Summer 2008 Pennsylvania CPA Journal

The Dual-Career Balancing Act

bhayes — Thu, 12 Jun 2008 18:08:00 GMT

By Joseph M. Larkin, CPA, PhD, and Joseph M. Ragan, CPA

A significant number of accounting professionals, regardless of their specific discipline, share a common dilemma: managing the dual-career challenges that arise from their and their spouses’ employment.

The accounting profession, like most professions in society today, has members, both male and female, that have spouses who are equally committed to their own careers. The result is evidenced by the growth in the number of dual-career couples. Recent research indicates that there are more than 40 million dual-career couples in the work force.

The benefits are significant, including increased family income and a sense of fulfillment for both husband and wife. However, many constraints and problems cannot be ignored. For instance, sometimes finding two suitable jobs or paths for advancement in the same geographical area is difficult. When a spouse is offered a promotion, which sometimes comes with a transfer, the decision of whether or not to accept the offer becomes more complicated.

Dual-career couples may also suffer from sociological pressures. About one-fourth of the nation’s working wives earn more than their husbands, which can cause strain within a marriage because of the long tradition of men holding the “bread-winner” role. To complicate this, couples may also have to juggle traditional home and family roles. Sometimes the stress that arises can paint a picture that dual-career couples have a less-than-rosy relationship. This fact, at the very least, is challenging.

To successfully manage dual-career relationships, there are five critical factors: mutual commitment to both careers, flexibility, coping mechanisms, financial considerations, and energy and time management.

Commitment to Both Careers - The accounting profession requires a significant time commitment, whether the CPA is in public accounting, consulting, industry, or not-for-profit. CPAs often spend more than 50 hours a week at their jobs.

It is important for each partner in a relationship to agree to, and share, this commitment to work and each other’s desire to pursue a career. The couple’s self-concept needs to be built around seeing themselves as a working team, realizing that sometimes one mate’s needs will take a back seat to their partner’s responsibilities.

Flexibility - The flexibility needed in managing dual careers has two components, personal flexibility and flexibility on the job. Personal flexibility is the willingness and ability to adapt and improvise to deal with problems that are affecting both members. Job flexibility exists when at least one spouse has the ability to change work schedules to accommodate conflicts and crises. Also, it is crucial that at-home roles be flexible and shared. If one spouse has a professional commitment, it is important for the partner to step up and take the lead at home.

Coping Mechanisms - Coping mechanisms are critical for dual-career couples. For example, restructuring home roles as needed may be a successful strategy. Each partner can negotiate to make his or her role more compatible with their joint responsibilities. Coping may also take the form of setting priorities or being more selective when planning and scheduling activities. It is also important, though sometimes not easy, to separate work from personal matters.

Financial Considerations - This factor raises many questions. Some couples hold finances jointly, while others have separate accounts and one joint account to pay joint expenses. What happens when one person in a marriage receives separate funds, such as gifts or an inheritance? Which account does that go in? Retirement funding, college planning, and health care considerations are also variables in the financial equation. It is important to analyze whether or not the family will be eligible for financial aid, and how to structure their finances to take the greatest advantage of it. All these financial decisions need to be addressed jointly, and agreed to, well in advance. Frank and open discussions are a prerequisite.

Energy and Time Management - Dual-career couples must work hard to make their relationship thrive. This requires devoting energy to supporting the partner’s endeavors and to plan a reasonable amount of time for commitments and responsibilities. Partners must recognize the importance of maintaining the relationship and giving it a high priority. Be sure to set aside some special time with your partner, whether it is a quiet evening alone or a night on the town. The key is to plan it, prioritize it, and follow through. Don’t allow anything to stand in the way of enjoying the moment.

Many organizations are developing a variety of strategies for dealing with the dual-career couple. An effective program should consider support services for career couples, flexible career-development tracks and experiences, spousal involvement with career planning and problem solving, and skills development in coping with conflict and life/career management.

Joseph M. Larkin, CPA, PhD, is an associate professor of accounting in the Haub School of Business at Saint Joseph’s University, and is director of the accounting internship program. He can be reached at jlarkin@sju.edu.

