Webinar Slides: 2014 First Quarter Accounting and Financial Reporting Update

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

Presented by: James Comito, Mike Loritz, Mark Winiarski and William Smith

March 20, 2014

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Today’s Presenters

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

Mike Loritz, CPA Shareholder, MHM 913.234.1226 | [email protected] Mike has 18 years of experience in public accounting with diversified financial companies and other service based companies, including banking, broker/dealer, investment companies, and other diversified companies ranging from audits of public entities in the Fortune 100 to small private entities. He is a member of MHM's Professional Standards Group, providing accounting knowledge leadership in the areas of derivative financial instruments, investment securities, share-based compensation, fair value, revenue recognition and others.

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Today’s Presenters

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

William M. Smith, Esq. Managing Director, CBIZ National Tax Office 301.951.3636 | [email protected] Bill Smith is a managing director in the CBIZ National Tax Office. Bill monitors federal tax legislation and consults nationally on a broad range of foreign and domestic tax services for businesses and individuals, including mergers and acquisitions, domestic and international investments or divestitures, and the review, negotiation and drafting of tax aspects of business agreements.


Today’s Agenda

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2

FASB Update

PCAOB Update

3 Federal Tax Update

FASB UPDATE


Accounting for Goodwill

The accounting alternative permitting goodwill amortization was finalized on January 16. (ASU 2014-02)

Qualifying private companies (not defined as public entities) can adopt this standard for financial statements that have not been made available for issuance.

Permits amortization of goodwill for up to a 10-year period

Eliminates the annual impairment test model in favor of a triggering event model

Private Company Council Activities


CraftSetters, Inc is a maker of custom eyewear and lenses.

CraftSetters receives orders from optometrists and their customers for frames and lens and manufactures them in their facility.

On December 31, 2009 CraftSetters acquired Eye Repair Shop, LLC, an owner of a chain of eye glass repair stores and optometrists.

Goodwill Amortization Election - Example


When performing the acquisition method of accounting CraftSetters recognized $10 million of goodwill.

CraftSetters determined that Eye Repair Store was a reporting unit because: It has business activities which earn revenues and causes

expenses to be incurred It has discrete financial information The CEO reviews performance weekly to allocate resources



Beginning in December 2010 the management of CraftSetters performed an annual impairment test of goodwill for the reporting unit and did not recognize any impairment losses.

In January 2014 the FASB issued Accounting Standards Update 2014-02 permitting a qualifying private company to elect to amortize goodwill.



Management of CraftSetters has decided to adopt the amortization method for goodwill for their 2013 financial statements which have not been made available for issuance.

Step 1: Is CraftSetters, Inc eligible to adopt the

accounting policy election? Does the entity fall under the not-for-profit entity guidance or

is it an employee benefit plan? No Is CraftSetters, Inc a public company? Maybe?



Definition of a public business entity as provided by ASU 2013-12: Is CraftSetters required to or does it voluntary file its financial

statements with the SEC? No Is CraftSetters required by the 1934 act to furnish financial

statements to another regulator? No Is CraftSetters required to furnish financial statements to a

regulator in preparation for the sale of unrestricted securities? No

Evaluating if CraftSetters is a Public Entity


Definition of a public business entity as provided by ASU 2013-12 (continued): CraftSetters has issued or is a conduit bond obligor? No CraftSetters:

Has unrestricted securities, and Yes By law, regulation or contract is required to make U.S.

GAAP financial statements available to the public No

Step 1 conclusion: CraftSetters is a qualifying private company.

Evaluating if CraftSetters is a Public Entity


Step 2: Identify all existing goodwill at date of adoption: $10 million of goodwill related to the acquisition of Eye

Repair Store

Equity method investment in Land Developers, Inc. with a $2 million purchase price and a $1 million carrying value — all $1 million is attributable to goodwill.



Step 3: Assign useful life to existing goodwill Should the estimated useful life be less then 10 years?

10 years

Step 4: Determine a policy for impairment testing Will impairment be tested at the entity or reporting unit

level? Reporting unit because of the relative success

of Eye Repair Store



Step 5: Determine amortization for the year of adoption Did a triggering event occur? No Compute amortization beginning January 1, 2013. Eye Repair Store: $10,000,000 / 10 years = $1,000,000 of amortization

Land Development equity method investment: $1,000,000 / 10 years = $100,000 of amortization attributed to

the equity method investment income Note that the balance of the equity method investment is still

subject to impairment under the equity method of accounting



Simplified Hedge Accounting

The accounting alternative permitting the simplified hedge accounting method for certain interest rate swaps was finalized on January 16. (ASU 2014-03)

Qualifying private companies can adopt this standard for any financial statements not already made available for issuance.

