Accounting and Auditing
Hot Topics for 2011
Finance and Administration Roundtable
Jeff Schragg
Patty Brickett
Leslie Pine
703-893-0600
Agenda
• Employee vs. Independent Contractor
• Proposed New Lease Accounting Standards (ASC 840)
• Update on New Form 1099 Reporting Rules
• Other Hot Topics
– ASC 820 – Fair Value Measurement
– ASC 310 – Receivables
– ASC 958-805 – Mergers of Non-Profits and Goodwill
– ASC 740 – Accounting for Income Taxes
– Increased Number of IRS Examinations
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Employee vs. Independent Contractor
Do you know who your employees are?
Do you know who your employees are?
Of course you do
•
Employees are easy to identify…
– Onboarding process through HR so all paperwork is in
place…Right?
– Offices, cubicles, desks and business cards
– Laptops, cell phones and organization email addresses
– They are at your office “every day”
– They receive Forms W-2 to report earnings and withholding
•
And you know you have Independent Contractors…
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Do you know who your employees are?
But what about volunteers, interns, temporary workers and
workers overseas?
• There is no IRS classification for volunteers, interns,
temporary workers and workers overseas
– How are they being handled by your organization?
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Do you know who your employees are?
• The IRS as part of an employment tax National Research
Program has embarked on a multiyear study with 500 audits
of Tax Exempt Entities expected in 2010, 2011 and 2012
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Do you know who your employees are?
As part of this comprehensive audit, the IRS is focused on
• Worker classification - Employee versus Independent
Contractor
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Do you know who your employees are?
The IRS is looking at:
• Workers who have received Form 1099
• Workers who have received both Form 1099 Miscellaneous
and Form W-2 during the audit period
• Workers hired as Independent Contractors and converted to
employees
• Downsized employees rehired as Independent Contractors
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Do you know who your employees are?
How do you determine if you have an “employee” working for
you?
• Review all facts and circumstances of the workers situation
using the factors the IRS has set out at
www.irs.gov/taxtopics/tc762.html
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Do you know who your employees are?
Relationship of the Worker and the Organization
• What agreements or contracts have been entered with the
worker?
• What benefits are available to the worker – insurance,
pension, contributions, vacation pay, sick pay
• How and who provide training for the worker?
• How does the organization represent the worker to others?
• How long has the worker been providing services to the
organization?
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Do you know who your employees are?
Behavioral Control
• What instruction is the worker given?
• Who determines the methods by which assignments are
performed?
• Who does the worker contact regarding problems?
• What is the work product?
• Where does the worker perform services?
• What schedule is the worker required to work?
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Do you know who your employees are?
Financial Control
• Who provides the worker supplies and equipment?
• What expenses are incurred by the worker?
• What expenses are reimbursed and how are expenses
reimbursed?
• Does the worker have other clients or customers?
• How is the worker paid?
• Can the worker realize a profit or incur a loss on the work?
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Do you know who your employees are?
So what should you do now? BE PREPARED
•
Internal audit of worker classification and reporting
– Generally multi-functional team including Finance, HR, Payroll and
Key Management Personnel
– Cooperation of overseas offices, if any, necessary
– Evaluate all classification utilized by the organization; Independent
Contractors, volunteers, interns, temporary employees and overseas
workers
•
Calculate exposure/risk
•
Evaluate options to correct retroactively and prospectively
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Tips to Support Independent Contractor
Classification
•
Always have a signed written contract
•
Only contract with a corporation, partnership or limited liability company
•
Require written invoices with employer identification number for payment
•
Do not set the hours of work
•
Require consultant to provide their own equipment
•
Pay by work project, not hours or days
•
Require consultants to pay their own out-of- pocket expenses
•
Include reimbursed expenses as payments reported on Form 1099
•
Do not closely supervise the work
•
Don’t use consultants for long periods of time
•
Allow the consultant to work for other organizations
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Resources
• www.irs.gov
• Form SS-8 Determination of Worker Status
• Publication 15 (Circular E), Employer’s Tax Guide
• Publication 15(A), Employer’s Supplemental Tax Guide
• Publication 1729, Independent Contractor or Employee
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Proposed New Lease Accounting Standards
Making Sense of the New Lease Accounting
Rules
Proposed New Lease Accounting
Standards
• If codified, proposed new accounting rules will represent a
radical shift in how entities have accounted for real and
personal property leases
• The impact on both lessees and owners of the property will
be dramatic and perhaps even shocking for some
• Although many details remain to be finalized before the new
standards for lease accounting are adopted, there is
virtually a 100% consensus that broad-based changes will
occur
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Current Standards
• Current lease accounting under Generally Accepted
Accounting Principles (GAAP) is based on SFAS 13 (now
ASC 840), originally issued in 1976
• Under the current standard, leases are characterized as
either operating or capital
• Operating leases generally are not reflected on an entity’s
statement of financial position, and payments made are
recorded as rent expense
• Tax Accounting Rules for operating vs. capital leases are
different than GAAP rules under SFAS 13/ASC 840
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Why the proposed changes?
