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

Presented by: Mike Loritz, Mark Winiarski, Steve Henley

December 11, 2014

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Before We Get Started…

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This webinar is eligible for CPE credit. To receive credit, you will need to answer periodic participation markers throughout the webinar.

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CPE Credit

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The information in this Executive Education Series course is a brief summary and may not include all

the details relevant to your situation.

Please contact your service provider to further discuss the impact on your business.

Disclaimer

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Today’s Presenters Mike Loritz, CPA Shareholder, MHM 913.234.1226 | mloritz@cbiz.com 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.

Mark Winiarski, CPA Senior Manager, CBIZ MHM 913.234.1656 | mwiniarski@cbiz.com Mark is located in our Kansas City office in an audit and advisory function. 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.

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Today’s Presenters Steve Henley, CPA National Tax Practice Leader, CBIZ 770.858.4443 | shenley@cbiz.com Steve Henley is the National Tax Practice Leader for CBIZ. Steve's responsibilities include developing and implementing strategies for the successful operation of the tax practice, including national support for the CBIZ MHM's local tax practices through the National Tax Office.

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Today’s Agenda

1

2 Accounting Standards Update – Q4 Activity

Audit Standards Update 3

4 Federal Tax Update

2014 Year-End Update

2014 YEAR END UPDATE

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Committee of Sponsoring Organizations

COSO 20 Years in the Making…

The 1992 COSO framework is superseded as of December 15, 2014.

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Control Environment

Risk Assessment

Control Activities

Information & Communication

Monitoring Activities

1. Demonstrates commitment to integrity and ethical values 2. Exercises oversight responsibility 3. Establishes structure, authority and responsibility 4. Demonstrates commitment to competence 5. Enforces accountability

6. Specifies suitable objectives 7. Identifies and analyzes risk 8. Assesses fraud risk 9. Identifies and analyzes significant change

10. Selects and develops control activities 11. Selects and develops general controls over technology 12. Deploys through policies and procedures

13. Uses relevant information 14. Communicates internally 15. Communicates externally

16. Conducts ongoing and/or separate evaluations 17. Evaluates and communicates deficiencies

COSO’s 17 Principles

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Standards, Standards and more Standards… 9 effective for years ending December 31, 2014 16 available for early adoption

Most significantly: ASU 2013-02 Reporting Amounts Reclassified Out of

Accumulated Other Comprehensive Income ASU 2013-17 Push Down Accounting Standards originating from the Private Company Council

Nonpublic Business Entities

Refer to the list of accounting standards for nonpublic business entities available in the handouts section.

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ASU 2013-02: Reclassifications from Accumulated Other Comprehensive Income (AOCI) requires:

Parenthetical presentation in the income statement or

disclosure of amounts that are reclassified in full from AOCI to the income statement

Disclose information about items that are reclassified to the balance sheet prior to affecting the income statement, such as amortization of defined benefit pension items.

Nonpublic Business Entities

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Available for Sale Securities (Concept Example)

Beginning balance (AOCI) 18,400$

Change in Unrealized Gains on Securities (OCI)

13,600

Ending Balance (AOCI) 32,000$

Prior to Adoption

Refer to the MHM Messenger in the handouts section for example required disclosures and presentation.

Beginning balance (AOCI) 18,400$

Unrealized Gains on Securities

22,000

Amounts reclassified from AOCI to Net Income

(8,400)

Ending Balance (AOCI) 32,000$

Subsequent to Adoption

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The following standards create options specific to private companies and may be early adopted:

ASU 2014-02 Accounting for Goodwill

ASU 2014-03 Accounting for Certain Receive-Variable, Pay-Fixed Swaps

ASU 2014-07 Applying VIE Guidance to Common Control Leasing Arrangements

Private Company Council Standards

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Proposed ASU: For business combinations a qualifying entity will may elect to not separately value or record: Non-competition agreements

Customer-related intangible assets that are not capable of being sold or licensed independently from the other assets of a business Mortgage servicing rights, commodity supply contracts and core

deposits would be recognized.

Private Company Council Standards

FASB has approved, but not yet issued, this fourth PCC standard.

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Standards, Standards and more Standards…

8 effective for years ending December 31, 2014

11 available for early adoption

Most significantly:

ASU 2013-17 Push Down Accounting

Public Business Entities

Refer to the list of accounting standards for public business entities available in the handouts section.

ACCOUNTING STANDARDS UPDATE – Q4 ACTIVITY

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Permits an entity that has been acquired to elect to “push down” into its separate financial statements the step-up in basis of the acquirer that results from (would have resulted from) the acquisition method of accounting

The election applies to each individual change-in-control event Control can be obtained in many ways, including:

Cash transfers or issuance of equity By contract Change in primary beneficiary of a variable interest entity

ASU 2014-17: Pushdown Accounting

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Once elected, the policy cannot be reversed. If not elected it can be applied in a later period to the most

recent change-in-control event as a change in accounting principle.

