Acuity Advisors

Understanding the statement of cash flows

The statement of cash flows highlights the sources and uses of cash. It’s arguably the most misunderstood and underappreciated part of a company’s annual report. Here’s an overview of how this statement is organized and what the Financial Accounting Standards Board (FASB) has recently done to make it more user-friendly.

Cash flows from operations

The first section of the statement of cash flows adjusts accrual-basis net income for items related to normal business operations, such as gains, losses, depreciation, taxes and net changes in working capital accounts. The end result is cash-basis net income.

Cash flows from investing activities

If a company buys or sells property, equipment or marketable securities, the transaction generally shows up here. This section reveals whether a company is reinvesting in its future operations — or divesting assets for emergency funds.

Cash flows from financing activities

The final section shows the company’s ability to obtain cash from lenders and investors. It includes new loan proceeds, principal repayments, dividends paid, issuances of securities or bonds, and additional capital contributions by owners.

Recent changes

The FASB recently issued Accounting Standards Update No. 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments, to reduce diversity in practice. The updated guidance clarifies that:

Debt prepayment and extinguishment costs are classified as financing outflows.
Accreted interest related to zero-coupon debt instruments are generally classified as operating outflows; the principal portion is a financing outflow.
Contingent payments from a business combination are classified as investing outflows if paid soon after the acquisition date. Later contingent payments are classified as financing outflows. Any payment over the liability is classified as an operating outflow.

The guidance also prescribes how to report certain insurance proceeds and payments, distributions from equity method investees, beneficial interests in securitization transactions, and cash flows that qualify under more than one classification. For public companies, the changes are effective for years beginning after December 15, 2017, and interim periods within those years. Private companies have an extra year to comply.

Call for help

The statement of cash flows provides valuable insight about financial health and potential weaknesses. But it’s not always clear how to classify transactions. We can help you get it right.

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4 tips to help ensure executive comp passes muster with the IRS

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Are you timing business income and expenses to your tax advantage?

Typically, it’s better to defer tax. One way is through controlling when your business recognizes income and incurs deductible expenses. Here are two timing strategies that can help businesses do this:

Defer income to next year. If your business uses the cash method of accounting, you can defer billing for your products or services. Or, if you use the accrual method, you can delay shipping products or delivering services.
Accelerate deductible expenses into the current year. If you’re a cash-basis taxpayer, you may make a state estimated tax payment before Dec. 31, so you can deduct it this year rather than next. Both cash- and accrual-basis taxpayers can charge expenses on a credit card and deduct them in the year charged, regardless of when the credit card bill is paid.

But if you think you’ll be in a higher tax bracket next year (or you expect tax rates to go up), consider taking the opposite approach instead — accelerating income and deferring deductible expenses. This will increase your tax bill this year but can save you tax over the two-year period.

These are only some of the nuances to consider. Please contact us to discuss what timing strategies will work to your tax advantage, based on your specific situation.

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Are You Ready for the New Revenue Recognition Rules?

A landmark financial reporting update is replacing about 180 pieces of industry-specific revenue accounting guidance with a single, principles-based approach. In May 2014, the Financial Accounting Standards Board (FASB) unveiled Accounting Standards Update (ASU) No. 2014-09, Revenue from Contracts with Customers. In 2015, the FASB postponed the effective date for the new revenue guidance by one year. Here’s why companies that report comparative results can’t delay any longer — and how to start the implementation process.

No time to waste

The updated revenue recognition guidance takes effect for public companies for annual reporting periods beginning after December 15, 2017, including interim periods within those annual reporting periods. The update permits early adoption, but no earlier than the original effective date of December 15, 2016. Private companies have an extra year to implement the changes.

That may seem like a long time away, but many companies voluntarily provide comparative results. For example, the presentation of two prior years of results isn’t required under GAAP, but it helps investors, lenders and other stakeholders assess long-term performance.

Calendar-year public companies that provide two prior years of results will need to collect revenue data under one of the retrospective transition methods for 2016 and 2017 in order to issue comparative statements by 2018. Private companies would have to follow suit a year later.

A new mindset

The primary change under the updated guidance is the requirement to identify separate performance obligations — promises to transfer goods or services — in a contract. A company should treat each promised good or service (or bundle of goods or services) as a performance obligation to the extent it’s “distinct,” meaning:

The customer can benefit from it (either on its own or together with other readily available resources), and
It’s separately identifiable in the contract.

Then, a company must determine whether these obligations are satisfied over time or at a point in time, and recognize revenue accordingly. The shift to a principles-based approach will require greater judgment on the part of management.

Call for help

Need assistance complying with the new guidance? We can help assess how — and when — you should report revenue, explain the disclosure requirements, and evaluate the impact on customer relationships and other aspects of your business, including tax planning strategies and debt covenants.

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Help Retain Employees with Tax-free Fringe Benefits

One way your business can find and keep valuable employees is to offer an attractive compensation package. Fringe benefits are an important incentive — especially those that are tax-free. Here’s a rundown of some common perks and their tax implications.

Medical coverage. If you maintain a health care plan for employees, coverage under the plan isn’t taxable to them. Employee contributions are excluded from income if pretax coverage is elected under a cafeteria plan. Otherwise, such amounts are included in their wages, but are deductible on a limited basis as itemized deductions. Employers must meet a number of requirements when providing coverage. For instance, benefits must be provided through a group health plan (fully insured or self-insured).
Disability insurance. Your premium payments aren’t included in employees’ income, nor are your contributions to a trust providing disability benefits. Employees’ premium payments (or other contributions to the plan) generally aren’t deductible by them or excludable from their income. However, they can make pretax contributions to a cafeteria plan for disability benefits, which are excludable from their income.
Long-term care insurance. Your premium payments aren’t taxable to employees. However, long-term care insurance can’t be provided through a cafeteria plan.
Life insurance. Your employees generally can exclude from gross income premiums you pay on up to $50,000 of qualified group term life insurance coverage. Premiums you pay for qualified coverage exceeding $50,000 are taxable to the extent they exceed the employee’s coverage contributions.
Dependent care. You can provide employees with tax-free dependent care assistance up to certain limits during the year.
Educational assistance. You can help employees on a tax-free basis through educational assistance plans (up to $5,250 per year), job-related educational assistance, and qualified scholarships.

Other tax-free benefits include adoption assistance (up to a certain amount), on-premises athletic facilities and meals provided occasionally to employees who work overtime. Contact us for more information about how to treat fringe benefits for tax purposes.

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