :

“Cadillac” Plans
–
–
A new 40% excise tax will be assessed on high-cost health
plans provided to employees by employers starting in 2018
The tax is applied to the amount of the plan that exceeds
$10,200 for individuals

–
The tax is applied to the amount of the plan that exceeds
$27,500 for families

–
Annual thresholds will increase by $1,650 for retired
individuals over 55 years old and for certain high-risk
professions
Annual threshold premiums will increase by $3,450 for retired
individuals over 55 years old and for certain high-risk
professions
Further adjustments will be based on CBO projections and
cost of living adjustments after 2018
How it Affects Businesses :

“Cadillac” Plans
–
Applies to:


–
–
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Employer-provided group health premiums where benefits are
not taxable to the employee, and
Self-employed plans which qualify for a deduction.
Insurer is responsible for payment of the tax.
For self-insured plans, the employer or plan administrator is
responsible.
Employers will be responsible for calculating the value of
excess premiums and filing an information return to the IRS
and Insurer or plan administrator.
How it Affects Businesses :

“Cadillac” Plans
–
Does NOT include:

–
–
Dental, vision, and long-term care plans
Penalties will be assessed for failure to properly
report excess premium amounts
Non-deductible expense
How it Affects Businesses :

Small Employer Tax Credit
–
Credit Amount

Up to 35% of small business premiums in 2010
–


Increases up to 50% on 1/1/2014
Up to 25% for tax-exempt small employers and is
limited to a certain amount of payroll taxes paid (use
form 990-T for refundable credit)
Average Wages Phase-out
–
Phase-out over average wages from $25,000 to $50,000
How it Affects Businesses :

Small Employer Tax Credit
–
How to qualify for the credit:



–
Equivalent of 25 or fewer full-time employees
Employer covers at least 50% of the cost of health care
coverage for some of its workers based on the single rate
Average annual wages below $50,000
Part-time workers are included in the calculation – Assume
a Company has 2 part-time workers which are
compensated $12,500 and 24 full-time employees earning
$25,000 – for purposes of this calculation the Company
would have 25 full-time employees.
How it Affects Businesses :

Small Employer Health Insurance Premiums Credit
– Definition of Employee – Generally all employees who perform
services for you during the tax year are taken into account in
determining your FTEs, average annual wages and premiums paid
– Excluded Employees

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–
Sole proprietorship owners
Partner in partnership
>2% S-Corp Shareholder
>5% outstanding stock or stock possessing more that 5% of combined
voting power of all stock of a corporation
>5% of the capital or profits interest in any other business that is not a
corporation
Family members or a member of the household who is not a family
member but qualifies as a dependent on the individual income tax return of
a person listed above
Controlled Group rules are effective – members of a controlled group
are treated as a single employer
How it Affects Businesses :

Small Employer Tax Credit
–
How to Claim the Credit






Use the new Form 8941 to calculate the credit
Include the amount of the credit as part of the general
business credit on the income tax return
Non refundable
Can only be used to offset regular tax liability, not AMT
Carry back of 1 year (begins in 2011), and carry forward
of 20 years
Tax-exempt entity
–
Credit is refundable to obtain refund of payroll withholding
taxes.
How it Affects Businesses :




The credit is not only for regular insurance but also for add-on
dental and vision insurance.
The amount of insurance expense deduction for the Company
is reduced by the amount of the credit.
Must be a “qualifying arrangement” whereas the Company pays
premiums for each employee enrolled in heal care coverage
offered by the employer which must not be less than 50% of the
total premium cost of the coverage.
Maximum guidelines – the amount of an employer’s premium
payments that counts when calculating the credit may not
exceed the average premium for the small group market in the
particular state in which the employer offers coverage for the
same arrangement (refer to IRS tables provided at
www.irs.gov).
How it Affects Businesses :

Largest Employers and Estimated Taxes
–
–
–
Defined as having assets of at least $1 Billion.
Increase by 15.75% the required corporate
estimated tax payments factor.
Will be subject to an increase in the required
estimated tax payments in 2014.
How it Affects Businesses :

Work-Place Wellness programs
–
Small Business may be eligible for grants if:


–
Fewer than 100 employees who work 25+ hours per
week, and
Currently does not offer any Work-Place Wellness
programs.
Must apply to Secretary of Health and Human
Services with program proposal.