Other requirements when elected: Goodwill must be pushed down. Bargain purchase gains are not recognized by the acquiree. Acquisition-related liabilities of the acquirer are recognized by

the acquiree if they are an obligation of the acquiree. Disclosures

ASU 2014-17: Pushdown Accounting

Effective as of November 18, 2014

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Staff Accounting Bulletin 115 Removes the prior guidance from the SEC Staff on the

application of pushdown accounting: Pushdown accounting should be reflected when the transaction

resulted in a “substantially wholly owned subsidiary.” Encouraged, but did not require, push down accounting when a

significant noncontrolling interest in the subsidiary existed Specific guidance on the treatment of debt, debt issue costs and

related interest expense As a result, SEC registrants should follow the requirements of

ASU 2014-17.

ASU 2014-17: Pushdown Accounting

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Entities must evaluate if a hybrid financial instrument has any embedded derivatives that must be accounted for separately. One step in the evaluation requires an entity to determine if the

host contract is more akin to debt or equity.

Applies to the evaluation of whether the host contract is more akin to debt or equity Host contracts include preferred shares, warrants, etc. Potential embedded derivatives include conversion rights, redemption

rights, protective covenants, etc.

ASU 2014-16: Debt vs. Equity

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Existing practice is mixed. Holistic approach

Evaluate the host contract once based on all of the terms of the contract

“Chameleon” approach

Re-evaluate the host contract for each embedded feature

ASU 2014-16: Debt vs. Equity

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ASU 2014-16 requires the use of the whole-instruments (holistic) approach. No single term is determinative.

Consideration should be given to: Legal terms and their characteristics

Circumstances of issuance, and

Potential outcomes

Retrospective or modified retrospective application

ASU 2014-16: Debt vs. Equity

Effective for public entities fiscal years and interim periods beginning after December 15, 2015; all other entities for

years beginning after December 15, 2015

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Transition Resource Group met on October 31, 2014 and discussed:

1) Customer options for additional goods and services and nonrefundable upfront fees

2) Presentation of a contract as a contract asset or a contract liability

3) Determining the nature of a license of intellectual property 4) Distinct in the context of the contract

5) Contract enforceability and termination clauses

Revenue Recognition Update

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Public entities adopt for reporting periods beginning after December 15, 2016; Private entities after December 15, 2017

The FASB is conducting outreach on whether a deferral

is warranted Expected to conclude by the end of Q1 2015

Revenue Recognition Update – Deferral?

If deferral occurs, it may be an indicator that entities that have already begun to work on implementation cannot

practically apply the standard by the effective date.

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Exposure Drafts Issued in Q4

Effects on Historical Earnings per Unit of Master Limited Partnership Dropdown Transactions (Comments due 1/15)

Fair Value Hierarchy Levels for Certain Investments Measured at Net Asset Value (Comments due 1/15)

Financial Services - Investment Companies (Topic 946): Disclosures about Investments in Other Investment Companies (Comments due 2/17)

FASB Technical Agenda

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Exposure Drafts Issued in Q4

Interest—Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Cost (Comments due 12/15)

Compensation—Retirement Benefits (Topic 715): Practical Expedient for the Measurement Date of an Employer’s Defined Benefit Obligation and Plan Assets (Comments due 12/15)

FASB Technical Agenda

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Final Standards Approved and Expected to be Issued

Consolidation: Principal versus Agent Analysis

Insurance: Disclosures about Short-Duration Contracts

Simplification by Eliminating Extraordinary Items

PCC Issue 13-01A Identifiable Intangible Assets

FASB Technical Agenda

AUDIT STANDARDS UPDATE

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AICPA guidance for accounting and review services recodification

Creates a new classification of service – Preparation of Financial Statements Lesser than a compilation

The accountant does not issue a report

Effective for periods ending on or after December 15, 2015, early adoption is permitted

SSARS 21: Preparation of Financial Statements

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Requires certain procedures be performed and representations from management obtained over: Related party transactions Significant Unusual Transactions Relationships and Transactions with Executives

Registrants should consider performing a review of the

controls and process over these types of transactions.

