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Update on Accounting Hot Topics


Title: Spring Cleaning...from a business perspective Author: T. Flin Cannon Last modified by: sgroover Created Date: 5/25/2010 3:53:10 PM Document presentation format – PowerPoint PPT presentation

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Title: Update on Accounting Hot Topics

Update on Accounting Hot Topics
August 31, 2011
Your Discussion Leaders
  • 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

Third Parties
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
  • Smaller organizations are disproportionately
  • 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

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.

Technology EFT Fraud
  • Attack is not centered on the Bank but is most
    often centered on the Companys computer which
    would initiate the transaction.
  • EFT Fraud basically has 3 steps
  • Hijacker illicitly acquired the login
  • Covertly gains access to the victims computer to
    avoid the Banks security features which is
    activated when the Banks system does not
    recognize the electronic fingerprint.
  • Transfer the Companys funds to the hijackers
  • 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
  • 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
Todays Understaffed Workplace
  • 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
  • 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
  • What should companies think about regarding
    internal controls?
  • As you undertake new opportunities, you will
    always face a level of risk. As you know,
    without risk, there is no reward.
  • Carefully designed internal controls can provide
    a means to minimize and mitigate the risks these
    new opportunities bring to your company.

Designing Internal Controls
  • The process of identifying and implementing these
    controls should be incorporated in your risk
    assessment procedures
  • The process will also serve to further your
    knowledge and understanding of the business and
    its related risks
  • These internal controls should be carefully
    designed and communicated to all levels of the
    organization (part of the education/awareness
  • Controls are only effective if everyone in the
    company follows them

Designing Internal Controls
  • To ensure everyone is on board, lead by example
    and set a tone at the top that highlights the
    importance of the controls
  • Tie in the big picture by aligning it with and
    relating it to the companys strategic vision
  • 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
  • While strong internal controls and positive
    leadership provide the most effective ways of
    deterring fraud, other methods have also proven
  • 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
  • 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
  • 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
  • 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

FASB and IASB Response
  • 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
  • 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
  • Performance Obligation Approach
  • 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
  • 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
  • Including the nature of the lease agreement
  • Information about the principal terms of any
    significant lease which has not commenced

New Disclosure Requirements
  • Lessor
  • 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
  • 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
  • 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
  • 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

Lease Accounting Things to Consider
  • 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
  • ??????

Health Care Reform 2010
  • What it means for you, your business, and your

  • 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)
  • 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

  • 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
  • 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
  • Individual and Head of Household Filers -
    gt200,000 earned income
  • Married Couples Filing Jointly Filers- gt250,000
    earned income
  • Married Couples Filing Separate Filers- gt125,000
    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
  • 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
  • Individuals - gt10,200
  • 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
  • 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
  • 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
  • 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
  • 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
  • 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
  • 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
  • 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
  • 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
  • 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
  • Annual thresholds will increase by 1,650 for
    retired individuals over 55 years old and for
    certain high-risk professions
  • The tax is applied to the amount of the plan that
    exceeds 27,500 for families
  • 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

How it Affects Businesses
  • Cadillac Plans
  • Applies to
  • Employer-provided group health premiums where
    benefits are not taxable to the employee, and
  • Self-employed plans which qualify for a
  • 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

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

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

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
  • Sole proprietorship owners
  • Partner in partnership
  • gt2 S-Corp Shareholder
  • gt5 outstanding stock or stock possessing more
    that 5 of combined voting power of all stock of
    a corporation
  • gt5 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

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 employers
    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

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
  • 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
  • If offers minimum coverage to employees must
    provide qualified employees with a free choice
  • 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
  • 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 employees 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
  • 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
  • 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
  • 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, theres 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 publics 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
  • 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 Acts 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 Acts future

Conclusion/Final Thoughts
  • The Health Care Reform Act has many provisions
    which will require additional changes in the near
  • Grandfather provisions are available however
    there is some near-term 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
  • The current political environment is creating a
    great deal of uncertainty for tax planning
  • 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

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 taxpayers 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
  • 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
    corps 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
  • 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)
  • 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
  • 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 RD 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 RD expense per income statement,
    temporary differences, permanent differences, and
    the RD 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 long-production-peri
    od 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 taxpayers trade
    or business. Credit can be up to 30,000/year per
    location or 1,000/year per location if installed
    at taxpayers 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

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/employe
    e 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 multi-national
    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
  • 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
  • The states will likely offer more tax and
    economic development incentives
  • Job and green energy incentives seem to be the

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 Credits availability through 2014,
    and establishing a priority waiting list for
  • 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 35Lighting retrofit projects
    0.60/square foot of buildingEnergy-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 Date12/31/2014

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
  • 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
    units 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

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
  • Carry forward of a reporting units 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
  • Amendment applies to all entities, public and
  • 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
  • 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,
  • Financial performance cash flows and earnings
  • Entity specific events change in management/
    key personnel, strategy, customers and threats of
  • 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
  • In the absence of a principal market, occurs in
    the most advantageous market for that asset or

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

  • Fair Value assumes the highest and best use of an
  • 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.

  • 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
  • Uses prices and other information generated by
    market transactions involving identical or
    comparable assets or liabilities
  • Income Approach
  • Uses valuation techniques to convert future
    amounts (cash flows, earnings) to a present value
  • Cost Approach
  • Uses current replacement cost amount currently
    required to replace the service capacity of an
  • 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
  • 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
  • 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
  • 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
  • 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

Questions Comments?
  • Contact
  • William Sammons, CPA, PFS, CIA, CFP
  • wsammons_at_nicholscauley.com
  • 404-214-1301
  • Ian Waller, CPA, CIA
  • iwaller_at_nicholscauley.com
  • 404-214-1301
  • Dave Musser, CPA
  • dmusser_at_nicholscauley.com
  • 404-214-1301
  • Bill McDevitt, CPA
  • bmcdevitt_at_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)
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