$200 million appropriated
Available for 5 years starting in 2011
How it Affects Businesses:

“Free Choice Vouchers” for certain low-income
employees
–
–
–
–
If offers minimum coverage to employees must provide
qualified employees with a free choice voucher
Must offer these employees voucher benefit equal to cost of
what the employer would pay for the employee sponsored
plan
If the exchange plan premium is less than the voucher
payment the excess is income to the employee
3 criteria for determining low-income employee – based on
400% of poverty level income and required contribution to
employer sponsored plan exceeding 8% of household
income
How it Affects Businesses:

Health Insurance Industry
–
–
–
The Health Insurance Industry will be subject
to an annual excise tax of $8.0 billion in 2014.
This tax will increase to $11.3 billion in 2015,
and increase to $14.3 billion in 2018
The deduction for an employee’s
compensation paid by a Health Insurer will be
limited to $500,000 starting in 2013
How it Affects Businesses:
–
–
The Health Insurance Industry will be subject to
an annual fee (nondeductible) of $8.0 billion in
2014, $11.5 billion for 2015 and 2016, and $13.5
billion for 2017 and $14.3 billion for 2018 and
thereafter.
The Pharmaceutical industry will be subject to an
annual fee (non-deductible) of $2.5 billion in 2011,
$3 billion for 2012 - 2016, and $4 billion for 2017
and $4.1 billion for 2018 and $2.8 billion for 2019
and thereafter.
Reporting Requirements - IRS
–
Coverage information must be reported to the IRS

Including:
–
Individual employees
– # of months covered
– Coverage type
– Amount of premiums paid by each employee


Penalties will be assessed if company fails to file.
Effective January 1, 2014
Reporting Requirements - IRS
–
Businesses must disclose the cost of benefits provided to
employees on annual W-2 forms beginning in 2012 (recently
extended from 2011 to 2012)
 Does not change tax-free treatment of employer-provided
health coverage
Reporting Requirements
–
If 200+ full-time employees


–
Required to automatically enroll employees in employer
plan.
Required to notify employees in writing of their right to
opt-out or enroll in another plan offered by employer.
Businesses must provide employees with a notice
describing the availability of services provided by
the American Health Benefit Exchange.
But Wait, there’s More


Aggregation Rules – Related employers and
predecessors shall be treated as a single employer
for purposes of automatic enrollment for employer
sponsored health benefit plans.
Beware of scam artists – According to the Better
Business Bureau scam artists are beginning to take
advantage of the public’s lack of knowledge by
attempting to convince unwary consumers to sign up
for phony health insurance plans.
Update on Recent News Related to the
Health Care Reform



26 states have all entered into legal challenges over ACA
Many companies have been granted petitions to “opt out”
11th Circuit Court of Appeals in Atlanta recently ruled against the
Act’s cornerstone mandate requiring all Americans to buy health
insurance
–
–


The court ruled that Congress could not force people to buy an expensive
product and the U.S. Constitution was violated
The circuit court left the rest of the health care reform law intact resulting in
a huge problem for health insurance providers
Arguments from other appellate jurisdictions are mounting that the
unconstitutionality of one individual mandate voids the entire
legislation
It is predicted the Supreme Court will ultimately decide the Act’s
future
Conclusion/Final Thoughts







