Acuity Advisors

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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Auditors’ Watchdog Role Requires Professional Skepticism

CPA stands for Certified Public Accountant. Although the company pays their fees, public company auditors work for the audit committee and the public in general, not management. This “public watchdog” role demands that auditors exercise professional skepticism throughout the audit process.

This role helps explain why auditors want concrete, third-party evidence to verify management’s assertions. Here’s a closer look at how professional skepticism factors into an audit.

Professional skepticism

All aspects of an audit benefit from professional skepticism. Specifically, the Public Company Accounting Oversight Board (PCAOB) expects auditors to:

Identify and assess risks of material misstatement,
Test controls and substantive procedures, and
Evaluate audit results to form an audit opinion.

These expectations also apply to auditors of private companies. The AICPA’s Code of Professional Conduct requires CPAs to be independent from their attestation clients. In other words, auditors must 1) act with integrity, and 2) exercise objectivity and professional skepticism.

Areas of interest

Professional skepticism is particularly important in examining areas that involve significant management judgment or transactions outside the normal course of business. Examples of such areas include nonrecurring reserves, financing transactions and related-party transactions. In addition, auditors consider the impact of uncorrected misstatements, evaluate the potential for management bias and assess whether financial statements are presented fairly.

Professional skepticism also plays a critical role in an auditor’s consideration of fraud. Where the risk of fraud is high, an auditor might modify planned audit procedures to gather more reliable evidence in support of financial statement assertions. For example, an auditor might obtain confirmation from an independent third party, engage a specialist or examine documentation from independent sources to corroborate management representations.

A win-win situation

The purpose of an audit is to provide investors, lenders and other stakeholders with an opinion that management-prepared financial statements are presented fairly, in all material respects, in conformity with the applicable financial reporting framework. Without professional skepticism, the value of an audit is impaired. So it’s in your best interests to understand what professional skepticism means and how to apply it throughout the audit process.

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Boost your 2016 Deductions by Buying a Business Vehicle this Year

If you’re looking to boost your deductions — and reduce your 2016 tax bill — you may want to consider purchasing a business vehicle before year end. Business-related purchases of new or used vehicles may be eligible for Section 179 expensing, which allows you to immediately deduct, rather than depreciate over a period of years, some or all of the vehicle’s cost. But the size of your deduction will depend in part on the gross vehicle weight rating.

The limits

The normal Sec. 179 expensing limit generally applies to vehicles with a gross vehicle weight rating of more than 14,000 pounds. The limit for 2016 is $500,000, and the break begins to phase out dollar-for-dollar when total asset acquisitions for the tax year exceed $2.01 million.

But a $25,000 limit applies to SUVs rated at more than 6,000 pounds but no more than 14,000 pounds. Vehicles rated at 6,000 pounds or less are subject to the passenger automobile limits. For 2016 the depreciation limit is $3,160. The amount that may be deducted under the combination of Modified Accelerated Cost Recovery System (MACRS) depreciation and Sec. 179 for the first year is limited under the luxury auto rules to $11,160.

In addition, if a vehicle is used for business and personal purposes, the associated expenses, including depreciation, must be allocated between deductible business use and nondeductible personal use. The depreciation limit is reduced if the business use is less than 100%. If the business use is 50% or less, you can’t use Sec. 179 expensing or the accelerated regular MACRS; you must use the straight-line method.

Maximize your tax benefits

Many additional rules and limits apply to these breaks. So if you’re considering a business vehicle purchase, contact us to learn what tax benefits you might enjoy if you make the purchase by December 31.

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Fair value reporting: What it means to the FASB and You

In 2002, the Financial Accounting Standards Board (FASB), as part of its move toward international financial reporting convergence, began to transition from the principle of historic cost to fair value reporting. Fair value estimates are now used to report such assets as derivatives, nonpublic entity securities, certain long-lived assets, and acquired goodwill and other intangibles. But why does the FASB’s move toward fair value matter to you?

Defining fair value

Under Accounting Standards Codification Topic 820, fair value is “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.” Although it’s similar to the term “fair market value,” which is defined in IRS Revenue Ruling 59-60, the terms aren’t synonymous.

The FASB chose the term “fair value” to prevent companies from applying IRS regulations or guidance and U.S. Tax Court precedent when valuing assets and liabilities for financial reporting purposes. The FASB’s use of the term “market participants” refers to buyers and sellers in the item’s principal market. This market is entity specific and may vary among companies.

Applying a hierarchy of inputs

The FASB recognizes three valuation approaches: cost, income and market. It also provides the following hierarchy for valuation inputs, listed in order from most important to least important:

Quoted prices in active markets for identical assets and liabilities,
Observable inputs, including quoted market prices for similar items in active markets, quoted prices for identical or similar items in active markets, and other market data, and
Unobservable inputs, such as cash-flow projections or other internal data.

Management can enlist the help of outside valuation specialists to estimate fair value, but ultimately it can’t outsource responsibility for fair value estimates. Management has an obligation to understand the valuator’s assumptions, methods and models. It also must implement adequate internal controls over fair value measurements, impairment charges and disclosures.

Finding help

Do your financial statements include fair value measurements? If so, are they reasonable? Many business owners are confused by the valuation process. We can help you evaluate subjective inputs and methods, as well as recommend additional controls over the process to ensure that you’re meeting your financial reporting responsibilities.

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