Joseph M. Ragan, CPA, is the accounting department chair and a professor of accounting in the Haub School of Business at Saint Joseph’s University. He can be reached at jragan@sju.edu.

Accounting for Environmental Remediation Liability

bhayes — Thu, 12 Jun 2008 18:04:00 GMT

By Khaled Abdel Ghany, CPA, PhD

The Governmental Accounting Standards Board’s (GASB’s) Standard No. 49 requires state and local governments to estimate the components of expected pollution remediation outlays and determine whether outlays for those components should be accrued as a liability or capitalized when goods and services are acquired.

This accounting treatment should be used if any of the following specified obligating events occurs:
-- The government is compelled to take pollution remediation action because of imminent endangerment.
-- The government violates pollution prevention.
-- The government is named, or evidence indicates that it will be named, by a regulator as a reasonable party for remediation or as a government responsible for sharing costs.
-- The government is named, or evidence indicates that it will be named, in a lawsuit to compel pollution remediation.
-- The government commences or legally obligates itself to commence pollution remediation.

The standard, Accounting and Financial Reporting for Pollution Remediation Obligation, however, is inconsistent with the Generally Accepted Accounting Principals (GAAP) presented in the accounting standards issued by the Financial Accounting Standards Advisory Board (FASAB), the Financial Accounting Standards Board (FASB), AICPA, and the International Accounting Standards Board (IASB).

Standard No. 49 develops new criteria to recognize the liability for pollution remediation outlays. These criteria state that the liability should be accrued when a range of outlays is "reasonably estimable." If a government cannot reasonably estimate the range of all components of the liability, it should recognize the liability as the range of each component - such as legal service, site investigation, and required post-remediation monitoring - becomes reasonably estimable.

For measuring the liability, GASB requires the use of the expected-cash-flow technique. This measures the liability as the sum of probability-weighted amounts in a range of possible estimated amounts, or the estimated mean or average. The standard also requires remeasurement of the liability, and its components, when new information indicates increases or decreases in estimated outlays.

Where FASAB Falls
According to FASAB Standard No. 5, Accounting for Liabilities of the Federal Government, a contingency liability should be recognized when all of the following three conditions are met:
-- A past event or exchange transaction has occurred (such as a federal entity has breached a contract with a nonfederal entity).
-- A future outflow or other sacrifice of resources is probable (such as the nonfederal entity has filed a legal claim against a federal entity for breach of contract, and the federal entity’s management believes the claim is more likely than not to be settled in favor of the claimant).
-- The future outflow or sacrifice is measurable.

The contingent liability will be disclosed if any of the conditions are not met and there is at least a reasonable possibility that a loss or additional loss may have occurred.

For measuring the contingent liability, this standard uses the better estimate amount in a range of amounts. If no amount within the range is a better estimate than any other amount, the minimum amount in the range is recognized, and the range and a description of the nature of the contingency should be disclosed.

What FASB Says
According to FASB Standard No. 5, Accounting for Contingencies, an estimated loss from a contingency shall be accrued by a charge to income. However, both of the following conditions must be met:
-- Information available prior to issuance of the financial statements indicates that it is probable that an asset has been impaired or a liability has been incurred at the date of the financial statements.
-- The amount of loss can be reasonably estimated.

If a range of loss can be reasonably estimated, and one amount in the range appears to be a better estimate than any other amount, that amount shall be accrued. When no amount within the range is a better estimate, the minimum amount in the range shall be accrued.

SEC Staff Accounting Bulletin No. 92 reviews the presentation of the contingency on the financial statements, and states that the charge on the income statement should be categorized as an operating expense, and should be included as a component of operating income or loss.

What AICPA Has Provided
AICPA Statement of Position (SOP) No. 96-1, Environmental Remediation Liabilities, requires environmental remediation liabilities to be accrued when the criteria in FASB Standard No. 5 are met. SOP 96-1 also requires that the accrual for environmental remediation liabilities should include the incremental direct costs of the remediation effort and the costs of compensation and benefits for employees who are expected to devote a significant amount of time to the remediation effort, to the extent of the time expected to be spent directly on the effort.

