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2016 Pork Management Conference

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Title: 2016 Pork Management Conference


1
2016 Pork Management Conference June 16,
2016 Clearwater, Florida
2
An Overview of the FASBs New Leases Standards
3
Disclaimer These slides are for educational
purposes only. The views expressed by the
presenters are not necessarily those of Frost,
PLLC
4
Contact Information
  • T.J. Boyle
  • tboyle_at_frostpllc.com
  • 501-376-9241

5
(No Transcript)
6
OVERVIEW
7
Overview
8
Applies To All Entities
Public
Private
Not-for- Profit
9
Overview
10
Public Entities Beginning after December 15,
2018 2019 for calendar year end companies
Non- Public Entities Beginning after December
15, 2019 2020 for calendar year end companies
Early Adoption Permitted
11
Overview
12
All Leases (Except Short-Term)
Assets
  • Liabilities
  • Lease liability and Lease asset (for right to
    use)
  • Will gross up both sides of the balance sheet

13
Overview
14
SCOPE
Applies to all leases except
Leases to Explore for or use of
Leases of
Inventory
Minerals
Assets Under Construction
Oil
Intangible Assets
Natural Gas
Similar non-regenerative resources (including
intangible right to explore and use the land)
Biological Assets (including timber)
15
Overview
16
A contract is a or contains a lease if it conveys
the right to control the use of identified
property, plant or equipment (an identified
asset) for a period of time in exchange for
consideration
  • Right to obtain substantially all of the economic
    benefits
  • Right to direct the use or the use is
    predetermined
  • Customer has the right to direct how and for what
    purpose the asset is used
  • Predetermined
  • Customer has the right to operate the asset
    without the supplier having the right to change
    those instructions, or
  • Customer designed the assets in a way that
    predetermines how and for what purpose the assets
    will be used.

17
Overview
18
Modified retrospective transition approach at the
beginning of the earliest comparative period
presented (existing and new contracts under the
new standard)
Full retrospective approach (existing, closed
and new contracts)
Standard is applied as of the beginning of the
earliest comparative period presented
19
Overview
20
Components
Lease Term
Lease Criteria
Lease Classification
21
  • Many contracts contain leases (lease components)
    and agreements to purchase or sell other goods
    and services (non-lease component)
  • Non-lease components are identified and accounted
    for separately under other applicable GAAP
  • Lessees allocate consideration in the contract to
    lease and non-lease components, on a relative
    standalone
  • Can make a policy election (by class) to account
    for each lease component and non-lease component
    as a single lease component

22
Components
LEASE TERM
Lease Criteria
Lease Classification
23
  • Includes any non-cancelable periods
  • Reasonably certain is a high threshold for
    including optional periods
  • Options to extend or terminate a lease
  • Lease payments consistent with the lease term
  • Exercise price of an option
  • Only included if reasonably certain of exercise.
  • Payments for termination of lease
  • Included unless reasonably certain not to be
    exercised
  • Include fees paid by the lessee to the owners of
    a special purpose entity for structuring the
    transaction

LEASE TERM
24
Components
Lease Term
LEASE CRITERIA
Lease Classification
25
  • The lease transfers ownership of the asset at the
    end of the lease to the lessee
  • The lease grants the lessee an option to purchase
    that the lessee is reasonable certain to exercise
  • The lease term is for the major part of the
    remaining economic life of the asset
  • The present value and residual value guaranteed
    by the lessee equals to exceeds substantially the
    fair value of the asset
  • The underlying asset is of such a specialized
    nature that it is expected to have no alternative
    use to the lessor at the end of the lease

LEASE CRITERIA
26
Components
Lease Term
Lease Criteria
LEASE CLASSIFICATION
27
  • Lessees
  • A lease that does not meet any of the criteria is
    an operating lease
  • A lease that meets any of the criteria is a
    finance lease
  • Short-term lease exemption
  • Lease term of 12 months or less and no purchase
    option
  • Do not recognize lease asset or liabilities

LEASE CLASSIFICATION
28
Overview
29
  • Customer enters into a contract with Supplier for
    the use of a specified ship for a five-year
    period. The ship is explicitly specified in the
    contract, and Supplier does not have substitution
    rights.
  • Customer decides what cargo will be transported
    and whether, when, and to which ports the ship
    will sail, throughout the five-year period of
    use, subject to restrictions specified in the
    contract. Those restrictions prevent Customer
    from sailing the ship into waters at a high risk
    of piracy or carrying hazardous materials as
    cargo.
  • Supplier operates and maintains the ship and is
    responsible for the safe passage of the cargo
    onboard the ship. Customer is prohibited from
    hiring another operator for the ship or operating
    the ship itself during the term of the contract.
  • The contract contains a lease. Customer has the
    right to use the ship for five years.
  • There is an identified asset. The ship is
    explicitly specified in the contract, and
    Supplier does not have the right to substitute
    that specified ship