• The Financial Accounting Standards Board (the FASB) is
responding to the public outcry stemming from Enron’s creative
accounting debacle
• As a natural extension of the Sarbanes-Oxley Act, the Securities
and Exchange Commission requested a rewrite of the lease
accounting rules
• In a 2005 report, the SEC estimated that there is over $1.25
trillion in non-cancelable operating lease obligations not currently
recognized in financial statements
• Both the FASB and the International Accounting Standards Board
(the IASB) were asked to work jointly to increase transparency in
lease-related financial statement reporting
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Issues with the Current Lease
Accounting Standards
Critics of the current standards contend that:
• Operating leases truly give rise to assets and liabilities that
should be recorded in an entity’s statement of financial position
• Failure to record leases in the statement of financial position
does not allow for transparency for the users of financial
statements
• Comparability of financial statements between entities that
account for leases differently is reduced
• “Off balance sheet” operating lease obligations translate to
significant fixed and contingent liabilities for entities
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Timing of Proposed New Standards
• The FASB and IASB issued a Discussion Paper in March
2009
• An Exposure Draft was issued in August 2010
• While no fixed date has been determined for the issuance of
the final standard, it is generally expected that the final
standard will be issued mid 2011 and could become
effective as early as 2012
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Proposed Changes to the Standards
Lessees:
•
While the Exposure Draft addresses new accounting rules for both lessors and
lessees, the primary focus will be on the basic changes affecting lessees
•
The lease accounting model contemplated by the new standard is a "right of
use" model that assumes that each lease creates an asset (the lessee's right to
use the leased asset) and a liability(the future rental payment obligations)
•
Specifics of the proposed rules provide for the following basic principles:
– No further distinction between operating and capital leases
– Will apply to all leased business assets with few exceptions and not just real estate
leases
– No so-called "grandfathered" leases so that all leases in existence as of the effective
date of the new standard will be subject to the new accounting rules
– A lessee's balance sheet will reflect an asset representing the company's right to use
the leased asset, and a liability representing the company's obligation to make rental
payments
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Proposed Changes to the Standards Continued
• Assets and liabilities will be measured on a basis that
– Assumes the longest possible lease term that is more likely
than not to occur, taking into account the effect of any options
to extend or to terminate
– Uses an expected outcome technique to reflect the lease
payments, including contingent rents (such as percentage
rent), residual payments (such as guaranteed residual value
payments) or expected payments under term option penalties,
and
– is updated when changes in facts or circumstances indicate
that there would be a significant change in those assets or
liabilities since the previous reporting period
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Proposed Changes to the Standards Continued
Lessors
•
Lessors will apply either a performance obligation approach or a
derecognition approach depending on whether the organization retains
exposure to significant risks.
– If the organization retains exposure to significant risks of the underlying
asset, a performance obligation approach will be used. Under this
approach, the lessor would continue to recognize the underlying asset but
would also recognize an asset for the right to receive lease payments and a
liability for the obligation to give another organization the right to use the
asset. The liability would be amortized as lease income over the life of the
lease and interest income would be recognized as payments are received.
– If the organization does not retain exposure to significant risks of the
underlying asset, a derecognition approach will be used. Under this
approach, an organization would account for the lease similar to the current
accounting for capital leases, except that it would be required to estimate
various options and contingencies in each lease.