The International Position
IASB Standard No. 37, Provisions, Contingent Liabilities and Contingent Assets, addresses the liability of uncertain timing or amount. It states that these should be recognized when, and only when, an entity has a present obligation as a result of a past event; it is probable that an outflow of resources embodying economic benefits will be required to settle the obligation; and a reliable estimate can be made of the amount of the obligation.

The amount recognized is the best estimate of the expenditures required to settle the obligation at the balance sheet date. The best estimate is the amount that an entity would rationally pay to settle the obligation at the balance sheet date, or to transfer it to a third party at that time.

Conclusion
GASB justifies Standard No. 49 by stating that recognizing pollution remediation liabilities after they are judged to be probable would cause a number of expected liabilities not to be recognized in financial statements. In fact, GASB lowered the criteria for recognizing the contingency liabilities, which would result in recognizing more contingent liabilities in the balance sheet.

GASB introduced a scientific technique to estimate the value of the expected contingency liabilities, but it requires the recognition of liabilities that are unrecognizable according to GAAP standards. This will result in increasing the liabilities recognized in the financial statements for state and local governments, weakening their financial positions and affecting their financial market credit rating while having no affect on the attitudes of the people and local governments toward protecting the environment.

GASB needs to reconsider its position in Standard No. 49 and recognize the environmental remediation liability when the expected loss is probable, not when it is reasonably estimable.

Khaled Abdel Ghany, CPA, PhD, is an auditor in the Office of the Inspector General in Washington, D.C. He can be reached at drabdelghany@yahoo.com.

Preserving Independence for Those Providing Attest Services

bhayes — Thu, 12 Jun 2008 18:00:00 GMT

By Ibolya Balog, CPA

AICPA and PICPA recently changed their codes of professional conduct to include Ethics Interpretation 101-3 (ET 101-3), Performance of Nonattest Services under Rule 101, Independence. This ethics update covers members who are providing nonattest accounting services to clients for whom the member, or member’s firm, also provides attest services. The changes provide additional guidance on frequently provided services.

ET 101-3 only pertains when attest services are provided. Attest services include audits and reviews of financial statements, as well as other attest services defined in the Statements on Standards for Attestation Engagements. When performing compilations, if the report is issued by a nonindependent issuer and includes the disclosure "I am (we are) not independent with respect to XYZ Company," ET 101-3 does not apply. If the compilation report is issued without the lack of independence disclosure, the presumption is the firm is independent, therefore ET 101-3 does apply.

There are three general requirements a CPA must follow if performing nonattest services for a client to whom attest services also are provided.

The first requirement is that the member should not perform management functions or make management decisions. Management function activities, or what appear to be management functions, include making operational or financial decisions; reporting to the board of directors on behalf of management; having custody of the client’s assets; preparing source documents for clients; authorizing or executing transactions on behalf of the client; or establishing or maintaining internal controls, including monitoring activities.

The second guideline is that the client must agree to assume certain responsibilities related to the nonattest function. As such, before agreeing to perform any nonattest services for the client, the firm must obtain the client’s agreement to make all management decisions and related functions; to designate an individual who possesses suitable skill, knowledge, and experience to oversee the services; to evaluate the adequacy and results of the services; and to accept responsibility for the results of the services. The CPA must be satisfied that the client’s designee understands the services to be performed well enough to oversee them. The designee need not be able to perform or reperform the services, only to be able to understand and agree to the nature, objective, and scope of the services, make related judgments, accept responsibility on behalf of the client, and ensure that the resulting work product meets agreed-upon specifications.

Lastly, before performing nonattest services, the CPA should establish and document, in writing, his or her understanding with the client, which may include the board of directors, audit committee, or management, regarding the following:
-- Objectives of the engagement
-- Services to be performed
-- Client’s acceptance of its responsibilities
-- The CPA’s responsibilities
-- Any limitations of the engagement

The CPA should document the understanding in the engagement letter, audit planning memo, or other firm file. Certain routine activities performed by CPAs as part of the normal client-member relationship are exempt from the general requirements listed above. Examples of exempt activities include assisting clients with technical accounting questions or providing training on new pronouncements.

