Acuity Advisors

How to report discontinued operations today

Did your company undergo a major strategic shift in 2016? If so, management may need to comply with the updated rules for reporting discontinued operations that went into effect in 2015 for most companies. Discontinued operations typically don’t happen every year, so it’s important to review the basics before preparing your year-end financial statements.

Narrower definition of discontinued operations

Under Accounting Standards Update (ASU) No. 2014-08, disposal of a component (including business activities) must be reported in discontinued operations only if the disposal represents a “strategic shift” that has or will have a major effect on the company’s operations and financial results. A component comprises operations and cash flows that can be clearly distinguished, both operationally and for financial reporting purposes, from the rest of the company. It could be a reportable segment or an operating segment, a reporting unit, a subsidiary or an asset group.

Examples of a qualifying strategic major shift include disposal of a major geographic area, a line of business or an equity method investment. When such a strategic shift occurs, a company must present, for each comparative period, the assets and liabilities of a disposal group that includes a discontinued operation separately in the asset and liability sections of the balance sheet.

Expanded disclosures

To provide financial statement users with more information about the assets, liabilities, revenue and expenses of discontinued operations, the new guidance also requires expanded disclosures. The following expanded disclosures must be made for the periods in which the operating results of the discontinued operation are presented in the income statement:

The major classes of line items constituting the pretax profit or loss of the discontinued operation. Examples of major line-item classes include revenue, cost of sales, depreciation and amortization, and interest expense.

One of the following: Either 1) the total operating and investing cash flows of the discontinued operation, or 2) the depreciation, amortization, capital expenditures, and significant operating and investing noncash items of the discontinued operations.

The pretax profit or loss attributable to the parent. This applies if the discontinued operation includes a noncontrolling interest.

Management also must provide various disclosures and reconciliations of items held for sale for the period in which the discontinued operation is so classified and for all prior periods presented in the statement of financial position. Additional disclosures may be required if the company plans significant continuing involvement with a discontinued operation — or if a disposal doesn’t qualify for discontinued operations reporting.

Which rules to apply?

Unsure whether a disposal qualifies as a discontinued operation under the updated rules? Reporting disposals can be confusing and time-consuming. We can help you understand the new, simpler discontinued operations guidance, which, if applicable, could streamline your reporting process.

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Help prevent the year-end vacation-time scramble with a PTO contribution arrangement

Many businesses find themselves short-staffed from Thanksgiving through December 31 as employees take time off to spend with family and friends. But if you limit how many vacation days employees can roll over to the new year, you might find your workplace a ghost town as workers scramble to use, rather than lose, their time off. A paid time off (PTO) contribution arrangement may be the solution.

How it works

A PTO contribution program allows employees with unused vacation hours to elect to convert them to retirement plan contributions. If the plan has a 401(k) feature, it can treat these amounts as a pretax benefit, similar to normal employee deferrals. Alternatively, the plan can treat the amounts as employer profit sharing, converting excess PTO amounts to employer contributions.

A PTO contribution arrangement can be a better option than increasing the number of days employees can roll over. Why? Larger rollover limits can result in employees building up large balances that create a significant liability on your books.

Getting started

To offer a PTO contribution arrangement, simply amend your plan. However, you must still follow the plan document’s eligibility, vesting, rollover, distribution and loan terms. Additional rules apply.

To learn more about PTO contribution arrangements, including their tax implications, please contact us.

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The Confirmation Process: A Key Audit Step

When performing an audit, CPAs send confirmation letters to outside parties typically via the U.S. Postal Service in accordance with Interim Auditing Standard AU Section 330, The Confirmation Process. Confirmation responses may be used to verify account balances, as well as unusual contractual terms and transactions. But the use of confirmations sometimes extends beyond loans and receivables.

Creative use of confirmations

Confirmation letters also may be used to substantiate inventory, consigned merchandise, construction and production contracts, accounts payable, contingent liabilities, and complex or related-party transactions. For example, confirmation letters may be sent to a company’s lawyers to determine whether there’s any pending litigation that needs to be reported or disclosed in the company’s audited financial statements.

Sometimes confirmation responses signal exceptions, requiring the auditor to determine the causes and extrapolate the misstatements. Additional procedures may be warranted, especially if management or the CPA suspects fraud.

Not for everyone

Don’t assume that all external assurance services include confirmation procedures, however. Reviews and compilations rarely include confirmations. And management may specifically request that auditors not confirm certain balances. For example, management may claim a dispute between the company and the intended recipient of a confirmation letter.

If an auditor accepts that a request not to seek external confirmation is valid, he or she might instead use alternative procedures — which generally hinge on less reliable internal documentation. If the auditor is satisfied with the alternative procedures, his or her report needn’t acknowledge the omission of confirmations.

Quid pro quo

Management sometimes argues that it’s above-and-beyond the call of duty to ask their customers, suppliers and other stakeholders to respond to confirmation letters. And, auditors are aware that some companies, such as certain large box retailers, are unlikely to take the time to confirm account balances. However, sending confirmations is a standard auditing procedure — and, someday, you might be on the receiving end of such as request.

When you receive confirmation letters, remember that they can be an effective way to determine whether account balances and transactions are legitimate. Be a good corporate citizen and help your customers and suppliers — as well as their auditors.

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Fun fact: Do you know when employees stopped paying income tax in one lump sum?

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Can you pay bonuses in 2017 but deduct them this year?

You may be aware of the rule that allows businesses to deduct bonuses employees have earned during a tax year if the bonuses are paid within 2½ months after the end of that year (by March 15 for a calendar-year company). But this favorable tax treatment isn’t always available.

For one thing, only accrual-basis taxpayers can take advantage of the 2½ month rule — cash-basis taxpayers must deduct bonuses in the year they’re paid, regardless of when they’re earned. Even for accrual-basis taxpayers, however, the 2½ month rule isn’t automatic. The bonuses can be deducted in the year they’re earned only if the employer’s bonus liability is fixed by the end of the year.

The all-events test

For accrual-basis taxpayers, the IRS determines when a liability (such as a bonus) has been incurred — and, therefore, is deductible — by applying the “all-events test.” Under this test, a liability is deductible when:

All events have occurred that establish the taxpayer’s liability,
The amount of the liability can be determined with reasonable accuracy, and
Economic performance has occurred.

Generally, the third requirement isn’t an issue; it’s satisfied when an employee performs the services required to earn a bonus. But the first two requirements can delay your tax deduction until the year of payment, depending on how your bonus plan is designed.

For example, many bonus plans require an employee to remain in the company’s employ on the payment date as a condition of receiving the bonus. Even if the amount of the bonus is fixed at the end of the tax year, and employees who leave the company before the payment date forfeit their bonuses, the all-events test isn’t satisfied until the payment date. Fortunately, it’s possible to accelerate deductions with a carefully designed bonus pool arrangement.

How a bonus pool works

In a 2011 ruling, the IRS said that employers may deduct bonuses in the year they’re earned — even if there’s a risk of forfeiture — as long as any forfeited bonuses are reallocated among the remaining employees in the bonus pool rather than retained by the employer. Under such a plan, an employer satisfies the all-events test because the aggregate bonus amount is fixed at the end of the year, even though amounts allocated to specific employees aren’t determined until the payment date.

Additional rules and limits apply to this strategy. To learn whether your current bonus plan allows you to take 2016 deductions for bonuses paid in early 2017, contact us. If you don’t qualify this year, we can also help you design a bonus plan for 2017 that will allow you to accelerate deductions next year.

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