The Health Care Reform Act has many provisions which will require
additional changes in the near future
Grandfather provisions are available; however there is some nearterm shift in Companies electing out of the Grandfathered Plans and
adopting conforming plans – but with a price to the employees by
using the change to increase the burden or cost to the employee
Realigning the additional costs to the employee is not prohibited
under the act
Taxes are increasing
Reporting requirements are increasing
This will create bigger government/government sponsored entities
Fierce resistance to these changes is gaining significant strength in
the current political crosswinds, with the courts beginning to rule in
favor of this resistance creating an uncertain future for the Act
Tax Developments
Corporate Tax
Update and Trends
Trends




The current political environment is creating a great
deal of uncertainty for tax planning purposes
On the one hand, there are severe budget shortfalls
at both the federal and state levels and a need for
the Administration to generate “revenue raiser” tax
reforms
While on the other hand, citizen demand has risen
for spending cuts and tax decreases
These crosswinds are making it difficult for
individuals and businesses to anticipate federal and
state tax policy and plan accordingly
W-2 Reporting

IRS further delays the requirement for employers to
report the cost of health insurance they provide to
employees on their W-2 forms

Last fall, the IRS made this new reporting
requirement optional for all employers for the 2011
W-2 Forms

More recently, the IRS announced that the reporting
requirement will continue to be voluntary for small
employers at least through 2012
Enhanced Charitable Contributions

Recently enacted legislation extended through 2011 certain
charitable contributions provisions beneficial to
businesses

Enhanced charitable contribution deduction for non-C
corp businesses that donate food that is lesser of (1) basis
plus one-half value in excess of basis or (2) two times
basis. Aggregate amount of contribution of “wholesome”
food cannot exceed 10% of the taxpayer’s aggregate net
income for that tax year from all trades or businesses
Enhanced Charitable Contributions



This rule has already been in effect for C corps for years.
But now C corps can also get the enhanced charitable
contributions for books and computer equipment donated
to certain schools and libraries
Tax incentive to encourage S corps to make charitable
donations of appreciated assets is still available for
contributions made in tax years beginning before Jan 1,
2012
Shareholders get to reduce their basis in S corp’s stock by
pro-rata share of the adjusted basis of contributed
property, rather than by the FMV of the charitable
contribution that passes through to the shareholder
Domestic Production Activities
Deduction

Code Sec.199 domestic production activities deduction still
available thru Jan 1, 2012. No extension after that currently exists

Can benefit a wide array of businesses

Deduction allowed for taxpayers who have domestic production
gross receipts from any of the following:
1) any sale, exchange, or other disposition, or any lease, rental, or license,
of qualifying production property manufactured, produced, grown or
extracted by the taxpayer in whole or in significant part within the U.S.; 2)
any sale, exchange, etc., of qualified films produced in U.S.; 3) any sale,
exchange or other disposition of electricity, natural gas, or potable water
produced in U.S.; 4) construction activities in the U.S. or 5) engineering or
architectural services performed in the U.S.
Work Opportunity Tax Credit (WOTC)

The Work Opportunity Tax Credit (WOTC) provides
an income tax credit to employers for amounts paid
or accrued before Jan 1, 2012 to the following
targeted groups of employees:
–
–
–
–
–
Temporary Assistance for Needy Families (TANF) recipients
Veterans
Vocational rehabilitation referrals (i.e. disabled persons)
Ex-felons
Supplemental Security Income (SSI) recipients
Work Opportunity Tax Credit (WOTC)

The tax Credit expires for certain qualified
employees who begin employment after
2010 - unemployed veterans and
disconnected youth in particular

However, there is currently bipartisan
proposals to reinstate these groups
Research Tax Credit

The research credit applies for amounts paid or accrued before Jan 1,
2012

The establishment of nexus between the qualifying costs and the relevant
business activities will still be an area of IRS scrutiny

Project-based accounting will still be preferred by the IRS to establish a
clear connection of business costs to business activities

The Obama Administration has proposals to increase the credit by nearly
20% and making it permanent and simpler to calculate