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Impacts of the Proposed New Standards
on Nonprofit Organizations
The impact of the new standard will have a number of far reaching impacts
on nonprofit organizations, particularly those entities that have a substantial
number of operating leases. Some of the anticipated impacts that will have
immediate effects on nonprofit organizations include:
– Substantial internal efforts, process adjustments and expense will need to be put in
place and expended in order to learn and implement the new reporting and
measurement requirements imposed by the new standard
– Higher rents will have to be recorded based on the most likely term and expected
outcome technique described above which, based on the impact to financial
statements, will require extensive internal analysis and estimates never before
required, all of which will result in the addition of significant liabilities to the statement
of financial position
– debt covenants in debt agreements may be violated or triggered due to material
changes in applicable financial ratios
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Impact of the Proposed New Standards
on Nonprofit Organizations - Continued
• Nonprofit organizations may seek to alter their leasing
strategy to
– Own assets instead of leasing where appropriate, or
– Reduce lease and extension option terms to create the
desired effect on its financial statements
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Actions Nonprofit Organizations Should
Take Now
•
There is still plenty of time before the new standard becomes effective
•
However, since the new standard will apply to virtually all business
assets and all leases in effect as of the effective date, it would be
prudent to start to plan and budget for the affirmative changes to come
•
Suggested actions would be as follows:
– Evaluate the Exposure Draft and the new lease accounting rules, monitor
the comments and review the final standard when issued in 2011
– Measure the likely reporting effect across its leasing platform and the
potential impact on its statement of financial position
– Review the effect of new reporting requirements on existing legal
documentation related to its debt obligations and consider whether any
affirmative action may be required to be taken with its lenders in advance of
the effective date of the new standard
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Actions Nonprofit Organizations Should
Take Now - Continued
Budget for and plan to implement an internal review,
technology and process changes required by the new rules,
including
– Educating the appropriate internal groups responsible for
assessment, measurement and reporting, and
– Determining who will make the difficult judgment calls
regarding certain decisions
– Reassess your leasing program and requirements to
take the appropriate strategic action (e.g., lease v. own,
shorter terms, fewer options, etc.) to minimize the impact
of the new standard
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Summary
• The proposed rule changes related to the new lease
accounting standard could have a significant effect on an
entity’s financial statements
• While the effective date of the new standard is not
immediate, it will take some time for your organization to
understand the implications of the rule changes and to
prepare internally for the new measurement and reporting
obligations
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2010 Patient Protection and Affordable
Care Act / Creating Small Business Jobs
Act of 2010
• Changed Form 1099 reporting rules to pay for health care
changes ($17.1 billion - PPA, $2.5 billion - CSBJA)
• CSBJA increased information return filing penalties ($421
million)
• Current Law – IRC 6041
– Trade or business must provide
• Form 1099 for taxable income payments over $600
• Major exception for corporations (except those providing medical care or
legal services)
• Major exception for purchased goods
• Major exception for “Gross Proceeds”
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2010 Patient Protection and Affordable
Care Act / Creating Small Business Jobs
Act of 2010
• New Law
– Beginning for payments in 2011, rental real estate is now a trade or
business for Form 1099 reporting purposes (2011 Form 1099 filed by
February 2012) – IRC 6041(h)
– Beginning for payments in 2012, all payments over $600 to be reported
(2012 Form 1099 filed by February 2013) – IRC 6041(a)
– IRS provided guidance on credit card charges/payee is credit card company
not vendor
• Repeal is a possibility for IRC 6041(a)
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Other Hot Topics
• ASC 820 – Fair Value Measurement
• ASC 310 – Receivables
• ASC 958-805 – Mergers of Non-Profits and Goodwill
• ASC 740 – Accounting for Income Taxes
• Increased number of IRS Examinations
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Jeff Schragg
Argy, Wiltse & Robinson, P.C.
jschragg@argy.com
703.770.6313
Jeff is a tax partner with Argy, Wiltse & Robinson, PC (“Argy”). Jeff
counsels clients on highly-complex tax and business matters. He
provides his clients a broad and deep knowledge of all areas of
state, federal and international taxation. Jeff has coordinated
services for both individual and business clients, including exempt
organizations, real estate companies and government contractors He brings a resultsdriven approach to closely-held businesses and high net-worth individuals. Jeff advises
clients in all phases of growth from inception to funding growth to exit strategies via sale
or going public. He has extensive mergers and acquisitions experience. As such, Jeff
has brought sophisticated tax planning and advice to Fortune 500 companies, S
corporations, trade associations and charities.