Bookkeeping is a nonattest service that is fraught with potential problems pertaining to an attest client. A CPA may provide bookkeeping services only if the client oversees the services and makes all management decisions in connection with the services. For example, if a CPA is engaged to provide bookkeeping services that will result in a set of financial statements, the client must approve all account classifications, provide source documents for preparation of any journal entries, and take responsibility for the results of the CPA’s services.

On the other hand, a proposal to adjust journal entries to a client’s financial statements as part of the CPA’s audit, review, or compilation services is considered a normal part of such engagements, and would not be considered performance of a nonattest service subject to the general provisions of ET 101-3, provided that the client reviews these entries and understands the impact on its financial statements and records any adjustments identified by the CPA.

Another common nonattest service provided by CPAs is representation of clients before taxing authorities. Authorized representation of a client in administrative proceedings before a taxing authority would not impair independence, provided the CPA obtains client agreement prior to committing the client to a specific resolution with the taxing authority. If the matter proceeds to a court to resolve a tax dispute, representing the client in court proceedings would impair independence.

Clients frequently turn to their CPAs when it comes to the design and implementation of a financial information system. A CPA, or a CPA’s firm, that provides attest services may install an accounting software package for a client, including helping the client set up a chart of accounts and financial statement format, without impairing independence. The CPA may also provide training to the client’s employees on how to use the software. A CPA, however, cannot supervise the client’s employees in their day-to-day use of the system, since that would be a management function activity.

The issues discussed in this article are not exhaustive. CPAs, therefore, should refer to ET 101-3 for additional guidance.

Ibolya Balog, CPA, is an assistant professor in the Department of Business, Management, and Economics of Cedar Crest College in Allentown, and a member of the Pennsylvania CPA Journal Editorial Board. She can be reached at ibalog@verizon.net.

Credit Crunch Plus Inflation Equals Really Bad News for Business

bhayes — Thu, 12 Jun 2008 17:57:00 GMT

By Edward R. Jenkins Jr., CPA

For the past several months, government agencies, the domestic financial press, and many financial pundits have been trying to put a brave face on significantly bad economic data that will drastically affect business opportunities for at least the short term.

The essence of this dim view is the conflicting problems of inflation and a credit crunch. The public policy solutions to these two problems are antithetical: the Federal Reserve typically tightens credit to combat inflation, but tightening credit while credit markets are precarious can cause significantly worse problems. The business community seems to be in a Gordian knot from which it will be very difficult to escape cleanly.

The primary sources of our current inflationary environment are varied, some of which include the following:
-- When the dollar was stronger, the U.S. used to be able to pay for imported goods with dollars. The U.S. currency is no longer the currency of choice, so that means the U.S. is now buying much of its goods and services with relatively lower-valued dollars. This makes foreign goods (most of our day-to-day items) and services much more expensive.
-- The cost of imported goods are also going up as a result of higher oil costs. That’s in addition to the paralyzing cost at the pump for domestic transport. Finally, much of the manufactured goods are now made of, or contained in, plastics and synthetics that use petrochemicals. So that means even the plastic wrap on domestic roast beef is more expensive.
-- The economic booms in less-developed countries (resulting from our outsourced manufacturing jobs and some services) has increased disposable income in those countries. Those citizens are now competing more aggressively for oil and consumer goods in the global marketplace, driving up prices.

The difficulties behind the credit crunch are just as problematic. With the subprime mortgage crisis, the press covered about $100 billion of a potential $600 billion credit problem. What the press is not talking about yet is the auto loan portfolio - an 84-month loan does not make sense for a depreciating asset - and cued up behind that is the credit card portfolio. Some financial institutions actually compete for customers that miss payments to tap the lucrative fee and interest acceleration clauses.