30
  • Customer has the right to control the use of the
    ship throughout the five-year period of use
    because
  • Customer has the right to obtain substantially
    all of the economic benefits from use of the ship
    over the five-year period of use. Customer has
    exclusive use of the ship throughout the period
    of use.
  • Customer has the right to direct the use of the
    ship. The contractual restrictions about where
    the ship can sail and the cargo to be transported
    by the ship define the scope of Customers right
    to use the ship. They are protective rights that
    protect Suppliers investment in the ship and
  • Suppliers personnel. Within the scope of its
    right of use, Customer makes the relevant
    decisions about how and for what purpose the ship
    is used throughout the five-year period of use
    because it decides whether, where, and when the
    ship sails, as well as the cargo it will
    transport. Customer has the right to change these
    decisions throughout the five-year period of use.
  • Although the operation and maintenance of the
    ship are essential to its efficient use,
    Suppliers decisions in this regard do not give
    it the right to direct how and for what purpose
    the ship is used. Instead, Suppliers decisions
    are dependent on Customers decisions about how
    and for what purpose the ship is used.

31
  • Customer enters into a contract with an aircraft
    owner (Supplier) for the use of an explicitly
    specified aircraft for a two-year period. The
    contract details the interior and exterior
    specifications for the aircraft.
  • There are contractual and legal restrictions in
    the contract on where the aircraft can fly.
    Subject to those restrictions, Customer
    determines where and when the aircraft will fly
    and which passengers and cargo will be
    transported on the aircraft.
  • Supplier is responsible for operating the
    aircraft, using its own crew. Customer is
    prohibited from hiring another operator for the
    aircraft or operating the aircraft itself during
    the term of the contract.
  • Supplier is permitted to substitute the aircraft
    at any time during the two-year period and must
    substitute the aircraft if it is not working. Any
    substitute aircraft must meet the interior and
    exterior specifications in the contract. There
    are significant costs involved in outfitting an
    aircraft in Suppliers fleet to meet Customers
    specifications.
  • The contract contains a lease. Customer has the
    right to use the aircraft for two years.

32
  • There is an identified asset. The aircraft is
    explicitly specified in the contract, and
    although Supplier can substitute the aircraft,
    its substitution right is not substantive.
    Suppliers substitution right is not substantive
    because of the significant costs involved in
    outfitting another aircraft to meet the
    specifications required by the contract such that
    Supplier is not expected to benefit economically
    from substituting the aircraft.
  • Customer has the right to control the use of the
    aircraft throughout the two-year period of use
    because
  • Customer has the right to obtain substantially
    all of the economic benefits from use of the
    aircraft over the two-year period of use.
    Customer has exclusive use of the aircraft
    throughout the period of use.
  • Customer has the right to direct the use of the
    aircraft. The restrictions on where the aircraft
    can fly define the scope of Customers right to
    use the aircraft. Within the scope of its right
    of use, Customer makes the relevant decisions
    about how and for what purpose the aircraft is
    used throughout the two-year period of use
    because it decides whether, where, and when the
    aircraft travels as well as the passengers and
    cargo it will transport.
  • Customer has the right to change these decisions
    throughout the two year period of use.
  • Although the operation of the aircraft is
    essential to its efficient use, Suppliers
    decisions in this regard do not give it the right
    to direct how and for what purpose the aircraft
    is used. Consequently, Supplier does not control
    the use of the aircraft during the period of use,
    and Suppliers decisions do not affect customers
    control of the use of the aircraft.

33
  • Customer enters into a contract with a
    manufacturer (Supplier) to purchase a particular
    type, quality, and quantity of shirts for a
    three-year period. The type, quality, and
    quantity of shirts are specified in the contract.
  • Supplier has only one factory that can meet the
    needs of Customer. Supplier is unable to supply
    the shirts from another factory or source the
    shirts from a third-party supplier. The capacity
    of the factory exceeds the output for which
    Customer has contracted (that is, Customer has
    not contracted for substantially all of the
    capacity of the factory).
  • Supplier makes all decisions about the operations
    of the factory, including the production level at
    which to run the factory and which customer
    contracts to fulfill with the output of the
    factory that is not used to fulfill Customers
    contract.
  • The contract does not contain a lease.
  • The factory is an identified asset. The factory
    is implicitly specified because Supplier can
    fulfill the contract only through the use of this
    asset.
  • However, Customer does not control the use of the
    factory because it does not have the right to
    obtain substantially all of the economic benefits
    from use of the factory. This is because Supplier
    could decide to use the factory to fulfill other
    customer contracts during the period of use.