Majority of states conform to some type of federal research tax credit but
not the expiration dates. Many states are even making their research
incentives more potent (i.e., such as refundable state tax credits)
Research Tax Credit
●
●
The IRS has announced that supporting attachments
for the new R&D reporting requirements on
Schedule M-3 are no longer required for 2010 and
2011 returns
The instructions had originally required that a
supporting schedule be attached with information on
the R&D expense per income statement, temporary
differences, permanent differences, and the R&D
deduction per the tax return
Tax Depreciation

More detailed IRS guidance on the 100% bonus depreciation
for qualifying new property acquired and placed in service after
September 8, 2010 and before January 1, 2012

Permits 100% bonus depreciation for components where work
on a larger self-constructed property began before September
9, 2010

Permits 100% bonus depreciation for qualified restaurant
property or qualified retail improvement property that also
meets the definition of qualified leasehold property
Tax Depreciation

For qualified property acquired and placed in
service after Dec 31, 2011 and before Jan 1,
2013, 50% bonus depreciation allowed
(through 2013 for certain aircraft and longproduction-period property)
Tax Depreciation

Maximum amount of Code Sec. 179 for tax years beginning in
2010 or 2011 is $500,000. For tax years beginning in 2012, the
max amount is $125,000 and falls to $25,000 for tax years
beginning after 2012

The President proposing to make the $125,000 limit permanent

For qualified real property placed in service in 2010 and 2011,
up to $250,000 may be expensed. Qualified real property
includes: leasehold improvements, restaurant property, or
qualified retail improvement property
Tax Depreciation

100% write-off for heavy SUVs purchased
after September 8, 2010 and before January
1, 2012 and used entirely for business. A
heavy SUV is one with GVW rating of more
than 6,000 pounds
Other Tax Developments

A taxpayer can claim a 30% credit for the cost of installing
qualified alternative vehicle refueling property used in the
taxpayer’s trade or business. Credit can be up to $30,000/year
per location or $1,000/year per location if installed at taxpayer’s
primary residence

Credit expires for refueling property placed in service after Dec
31, 2011 (except for hydrogen refueling property)

Proposal from the Obama Administration to replace tax
deductions for energy efficient commercial building property
with a tax credit to encourage owners to invest in “green”
retrofits
Other Tax Developments



President Obama proposed to repeal the lower-of-cost-or-market
(LCM) and “subnormal” goods inventory accounting methods in
addition to the LIFO method for tax years beginning after December
31, 2012
LIFO repeal would mean a forced change in tax accounting for any
business that has relied on LIFO for its tax reporting. As a result,
many businesses would have to recapture their LIFO reserves which
would result in a substantial additional income tax
Businesses not using LIFO often use LCM to write down the book
value of their ending inventory that has declined in economic value. In
addition, current tax law allows a write down of the cost of certain
subnormal goods. Repeal of the LCM and subnormal goods methods
would mean higher taxes for certain businesses that would no longer
be able to recognize a current economic loss in a down economy at a
time when they can least afford it
Other Tax Developments
●
●
Guidance for S Corporation shareholder
compensation has become clearer. Recent court
decisions have provided further support for an
analytical framework to be used in determining what
the appropriate amount of shareholder/employee
compensation should be
There are also proposals underway to restrict
deductions for high income taxpayers in lieu of
raising rates
Other Tax Developments

Taxpayers may elect to treat qualified environmental
remediation expenses paid or incurred before Jan 1, 2012 as a
deduction rather than adjustment to capital accounts. These
expenses must be paid or incurred in connection with the
abatement or control of hazardous substances (including
petroleum products) a qualified contaminated site

Empowerment zone tax incentives for businesses within such
Zones still eligible for 20% wage credit, generous Sec. 179
deductions, tax-exempt bond financing, and deferral of capital
gains tax

White House proposal underway to make permanent the rule
allowing exclusion of gain on qualified small business stock
Other Tax Developments