Jeff is the Chair of Synetic Theater’s Board of Directors and a board member of the
Fairfax County Chamber of Commerce.
Jeff received is Juris Doctor from The National Law Center at George Washington
University and a Bachelor of Arts in Economics and Management from Albion College.
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Patty Brickett
Argy, Wiltse & Robinson, P.C.
pbrickett@argy.com
703.752.2782
Patty Brickett, Lead Partner of Argy’s International Services Practice, has over 21
years of experience providing International Tax and human resources consulting
services to multinational corporations and their global executives. Patty works with
clients in all industries and in the not for profit community. Her clients range from
those just beginning to expand globally, to those with mature international operations.
Patty assists clients with Tax planning and compliance using Income Tax Treaty Network to minimize exposure,
International compensation delivery, International payroll management and consulting, Tax equalization/tax
protection policy development, Analysis of Status of Forces Agreements (SOFA’s), Technical Cooperation
Agreements and other bilateral agreements, U.S. tax withholding and reporting requirements on payments to
foreign entities and individuals including assistance to companies under Audit Permanent Establishment
Analysis and Review of foreign tax obligations created by Business Travelers and development of internal
process and procedures to mitigate risk.
Patty is frequently asked to speak on International Tax, payroll and human resources issues. She has spoken
for numerous organizations including the American Society of Payroll Management, ADP, Virginia Society of
CPA’s, the Greater Washington Society of CPA’s Not-For-Profit Organization Symposium, The CanadianAmerican Business Association, Inside NGO’s Annual Conference; Inside NGO’s Taxation of Americans
Overseas Workshop, and the DC Bar Association. Patty is a guest lecturer at the American University Masters
in Tax program and she has been quoted on International Tax and human resource issues in the Washington
Post, Washington Business Journal and the Journal of Financial Planning.
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Leslie Pine
Argy, Wiltse & Robinson, P.C.
lpine@argy.com
703.770.6334
Leslie Pine, Partner in the Virginia office of Argy Wiltse & Robinson, P.C.
(Argy) has over 23 years of experience providing audit and consulting
services to various for profit and non-profit organizations.
As a partner in Argy’s Assurance and Business Advisory Group, Leslie
spends the majority of her time overseeing audits, reviews and compilations
for non-profit organizations and government contractors. Her clients range from start-up entities to
those with mature significant operations. Her expertise also includes non-profit audits under OMB
Circular A-133. In addition, she performs special projects and due diligence reviews for both
acquired and acquiring clients, as well as various types of consulting for government contractors and
non-profit organizations. Leslie is the lead in the assurance and business advisory group with regard
to non-profit clients, and has spoken on several current accounting topics for not-for-profits, such as
Accounting for Uncertainty in Income Taxes and alternative investments. Leslie assists clients with
governmental cost principles, indirect rate structures, disclosure statements, compliance audits for
government contractors and not-for-profits and technical support on auditing and accounting issues
for those clients.
Leslie received both her undergraduate degree and Master’s Degree in Accountancy from the
University of Nevada. She is a member of the AICPA and is licensed in Virginia, the District of
Columbia, and has a Practice Privilege in California.
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All of the materials contained in this course have been created by and belong
solely to Argy, Wiltse & Robinson, P.C.
IRS Circular 230 Disclosure: Tax advice contained herein is not intended or
written to be used and cannot be used for the purpose of avoiding tax-related
penalties that may be imposed on the taxpayer. Argy, Wiltse & Robinson, P.C.
is not rendering legal advice and assumes no liability whatsoever in
connection with its use.
Please Contact Us At
Jeff Schragg
jschragg@argy.com
703.770.6313
Leslie Pine
lpine@argy.com
703.770.6334
Patty Brickett
pbrickett@argy.com
703.752.2782