Excludes not-for-profit entities, employee benefit plans, public business entities and financial institutions

ASU - Interest Rate Swaps


Simplified Hedge Accounting Only applies to qualifying receive-variable, pay-fixed interest

rate swaps

Permits hedge accounting adoption up until the financial statements are made available for issuance

Reduced documentation to apply hedge accounting

Use of settlement value instead of fair value

Effective for period beginning after December 31, 2014, but early adoption is permitted.

ASU - Interest Rate Swaps


The PCC removed its project on the combined instruments approach for hedge accounting.

FASB endorsed the PCC alternative for the application of variable interest entity accounting (consolidation) for certain commonly controlled leasing arrangements. Expected to be effective for periods beginning after

December 15, 2014. Early adoption will be permitted. Retrospective adoption will be required.

Other Private Company Council Updates


A qualifying private company may elect to not apply the VIE model to leasing entities when: The lessor entity and the private company are under common

control The private company has a lease arrangement with the

lessor entity Substantially all the activity between the two entities is

related to the leasing activities between the two entities, and Any obligations of the lessor entity that are guaranteed or

collateralized

Election applies to all qualifying leasing arrangements

Commonly Controlled Leasing Entity


Investments – equity method and joint ventures: accounting for investments in qualified affordable housing projects (ASU 2014-01)

Receivables – troubled debt restructuring (ASU 2014-04) Service concession arrangements (ASU 2014-05) Classification of certain government-guaranteed

residential mortgage loans upon foreclosure (approved by FASB)

EITF Activity


Accounting for share-based payments when the terms of an award provide that a performance target could be achieved after the requisite service period (final consensus)

Recognition of new accounting basis (pushdown) in certain circumstances (consensus for exposure draft)

EITF Issues


FASB voted to remove development stage entities Development stage entities:

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

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

disclosures Added additional risk disclosures for entities that have not

begun operations Removed guidance for development stage

entities from the VIE model

Development Stage Entities


Conceptual framework for financial reporting; Chapter 8, notes to the financial statements Exposure draft issued with comments due July 14, 2014 Objective is to provide a framework to assist in streamlining

financial statement disclosures

Next phase is the Entity’s Decision Process.

Disclosure Project


Increase the usefulness of information about insurance contracts

FASB recently decided to limit the scope to those

entities that are insurance entities. However, the FASB will consider including certain other

contracts on a case-by-case basis.

Most likely will result in final standards that are not converged with the IASB

Convergence - Insurance Project


Classification Measurement of equity instruments at fair value recognized

through net income Excluding equity method investments and instruments that fall under

the practicability exception Will not require an entity to separately evaluate cash flow

characteristics The host contract after bifurcating an embedded derivative Other assets that are not required to be bifurcated

Permit an irrevocable fair value option for hybrid financial assets and liabilities with embedded derivatives that require bifurcation

Convergence - Financial Instruments Project


Revenue recognition Final standard likely in Q2 2014

Leasing

IASB and FASB meetings

Other Convergence Projects

PCAOB UPDATE


PCAOB & SEC Issued: Attestation Standard No. 1: Examination engagements regarding

compliance reports of brokers and dealers

Attestation Standard No. 2: Review engagements regarding exemption reports of brokers and dealers

Auditing Standard No. 17: Auditing supplemental information accompanying audited financial statements

PCAOB Update


Transparency Project Proposal to require disclosure of the following: The name of the engagement partner

Names of participants in the audit that are not employees of

the audit firm Comment period on the transparency project ended on

March 17.

PCAOB Update


Other Developments The SEC has removed the project on auditor rotation

from its agenda.

PCAOB Update

FEDERAL TAX UPDATE

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

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

Chair of Senate Finance Committee Ron Wyden (D-Ore.) indicated committee will take up extenders in April.

“Tax Extenders” - Expiring Tax Provisions

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“Tax Extenders” - Expired Business Provisions

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

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

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

restaurant, and retail improvements

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On 2/26, Chairman of House Ways and Means Committee Dave Camp (R-Mich.) released discussion draft of a comprehensive tax reform bill

Would be most sweeping tax reform since 1986 Reaction on Capitol Hill was mixed Impacts all areas of income taxation, including: Businesses Individuals International Retirement plans

Camp Tax Reform Proposal

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Camp Proposal – Notable Business Reforms

Top corporate tax rate of 25% (down from 35%) Sec. 179 expensing election capped at $250,000 Corporate NOL limited to 90% of taxable income Software development / R&D amortized over 5 years Research credit made permanent 70% of inc. to active LPs, S corp S/Hs subject to S/E tax Portion of carried interest income taxed as ordinary Most businesses with gross receipts > $10 million required

to use accrual basis Income required to be recognized no later than when

recognized for financial statement purposes

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Camp Proposal – Business Reforms, cont’d.