In its recent Aug 9th Treasury Report, Treasury
proposed a new definition of “small business.” The
proposal defines the upper limit at $10 Million in
annual gross income or deductions. Currently there
is no cap
Larger, closely held businesses such as
partnerships, S corporations, and limited liability
companies could be affected
There are concerns the larger “flow-through” entities
are being targeted for a federal corporate-like tax
Other Tax Developments

Proposed Treasury Regulations for officer
compensation deduction limit of $1Million will
require that exempt performance-based pay,
must be from a plan that specifies the
maximum number of shares with respect to
which options or stock appreciation rights
can be granted to an employee during a
specified time period
Other Tax Developments

Congressional support is building to offer tax
holidays as a way to encourage multinational corporations (MNCs) to create new
jobs. A lower U.S. tax rate would be offered
to MNCs for repatriating foreign earnings
back to the U.S in a way that created jobs in
the U.S. with the money saved from lower tax
rates
Other Tax Developments

On August 2, 2011, the president signed into
law the debt limit legislation sent to him by
Congress and a default on U.S. debt was
avoided. The legislation did not include any
significant tax changes
State Tax Trends




States are being subsidized less by the federal
government
States are running out of money and facing budget
shortfalls more and more
Even though there is a current swell of anti-tax
sentiment, there is likely to be state tax increases
The states will likely offer more tax and economic
development incentives
–
Job and green energy incentives seem to be the direction
State Tax Developments

North Carolina – legislation was adopted that
limits the circumstances under which the
Secretary can forcibly combine related
corporations and impose penalties
–
The provisions of the bill are effective only for
assessments proposed for tax years beginning on
or after January 1, 2012
GA Clean Energy Tax Credit

On April 14, 2011, the General Assembly of Georgia passed
House Bill 346 (“the Bill”) doubling the annual allotment of the
Clean Energy Property Tax Credit (“the Credit) to $5 million,
extending the Credit’s availability through 2014, and
establishing a priority waiting list for applicants

The Bill enjoyed a broad base of support from the Georgia
Solar Energy Association, economic development interests, as
well as businesses and individuals who recognize the
importance of a vibrant solar industry to the State of Georgia.
Governor Deal signed the legislation into law on May 11, 2011
GA Clean Energy Tax Credit
● Amount:
● Renewables: 35%
Lighting retrofit projects: $0.60/square foot of building
Energy-efficient products: $1.80/square foot of building
● For credits allowed through the end of 2011, excess credit may be
carried forward for five years from the close of the taxable year in
which the clean energy property was installed. Credits allowed for
2012, 2013 or 2014 must be taken in four equal installments over four
successive taxable years beginning with the taxable year in which the
credit is allowed.
● Expiration Date:12/31/2014
Accounting Update to Goodwill
Impairment
ASC 350-20-35 Goodwill Subsequent
Measurement



Goodwill is not amortized, but subject to
periodic impairment testing
Goodwill is assigned to reporting units and
the impairment testing is prepared on
reporting unit level
Impairment testing is a two step process
Goodwill Impairment Testing

Step One –
–
–

Compares a reporting units overall fair value to its
carrying amount
If fair value is less than the carrying value, move
to step two
Step Two –
–
Determine whether the implied fair value of the
goodwill is less than the carrying amount. If so, an
impairment loss is recognized
Step One

In performing step one, an entity must –
–
–
–
–
Identify reporting units
Assign assets and liabilities to reporting units
Assign goodwill to reporting units
Determine fair value of each reporting unit
Step Two

Determine the implied fair value of the reporting
unit’s goodwill
–
–

Fair value of goodwill is a residual amount and is calculated
pursuant to ASC 850 – Business Combination (i.e.
determine the fair value of unrecognized assets and
liabilities of the reporting unit
The differences between the fair value of the reporting unit
and the fair values of the individual assets and liabilities is
the implied fair value of goodwill
Compare implied fair value of goodwill to carrying
amount to determine if impairment loss exists
Other Notes