The fundamental problem that underlies the credit crisis is unrestricted consumer spending. During some quarters, personal savings rates have been negative in the U.S. If households stop their credit-fueled spending ways as a result of tightening credit and higher prices, spending will slow, which then puts commercial loan portfolios in trouble. The lack of solid personal savings restricts the ability of entrepreneurs to fund the start-up of new businesses. Since new businesses are usually the generator of new jobs, this could be a bigger problem than anybody is talking about.

Assuming we only have a recession from this troubling confluence of events, the economic circumstance detailed above will leave a mark on business transformations in the near future. Here are some of the possible outcomes:
-- Depending upon immigration policy and its effect on wage rates and labor availability, transformations that bring more manufacturing back to the United States could become attractive. Also, many companies minimized their risk assessments when analyzing the benefits of moving production abroad to cut costs. Volatility overseas could revise that thinking.
-- Financial distress will create opportunities to consolidate industries that are ripe for consolidation. Deals that were previously too expensive could become viable at the right price.
-- Companies that serve vibrant export markets will continue to enjoy brisk business as a deflated dollar continues to make their products attractive in the global market. Transformations that acquire additional access to foreign markets could continue to be attractive for that reason.
-- A deflated dollar may make deals that let foreign manufacturers produce in the United States continue to be attractive. Foreign manufacturers, therefore, could continue to have access to U.S. markets and not lose money in their home currencies.
-- Undercapitalized companies will have a higher likelihood of becoming targets as their viability is challenged.
-- As companies experience economic difficulty, their advisors may play more significant roles. Compliance and due diligence procedures will become even more important as pressure mounts to make deals.

The list could go on. Time will be the true measure, so we should all care-fully watch to see how the national economy holds up over the summer.

As things change, we will discuss how those changes are affecting the area of business transformations.

Edward R. Jenkins Jr., CPA, is managing member of Jenkins & Co. LLC in Spring Grove. He is also a member of the Pennsylvania CPA Journal Editorial Board. He can be reached at edwardj@wemanagetaxes.com.

IFRS Gaining Ground as a Global Standard

bhayes — Thu, 12 Jun 2008 17:52:00 GMT

By Dmitri D. Shiry, CPA

Call it the next British Invasion. The clamor over the International Financial Reporting Standards (IFRS) published by the London-based International Accounting Standards Board could create a sea change in the way U.S. companies conduct financial reporting and other business operations.

This new wave in accounting will affect both large multinationals as well as mid-market companies with cross-border activities. In fact, virtually all organizations involved in financial reporting could be affected to some degree if IFRS becomes universal.

IFRS rules are already used by more than 100 countries, including the influential economies of the United Kingdom and Australia. Others coming on board include Israel this year, Chile and Korea in 2009, Brazil in 2010, and Canada in 2011. Among the Fortune Global 500, approximately 40 percent follow IFRS, while another 40 percent use U.S. GAAP. The remaining 20 percent use local GAAP. Many of the companies using local GAAP, though, are in countries moving to IFRS, including Canada and Brazil. Momentum is on the side of IFRS.

The trend has not gone unnoticed at home. Last August, the Securities and Exchange Commission put forth a concept release seeking opinion on whether U.S. issuers should be able to choose between IFRS or U.S. GAAP. Most comments supported the IFRS choice, which means SEC could take action this year to formalize the option. U.S. companies, therefore, could be using IFRS by 2010 or 2011.

American financial executives have IFRS on their radar. A Deloitte study of about 300 companies showed that 20 percent would consider adopting IFRS if given a choice. Almost two-thirds of those would consider adopting the international standard within the next three years.

Fueling this movement are the easy-to-understand benefits that a single standard will reduce complexity, improve efficiency, and increase transparency and comparability, in addition to enhancing tax planning. But there are also less obvious benefits. One is an opportunity to further reduce costs by changing silo-type accounting functions over to a shared-services model, one that features standardized training programs and the ability to develop accounting personnel throughout the globe.

Organizations may also enjoy a better controls environment because they can put one team in charge of all statutory reporting within the enterprise. This is a difficult proposition when organizations use multiple accounting standards that have to be manually converted from U.S. GAAP. Cash flow planning, too, can be improved for those companies paying dividends from subsidiaries located in different countries.