Repealed provisions would include (not all inclusive): Accelerated depreciation DPAD (phased out over several years) Like-kind exchanges LIFO and LCM inventory accounting Corporate AMT Work opportunity tax credit Energy credits and energy efficient building deduction Gain exclusion on sale of small business stock Exception to $1 million compensation deduction limit for stock

options, commissions, etc.

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Camp Proposal – Notable International Reforms

Subpart F replaced with 95% exemption on foreign dividends paid to 10% US corporate shareholders

Foreign tax credit reforms No indirect credit on foreign taxes attributable to exempted

dividends Only direct expenses attributable to foreign sub allocated

against foreign source income

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Obama Fiscal Year 2015 Budget Proposals

President Obama released his annual list of budget proposals on March 4th

Over 80% of the tax proposals are the same as in last year’s budget proposal

Common themes: Raise revenue on higher income individuals Help working families Encourage retirement savings Encourage job creation Close “loopholes”

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Obama Budget – Notable Business Provisions

Extenders: Permanently extend R&E credit Permanently extend $500,000 expensing election Permanently extend 100% gain exclusion on small business stock Permanently extend Work Opportunity Tax Credit

Holdovers from previous budget: Tax carried interests as ordinary income Repeal LIFO and LCM inventory accounting methods “Promise Zones” to encourage investment in disadvantaged areas Extend recovery period on corporate jets Renew and expand energy incentives

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Obama Budget – Business Provisions, cont’d.

New provisions: Limit capital gain deferral on like-kind exchanges of real

estate to $1 million per year Impose S/E tax on active owners of professional services

businesses

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Affordable Care Act Update

Employer shared responsibility payment: Nondeductible excise tax on large employees who do not

provide affordable & adequate health coverage to full-time employees

Modifications: Delayed until 2016 for certain employers Percentage of employees who must be offered minimum essential

coverage decreased from 95% to 70% in 2015

Full-time Employees 2014 2015 2016 Less than 50 N/A N/A N/A 50 – 99 N/A N/A 95% 100 or more N/A 70% 95%

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Tangible Property Regulations Update

Timeline: September 13, 2013 – Treasury issued:

Final regulations on capitalization of costs incurred to acquire, maintain, repair and replace tangible property

New proposed regulations on the disposition of tangible property January 24, 2014 – IRS issued implementation guidance on

final capitalization regulations (Rev Proc 2014-16) February 28, 2014 – IRS issued implementation guidance on

proposed disposition regulations (Rev Proc 2014-17) Effective Date: Tax years beginning on or after January 1, 2014 Optionally may be applied for the 2012 and 2013 tax years

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Rev Proc 2014-16 – Capitalization Rules

Common automatic accounting method changes: Deducting as repairs amounts that were typically capitalized Deducting under routine maintenance safe harbor amounts

that were typically capitalized Deducting payments for non-incidental supplies in year used Deducting payments for incidental supplies in year paid or

incurred IRS encouraging compliance by: Waiving scope limitations Simplifying filing requirements for small taxpayers Not requiring full compliance with 263A UNICAP rules

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Rev Proc 2014-17 – Disposition Rules

Partial dispositions of tangible property Previously an accounting method under temporary regulations Now an annual election under new proposed regulations Rev Proc 2014-17 allows taxpayers to make a late partial

disposition election on property retired in a previous tax year Rev Proc 2014-17 permits use of statistical sampling to identify

assets disposed in prior years Taxpayers that made a partial disposition under the temporary

regulations will still need a late partial disposition election General asset account (GAA) elections Temporary regulations gave taxpayers ability to elect to recognize

gain or loss on disposal of asset in a GAA New proposed regulations eliminated that ability Rev Proc 2014-17 allows taxpayers to revoke GAA elections under

temporary regulations

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Eye on Washington: Quarterly Business Tax Update

For more information on tax developments that may impact your business, attend our upcoming quarterly tax update webcast:

May 7th May 13th May 14th All times 2 – 3 pm EDT

Visit www.cbiz.com to register

http://www.cbiz.com/


Questions?


Join us for these courses: Repeat broadcast on April 10 Second Quarter Update on June 26 Third Quarter Update on Sept. 11 Fourth Quarter Update on Dec. 11

Read these related publications: FASB Votes to Eliminate Development Stage Entities Insurance Contracts Joint Project Update Changes to the Accounting for Interest Rate Swaps used in Hedging

Relationships - Private Companies Changes in Accounting for Goodwill for Private Companies

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Webinar Slides: 2014 First Quarter Accounting and Financial Reporting Update

Economy & Finance

Transcript of Webinar Slides: 2014 First Quarter Accounting and Financial Reporting Update