Test annually or more frequently if events and
circumstances change that would reduce fair value
of reporting unit
A change in the testing date for impairment is
considered a change in accounting principle
Different reporting units can have different test dates
Carry forward of a reporting unit’s fair value in future
years
Impairment testing/ non-controlling interests
Goodwill Impairment – Update




FASB issued proposed update to simplify how an
entity is required to test goodwill for impairment
Amendment applies to all entities, public and private
Intended to reduce complexity and costs through the
use of the qualitative evaluation
Expands upon examples of events and
circumstances that an entity should consider
between annual impairment tests
Goodwill Impairment

Amendment allows an entity to first assess qualitative factors to
determine whether the fair value is less than its carrying value

The entity would not be required to calculate the fair value
unless it is more likely than not that the fair value is less than its
carrying amount
Entities would no longer be permitted to carry forward its
detailed calculation of fair value from a prior year
No change in the current guidance for testing indefinite-lived
intangible assets
Certain disclosures of quantitative information about
unobservable inputs used in a fair value measurement is not
required



Qualitative Factors to Consider


Macroeconomic conditions –
limitations on accessing
capital, deterioration of general
economic conditions and
foreign exchange rate changes
Industry and market
considerations –
deterioration of environment,
increase in competition,
change in market of products/
services, and regulatory/
political development
Qualitative Factors to Consider




Cost factors – increases in materials, labor,
overhead
Financial performance – cash flows and earnings
Entity specific events – change in management/
key personnel, strategy, customers and threats of
litigation
Sustained decrease in share price
Fair Value Accounting
Definition of Fair Value (ASC 820)


“The price that would be received to sell an
asset or paid to transfer a liability in an
orderly transaction between market
participants at the measurement date.”
Must consider:
–
–
–
–
Price
Principal (or most advantageous market)
Market participants
The asset or liability
Fair Value Measurement & Market Price




Fair Value – based on hypothetical
transaction as of the date of measurement
The objective is to determine the “Exit Price”
Market price is generally equal to or close to
fair value – however, this could diverge in
troubled markets
No adjustment for transaction costs
Principal or Most Advantageous
Market

Fair value measurement assumes that the
transaction to sell an asset or transfer a
liability either:
–
–
Occurs in the principal market for that asset or
liability
In the absence of a principal market, occurs in the
most advantageous market for that asset or
liability.
Market Participants


Fair Value should be based on assumptions
used by market participants.
Should Consider factors relating to:
–
–
–
The asset or liability
The principal or most advantageous market
Market participants
Assets

Fair Value assumes the highest and best use
of an asset
–
Use of the asset must be:




Physically possible
Legally permissible
Financially feasible
Highest and Best Use – determination based
on use by market participants
Highest and Best Use


“In-Use” – asset would provide maximum
value through its use in combination with
other assets as a group.
“In-Exchange” – asset would provide
maximum value on a standalone basis.
Liabilities

Fair Value measurement assumes:
–
–


Liability is transferred to a market participant at
the measurement date.
The related nonperformance risk is the same
before and after the transfer.
Maximize use of observable inputs
Minimize use of unobservable inputs
Valuation Techniques Under ASC
820

Market Approach
–

Income Approach
–

Uses prices and other information generated by market
transactions involving identical or comparable assets or liabilities
Uses valuation techniques to convert future amounts (cash flows,
earnings) to a present value amount
Cost Approach
–
Uses current replacement cost – amount currently required to
replace the service capacity of an asset.
Note: Multiple techniques may be used.
The Market Approach



Uses prices and other relevant information
generated by market transactions involving
identical or comparable assets or liabilities.
Based on the economic principle of efficient
markets.
Often use market multiples – judgment
required.
Income Approach




Based on the economic principle of
“anticipation”
Investor “anticipates” the expected economic
income to be earned from the investment.
The expectation of future income is
converted to a present value.
Can involve use of subjective variables.
Fair Value Hierarchy


Fair value of an asset or liability should be
grouped by hierarchy level for disclosure.
The level within the hierarchy is based the
type of input:
–
–