In addition to company-level benefits, larger positives will flow to the global economy. The investment community is demanding better quality financial information, and IFRS is perceived as an opportunity to compare companies across global industries. Similarly, a more global set of accounting rules will make it easier for companies and individuals to access foreign markets, thus stimulating investment and cross-border capital flow. Given current fears of a global economic downturn, such measures may gain even greater support by the markets.

What Should U.S. Companies Do?
Global acceptance of IFRS may be inevitable. If U.S. companies want to get ahead of the curve, management, most notably CFOs, CEOs, audit committees, and boards of directors, should consider the following actions.

Assess how the organization is exposed to IFRS - Does the organization have a parent company outside the U.S. reporting under IFRS? Does the company have investors outside the U.S., including those involved in joint ventures, using IFRS? Does the company have complex cross-border structures? Does the company operate in an industry in which the major players use IFRS?

Analyze the cost/benefits of adoption - Will adoption increase efficiencies in financial reporting? How long would it take the organization to assimilate IFRS in a controlled manner? Will the organization be ready if IFRS becomes optional or mandatory at a certain date?

Develop an implementation plan embracing different time scenarios - Plans should explore both a deliberate, phased implementation, and quick-strike approach in case of an IFRS mandate.

Transitioning to IFRS is more than a narrow accounting issue. The shift will look more like an enterprisewide effort, touching financial reporting systems, internal controls, taxes, treasury, cash management, legal, among others. Managed correctly, the conversion can bear fruit throughout the organization.

But take action sooner rather than later. Given the forces pushing IFRS acceptance, this British Invasion won’t exactly be a long and winding road.

Dmitri D. Shiry, CPA, is a partner with Deloitte in Pittsburgh, and a member of the Pennsylvania CPA Journal Editorial Board. He can be reached at dshiry@deloitte.com.

Executives, Too, Must Plan for the Unexpected

bhayes — Thu, 12 Jun 2008 17:49:00 GMT

By Douglas P. Hepburn, CPA/PFS, CFP

When designing a financial plan for executives, one of the major risks to consider is job loss. During the 2001 recession, executives and people over 45 years old were more likely to experience long-term unemployment than ever before. This trend is expected to continue. The U.S. Department of Labor indicates that the average length of unemployment is 18 months, so planning for unforeseen transition cannot be overlooked, and must be addressed well in advance.

Know the Cash Flows
Clients who have a good handle on their monthly expenditures are more likely to know where they can economize to build reserves before an event happens. As a general recommendation, having at least six months of expenses in liquid, low-risk assets is a prudent choice. Of course, this needs to be coordinated with other expected resources.

Unemployment compensation is one source, but it won’t come close to matching an executive’s salary. Generally, the benefit is limited to 50 percent of quarterly income, but is usually capped at a maximum weekly amount. Higher-paid employees, therefore, will have less of their income replaced. The more clients make, the less they will receive as a percentage of pretermination income.

Some companies offer severance packages for termination without cause, so contracts and company policies need to be reviewed as part of the planning process. Unless the client has a contract or is being "packaged out," severance is generally determined by tenure.

If there is a change in control, however, severance payments in excess of three times the executive’s average compensation over the last five years are subject to the 20 percent excise tax on “golden parachute” payments. This is in addition to income tax owed on those payments.

If the former employer’s retirement plan allows for after-tax contributions, these will be distributed to the participant at the time a rollover is requested and could be a nice, tax-free resource at a difficult time.

Because of the contribution limitations on 401(k) plans, many companies offer excess deferral plans to executives. Review the summary plan description for these, as some companies force terminated employees to take their deferrals as soon as administratively practical. Other employers will distribute deferrals seven months after separation from service or after Dec. 31 of the year of separation, whichever is later, creating the opportunity to defer that income into the next tax year. Still others will allow deferrals to be taken out over a period of years. These distributions will be taxable as ordinary income, but there are no early withdrawal penalties like pretax qualified plan distributions.