PCAOB – Accounting Standard 18

Effective for audits for fiscal years, and interim reviews within the year, beginning on/after December 15, 2014

FEDERAL TAX UPDATE

Stephen Henley National Tax Practice Leader

CBIZ MHM, LLC National Tax Office

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Agenda Year End Tax Planning

Tangible Property Tax Planning Asset Issues Tangible Property Analysis, Protective 3115s, Depreciation Review Cost Segregation Depreciation: Potential Extender Legislation

Legislative Updates Changes to Tax Writing Committees Comprehensive Tax Reform Proposals: Obama and Camp Extender Legislation

H.R. 5771 One Year Deal for 2014 Koskinen’s Warning to Congress

Administrative Bonus Accruals

YEAR-END TAX PLANNING

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Tangible Property Regulations Process to ensure compliance Protective 3115 Filings Depreciation review

Cost Segregation Bonus and Sec. 179 expensing Potential Extender Legislation

Tangible Property Planning

LEGISLATIVE UPDATES

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Senate Finance Orrin Hatch (R – Utah) taking over Favors revenue neutrality, geographic tax system (tax

earnings where earned) House Ways and Means Camp (R- Mich.) retiring Paul Ryan (R – Wis.) to take over Applauded Reg. Camp’s tax reform proposal Will use Camp proposal as a “Marker,” not necessarily as a

starting point

Tax Writing Committees

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At the end of February, Chairman of House Ways and Means Committee Dave Camp (R-Mich.) released discussion draft of a comprehensive tax reform bill.

President Obama released his annual list of budget proposals a week after Camp’s proposal (March). Over 80% of the tax proposals are the same as in last year’s

budget proposal.

Obama and Camp on Tax Reform

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Obama vs. Camp: Comprehensive Tax Reform

Obama/Camp Agree Obama/Camp on Same Page Obama/Camp Disagree

R&E Credit made permanent

Section 179 expensing (Obama $500,000; Camp $250,000)

Gain on Sale of Small Business Stock (Obama permanent exclusion; Camp repeal)

Repeal LIFO and LCM methods of accounting

Like Kind Exchanges (Obama $1 million per year limit; Camp repeal)

WOTC (Obama permanent; Camp repeal)

Taxing carried interests as ordinary income (Obama 100%; Camp “total capital invested in a fund multiplied by a rate of return”)

Energy Incentives (Obama renew and expand; Camp repeal)

Pass-through income of service organizations subject to self-employment tax (Obama 100%; Camp 70%)

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Camp Comprehensive Tax Reform: Other

Top corporate tax rate of 25% (down from 35%) Corporate NOL limited to 90% of taxable income Software development / R&D amortized over 5 years 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 Comprehensive Tax Reform: Other

Repealed provisions would include (not all inclusive): Accelerated depreciation DPAD (phased out over several years) Corporate AMT Exception to $1 million compensation deduction limit for stock

options, commissions, etc.

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Rep. Paul Ryan’s Comments

Comprehensive Tax Reform: Needed to make US globally competitive Reduce corporate tax rate Will require “Base Broadening” Business community needs to look at the “big picture” and

not only at their special tax incentives

www.cbiz.com/memphis

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Resistance to Accrual Method Proposal for Businesses with Revenue over $10 million

Camp’s (R-Mich.) comprehensive tax reform package includes a requirement that businesses with average annual gross receipts of more than $10 million would be required to use the accrual method.

The proposed change would preclude the use of cash accounting by pass-through entities, professional services firms, family farms and other businesses.

223 Representatives and 46 Senators have sent letters opposing the change.

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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

“Tax Extenders” – Expired Tax Provisions

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House passed one-year Extender Package Dec. 3 Senate expected to pass this week without

amendments Will cost approx. $41.6B through 2024 Summary: Extends tax benefits retroactively through end of 2014 Includes those extenders mentioned on previous slide Bonus depreciation at 50% Sec. 179 expensing election: $500,000/$2,000,000 15-year recovery period: qual. L/H improvements/certain

retail and restaurant improvements

House Bill H.R. 5771: One-Year Extender

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Koskinen’s Warning to Congress

IRS needs Enacted Legislation by Dec. 12; Otherwise… Tax filing season will be delayed Processing of tax refunds “for millions of Americans” will be

delayed

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Sen. Harry Reid Comments

Has stated that Senate might not pass Extender Legislation in Lame Duck Session

Rank and file Democrats say critical provisions that help working families have been omitted

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Employers have been lured into a false sense of security, believing that any compensation paid within 2½ months of year-end for services provided in the prior year were deductible in the year the services were provided.

IRS attacks on bonus accrual examples: Forfeited Bonuses Revert Back to Taxpayer Forfeited Bonuses Allocated to Other Employees Bonuses Forfeited After a Certain Date Revert Back to

Taxpayer

IRS Attacks Year-End Bonuses

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Questions?

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Join us for these courses: 12/18: SEC Update - What Public Companies Need to Know 1/21, 1/27 & 1/28: Eye on Washington - Quarterly Business Tax

Update

Read these related publications: Renewed Audit Focus - Related Parties and Unusual Transactions Re-evaluation of Your Hybrid Financial Instruments May Be Required Revenue Recognition Serial:

Part 1: An Introduction to the Revenue Recognition 5-Step Process Part 2: Step 1 - Identifying the Contract(s) with a Customer Part 3: Step 2 - Identify the Performance Obligations in the Contract

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