Observable
Unoberservable
The hierarchy refers to the reliability of the
inputs relative to the a valuation technique
Level 1


Level 1 – (Preferred) – uses quoted exit
prices for identical assets in an active
market.
Examples:
–
–
–
Marketable Investments
Inventory
Equipment
Level 2


Adjusted Market Value – uses market value
(or possibly other inputs) for similar assets,
which are then adjusted for asset-specific
information.
Examples:
–
–
–
Land
Land Improvements
Buildings
Level 3



Income approach to valuation
Most subjective and open to error in
estimation
Examples:
–
–

Customer lists
Various other intangible assets
Independent appraisals may be useful
Big GAAP vs. Little GAAP
Little GAAP vs. Big GAAP


Complaint for many years GAAP
requirements for larger public companies
cause inefficient and ineffective reporting
standards for private companies
Private companies assert GAAP has created
an over-complexity and a lack of relevance of
a number of accounting standards for use in
private company financial reporting
Little GAAP vs. Big GAAP


There are approximately 28 million private
companies in the US
While many of these companies are simply required
to file income tax returns, some are required to
prepare financial statements in accordance with
GAAP by outside parties
–

Lenders, Bonding Companies, Regulators, etc.
Most private companies lack the sufficient
accounting resources to efficiently prepare effective
GAAP financial statements
Blue-Ribbon Panel


In December of 2009, the American Institute
for Certified Public Accountants (AICPA),
Financial Accounting Foundation (FAF) , and
NASBA established a “blue-ribbon” panel to
address how accounting standards can best
meet the needs of US private company
financial statements
Panel issued a report to the Board of
Trustees of the FAF in January 2011
Results of the “Blue-Ribbon” Panel


Recommendation made by Panel to create a
separate Private Company Accounting
Standards Board (New Board) to implement
exceptions and modifications to existing
GAAP to better serve the needs of private
companies in the US
Objective is not to create new standards or
rewrite GAAP, but simply modify and allow
for exceptions for smaller private companies
Blue Ribbon Panel Recommendations


The New Board would monitor the activities
and help establish modifications and
exceptions to existing GAAP while working
alongside with the FASB
New Board will conduct outreach to private
company stakeholders and provide input and
feedback to the FASB
Reasons for BRP Recommendations



Change needs to be made quickly
Comparability needs to remain the main
focus for preparation and use of financial
statements
New Board will provide more focus on needs
of preparers and users of private company
financials rather than public standards
Drawbacks from BRP
Recommendations

More benefit for cost than clarity
–

Users of private company financial statements
have adjusted to current reporting requirements
Creation of new board could lead to creation
of new standards and more confusion
Results of BRP and Recommendations

Not likely to see any significant change in near future
–


Look for FAF to issue standing on report and
recommendations in 2013
Many public companies are joining the fight in an
effort to possibly eliminate reporting requirements for
all companies
Governing bodies will avoid issue unless true
concerns for clarity of statements for users can be
established
–
Will not change current procedures simply to lower fees of
private company financial statement preparation
Questions & Comments?
o
Contact
o
William Sammons, CPA, PFS, CIA, CFP™
o
o
o
Ian Waller, CPA, CIA
o
o
o
iwaller@nicholscauley.com
404-214-1301
Dave Musser, CPA
o
o
o
wsammons@nicholscauley.com
404-214-1301
dmusser@nicholscauley.com
404-214-1301
Bill McDevitt, CPA
o
o
bmcdevitt@nicholscauley.com
404-214-1301
We appreciate your time and patience!
Circular 230
Pursuant to requirements related to practice before
the Internal Revenue Service, any tax advice
contained in this communication (including any
attachments) is not intended to be used, and cannot
be used, for purposes of (1) avoiding penalties
imposed under the United States Internal Revenue
Code or (2) promoting, marketing, or recommending
to another person any tax-related matter.