34
  • Customer also does not control the use of the
    factory because it does not have the right to
    direct the use of the factory. Customer does not
    have the right to direct how and for what purpose
    the factory is used during the three year period
    of use. Customers rights are limited to
    specifying output from the factory in the
    contract with Supplier. Customer has the same
    rights regarding the use of the factory as other
    customers purchasing shirts from the factory.
    Supplier has the right to direct the use of the
    factory because Supplier can decide how and for
    what purpose the factory is used (that is,
    Supplier has the right to decide the production
    level at which to run the factory and which
    customer contracts to fulfill with the output
    produced).
  • Either the fact that Customer does not have the
    right to obtain substantially all of the economic
    benefits from use of the factory or the fact that
    Customer does not have the right to direct the
    use of the factory would be sufficient in
    isolation to conclude that Customer does not
    control the use of the factory.

35
(No Transcript)
36
PRESENTATION
37
Presentation
38
  • Assets
  • Lease ROU asset can be presented separately or
    together with other assets
  • Finance leases ROU assets are prohibited from
    being presented in the same line as an operating
    lease ROU asset
  • Liabilities
  • Lease liabilities can be presented separately or
    together with other liabilities
  • Finance lease liabilities are prohibited from
    being presented in the same line as operating
    leases

39
Presentation
40
  • Income Statement
  • Finance Lease
  • Lease-related interest expense and amortization
    presented in a manner consistent with how the
    entity presents interest expense and depreciation
    or amortization of similar assets
  • Operating Lease
  • Lease expense included in income from continuing
    operations

41
Presentation
42
  • Disclosure
  • New disclosures for lessees and lessors
  • Significant assumptions and judgments
  • Maturity analysis
  • Lessees
  • Quantitative disclosure of lease expense by type
  • Weighted average remaining lease term, by type
  • Weighted average discount rate, by type
  • Lessors
  • Information about management of risks of residual
    values
  • Sales-type and direct financing, explanations of
    significant changes in balances of unguaranteed
    residual assets
  • Table of lease income recognized during reporting
    period

43
(No Transcript)
44
Lessor Topics
45
Lessor will classify lease as
either
Sales-type
Direct Financing
Operating
46
Lessor Topics
47
  • Transfers ownership of asset
  • Grants lessee option to purchase that is
    reasonably certain
  • Lease term is for major part of the remaining
    economic life of asset
  • PV of payments exceeds substantially all of FV of
    asset
  • Specialized asset that will have no other use

48
Lessor Topics
49
  • Both of the following must be met
  • PV of payments along with any from an unrelated
    3rd party exceeds substantially all of FV of
    asset
  • Probable that the lessor will collect payments
    plus any amount necessary to satisfy residual
    value guarantee

50
Lessor Topics
51
Any lease that does not meet the definition of
sales-type or direct-finance is an operating
lease.
52
Lessor Topics
53
  • Operating Lease
  • Continue to recognize underlying asset
  • Recognize lease payment as income over lease
    term, generally straight-line basis
  • Sales-Type
  • Derecognize underlying asset and recognize net
    investment in lease and selling profit (loss) if
    collectability is probable
  • If collectability is not probable, recognize
    lease payment received as a deposit liability (do
    not derecognize lease)
  • Direct Finance Lease
  • Derecognize underlying asset and recognize net
    investment in the lease
  • Selling profit is deferred and recognized over
    lease term
  • Selling loss is recognized up front

54
(No Transcript)
55
(No Transcript)
56
Grower Contracts
Lease component applicable to the house
ANIMAL PRODUCTION
Non-lease component applicable to the grower
services they perform
Equipment
Contract that may have both a lease
component and non-lease component
Lease component applicable to the equipment leased
Non-lease component applicable to maintenance
57
  • Ensuring staff will be fully trained
  • Understanding the modified retrospective
    transition approach
  • Working with your auditor
  • Modifying IT systems if necessary
  • Determining interim disclosures
  • Reviewing debt covenants
  • Reviewing employee compensation agreements
  • Educating key stakeholders

58
  • Income Estate Tax Update
  • Income Tax Legislation 2016 and Beyond
  • Estate Tax Update
  • Budget and Other Top Tax Issues
  • Other Noteworthy Items

59
Tax Legislation Since June 2015
60
  • Legislative Focus Past Year
  • Stopgap Highway Bill Includes New Tax Compliance
    Measures Signed July 31, 2015
  • Protecting Americans From Tax Hikes Act Of 2015-
    Signed December 18, 2015
  • Continued Discussion of Comprehensive Tax Reform

61
  • Surface Transportation Act of 2015
  • (Highway Funding Bill)
  • Changes the Filing Deadlines of Certain Returns
  • 6 Year Statute for Basis Overstatement
  • Requires Consistency B/T Estate Tax Value
    Income Tax Basis of Assets

