Update on Accounting Hot Topics Update on Accounting Hot Topics August 31, 2011

Update on Accounting Update on Accounting Hot TopicsHot Topics

August 31, 2011August 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, CIAAudit Partner – Atlanta Office

David Musser, CPA, CIA, CFP®Tax Partner – Atlanta Office

Bill McDevitt, CPA Tax Manager – Atlanta Office

Fraud

EmployeesCustomers

Vendors OfficersT

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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 $160,000

Smaller organizations are disproportionately victimized

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 detection

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 Company’s computer which would initiate the transaction.

EFT Fraud basically has 3 steps:– Hijacker illicitly acquired the login credentials.– Covertly gains access to the victim’s computer to avoid the

Bank’s security features which is activated when the Bank’s system does not recognize the electronic fingerprint.

– Transfer the Company’s funds to the hijackers account. 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 Today’s 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 controls 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

o What should companies think about regarding internal controls?

o As you undertake new opportunities, you will always face a level of risk. As you know, without risk, there is no reward.

o Carefully designed internal controls can provide a means to minimize and mitigate the risks these new opportunities bring to your company.

Designing Internal Controls

o The process of identifying and implementing these controls should be incorporated in your risk assessment procedures

o The process will also serve to further your knowledge and understanding of the business and its related risks

o These internal controls should be carefully designed and communicated to all levels of the organization (part of the education/awareness program)

o Controls are only effective if everyone in the company follows them

Designing Internal Controls

o To ensure everyone is on board, lead by example and set a tone at the top that highlights the importance of the controls

o Tie in the big picture by aligning it with and relating it to the company’s strategic vision

o 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 Workplace

While strong internal controls and positive leadership provide the most effective ways of deterring fraud, other methods have also proven useful

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 users

– 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 Project

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

1. Performance Obligation Approach Used when significant risks or benefits associated with

the underlying asset are retained by the lessor

2. 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


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


Lessor– A rollforward of the opening and closing balances for

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 disclosures

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 flows.

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Health Care Reform 2010

What it means for you, your business, and your

clients

Introduction

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 1964

Introduction

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 - >$200,000 earned

income– Married Couples Filing Jointly Filers- >$250,000 earned

income– Married Couples Filing Separate Filers- >$125,000 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


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 adjusted) – – Individuals - >$10,200– 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


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 non-deductible

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 to 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 royalties.

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 credit– 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


“Large” Employers– Non-deductible fee if firm fails to offer adequate

coverage – “Pay or Play” – Effective 2014– 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.


“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 2018


“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 deduction.

– 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 administrator.


“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


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 $50,000


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 employees.


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 >2% S-Corp Shareholder >5% outstanding stock or stock possessing more that 5% of combined

voting power of all stock of a corporation >5% 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 employer


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.


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 employer’s 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 www.irs.gov).


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.


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 programs.

– 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 employees

– If offers minimum coverage to employees must provide qualified employees with a free choice voucher

– 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 employee

– 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


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 employee’s

compensation paid by a Health Insurer will be limited to $500,000 starting in 2013


– 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 thereafter.

– 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 file. 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 2012)

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, there’s 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 public’s 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 Reform

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

Act’s 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 Act’s future

Conclusion/Final Thoughts

The Health Care Reform Act has many provisions which will require additional changes in the near future

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 DevelopmentsTax Developments

Corporate Tax Corporate Tax Update and TrendsUpdate and Trends

Trends

The current political environment is creating a great deal of uncertainty for tax planning purposes

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 2012

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 taxpayer’s 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 libraries

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 corp’s 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 following: 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) recipients

– 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 particular

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 R&D 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 R&D expense per income statement, temporary differences, permanent differences, and the R&D 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-period 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 taxpayer’s trade or business. Credit can be up to $30,000/year per location or $1,000/year per location if installed at taxpayer’s 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


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 it


● 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/employee compensation should be

● There are also proposals underway to restrict deductions for high income taxpayers in lieu of raising rates


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


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


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


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


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 government

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 increases

The states will likely offer more tax and economic development incentives

– Job and green energy incentives seem to be the direction

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 Credit’s availability through 2014, and establishing a priority waiting list for applicants

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: 35%

Lighting 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 Date:12/31/2014

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 level

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 unit’s 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 exists

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 dates Carry forward of a reporting unit’s 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 impairment

Amendment applies to all entities, public and private 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 changes

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, overhead

Financial performance – cash flows and earnings Entity specific events – change in management/

key personnel, strategy, customers and threats of litigation

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

liability– In the absence of a principal market, occurs in the

most advantageous market for that asset or liability.

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

Assets

Fair Value assumes the highest and best use of an asset– 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.

Liabilities

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 amount

Cost Approach– Uses current replacement cost – amount currently required to

replace the service capacity of an asset.

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 markets.

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 companies

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 FASB

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 future– 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 preparation

Questions & Comments?

o Contacto William Sammons, CPA, PFS, CIA, CFP™

o [email protected] 404-214-1301

o Ian Waller, CPA, CIAo [email protected] 404-214-1301

o Dave Musser, CPAo [email protected] 404-214-1301

o Bill McDevitt, CPAo [email protected] 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) is not intended to be used, and cannot be used, for purposes of (1) avoiding penalties imposed under the United States Internal Revenue Code or (2) promoting, marketing, or recommending to another person any tax-related matter.

Documents

Update on Accounting Hot Topics Update on Accounting Hot Topics August 31, 2011