62
  • 2015 Highway Funding Bill (Cont.)
  • 2016 Tax Return Due Date Changes
  • 1065 1120S 15th day of 3rd month plus 6-month
    extension
  • 1120 15th day of 4th month plus 5-month
    extension
  • For C Corps with June 30th year-end, changes not
    effective until 12/31/2025

63
  • 2015 Highway Funding Bill (Cont.)
  • More 2016 Tax Return Due Date Changes
  • Form 1041 gets new 5 ½ month extension to Sept.
    30th (calendar year taxpayers)
  • FinCEN 114 changed from 6/30 to 4/15 but now
    has a 6 month extension
  • Form 5500 new 3 ½ month extension to November
    15th

64
  • Protecting Americans from Tax Hikes Act of 2015
    (PATH Act)
  • Addressed Extender Renewals
  • Made Many Popular Provisions Permanent
  • Provided Roadmap for Bonus Depreciation
    Provisions

65
  • PATH Act
  • Individual Impact
  • State Local Sales Tax Deduction (Perm)
  • Higher Education Deduction (Thru 2017)
  • Child Tax Credit (Thru 2017)
  • Charitable Distributions from IRAs (Perm)

66
  • PATH Act
  • Business Impact
  • Reduced S-Corp Built-In Gains Recognition Period
    5 Years (Perm)
  • Section 179 Expensing - 500k (Perm)
  • RD Tax Credit (Perm)
  • WOTC (Thru 2019)

67
  • PATH Act
  • Business Impact
  • Bonus Depreciation
  • 2015 50
  • 2016 50
  • 2017 50
  • 2018 40
  • 2019 30

68
  • American Taxpayer Relief Act
  • Estate Tax Review
  • 5mm Indexed Exemption Permanent
  • Top Rate for 2013 and Beyond 40
  • Permanent Unification of Estate, Gift GST Taxes
  • Permanent Extension of Portability

69
Estate Taxes Post-American Taxpayer Relief Act
Calendar Year Applicable Lifetime Exclusion Amount Top Rate
2013 5,250,000 40
2014 5,340,000 40
2015 5,430,000 40
2016 5,450,000 40
Annual Gift Exclusion Remains at 14,000 per
Recipient for 2016
70
Obama Lays Out Tax Plans in Final Budget
  • Continued renewal of tax proposals from previous
    budgets related to both international tax and
    retirement savings.
  • Revenue raising provisions - 2.8 trillion over
    next 10 years
  • Increase in LTGC Rate to 24.2
  • Reinstatement of 2009 Estate and Gift Tax Rates
  • Expansion of Estate/Income Tax Consistency Rules
  • Adopting Buffett Rule Minimum 30 Rate
  • Limiting 1031 Like-Kind Exchange Deferral to 1mm
    annually

71
Final Budget (Cont.)
  • IRS Budget/Tax Administration
  • Budget Set at 11.8 Billion for FY 2017
  • Represents a 530mm increase
  • Increase earmarked for Taxpayer Services, ID
    Theft Prevention
  • PY budget requested a 2B Increase, but on 290mm
    was approved

72
Top Tax Issues for the Remainder of 2016
  1. PATH Act
  2. Supreme Court on ACA Tax Credit
  3. ACA Implementation Changes
  4. Revised Repair Reg Rules
  5. FATCA Implementation
  6. New Partnership Audit Rules
  7. Rules to Reign in Certain Partnership Strategies
  8. Tax Related Identity Theft
  9. Budget Pressures on IRS
  10. Supreme Court on Same Sex Marriage

73
(No Transcript)
74
  • Partnership Audits 2015
  • The number of partnership returns filed with the
    IRS annually has grown steadily in the last 10
    years. In calendar year 2005, the IRS received
    2.7 million partnership returns. Filings topped 3
    million returns in CY 2007 and amounted to 3.77
    million for CY 2014.
  • The number of partnership audits has fluctuated
    over the last 10 years. In FY 2006, the IRS
    conducted 9,752 partnership audits, which
    provided coverage of 0.36 percent of returns. The
    number of audits essentially doubled in FY 2015,
    to 19,212, providing audit coverage of 0.51
    percent, the highest percentage in the last 10
    years.

75
  • Pork Industry - Notable Items
  • 1231 Capital Gain on Breeding Stock
  • Farmer Income Averaging
  • Cash Basis Accounting
  • Domestic Production Activities Deduction (DPAD)
  • Estimated Tax Requirements
  • 5 Year NOL Carryback Provisions

76
2016 Pork Management Conference Thank You TJ
Boyle, CPA Rob Gunther, CPA tboyle_at_frostpllc.com
rgunther_at_frostpllc.com Frost, PLLC (800)
766-9241 Direct (501) 975-0112
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