Equity compensation, such as restricted stock and stock options, has its perks, but depending on the plan provisions, clients in transition may be subject to accelerated vesting or expiration dates. These accelerations are particularly important with incentive stock options, since qualifying dispositions are determined by the exercise and sale dates, and are taxed at capital gains rates, notwithstanding the affects of the alternative minimum tax.

Reaching the Other Side
Your client will ultimately land at a new position. When that happens, there are several issues to consider concerning his or her financial planning decisions.

The first thing that most people think of resolving is their 401(k) rollover. Some argue that moving the rollover into a new employer’s 401(k) plan as soon as possible is important because of the ERISA protections and the ability to borrow, but by keeping rollover money in an IRA, clients will have the option to invest in more and broader-based investment options than may be available in the new company’s retirement plan. This decision will have to be made after a thorough evaluation of the new 401(k) plan. Regardless of how the rollover is handled, clients still should enroll in the new employer’s retirement plan as soon as they become eligible.

Nonqualified salary deferral plans require an election to participate prior to the beginning of the tax year, but newly hired employees usually have a 30-day window to make their salary deferral election, beginning on their date of hire. If not done immediately, it could be 11 months before the next election opportunity.

Equity compensation granted at the time of hire requires serious consideration and analysis to determine whether a Section 83(b) election should be made. This enables the employee to have capital gains treatment on the sale of the grant in exchange for accelerating the income tax to the current year. The downside is that, if the client separates from service prior to the vesting date of the grant, the taxes paid are forfeited.

For corporate executives, the wide array of executive benefits combined with the risk of uncertain employment makes the role of CPA financial advisors critical to pursuing and preserving financial success.

Douglas P. Hepburn, CPA/PFS, CFP, is an advisor representative of Multi-Financial Securities Corporation, member FINRA/SIPC. He can be reached at dhepburn@hepburnadvisors.com.

Confronting the Inevitable Blame Game

bhayes — Thu, 12 Jun 2008 17:44:00 GMT

By Wilhelm Dingler, JD

Insightful lessons can be learned by reviewing professional liability issues. With this in mind, Bollinger Inc. provides this column. For more information, contact Bollinger at robert.connolly@bollingerinsurance.com.

CPAs are well aware of the scandals and litigation of the recent past in which overly aggressive accountants have been ensnared. Today, the subprime mortgage crisis is making headlines and, in the usual efforts to ascribe blame, it should come as no surprise that many are looking to finger accountants for the mess.

At the heart of this is FAS No. 140 and the recently updated FAS No. 157. The changes to FAS 157 - which took effect in November 2007 - were designed to add transparency to financial reporting and the treatment of certain assets. In particular, the standard attempted to settle the long-standing debate over "cost" versus "market" in the valuation of assets for financial reporting purposes. FAS 140, on the other hand, was designed to allow financial institutions to treat assets held in various securities as sales or secured financing. This sometimes allowed transactions to be taken "off balance sheet," thus defeating the goal of transparency. It is in this context that the debate over blame finds its genesis.

It seems that no matter how many times one places "... is the representation of management" on a financial statement, people still want to believe the accountants or the accounting/financial reporting rules are to blame when some reckless deal comes apart at the seams.

This should serve to emphasize the primary maxim for accountants: consistently and religiously document your files with the actions you take. Note the reasons for your actions and, where available, cite guidelines, rules, Treasury regulations, FASB pronouncements, and the like. Like a baseball manager, rarely is an accountant immune from multiple layers of second guessing. Likewise, it is rare that one can avoid litigation borne of the second guessing. Statistically, economic downturns parallel a distinct rise in litigation.1 That means someone might be looking to you to fill the gap in their economic expectations.

The best way to protect yourself is to be armed with evidence of the reasons for actions recommended. For tax practitioners, for example, positions that should be documented include unusual, aggressive, or out-of-the-ordinary tax positions or if the practitioner believes new standards, as found in Section 6694(a)(2)(B) of the IRC of 1986, are implicated. When it comes to auditors, valuing an asset on the basis of "cost" versus "market" is one example where the thought process and reasoning of one approach over the other should be set down.

Often, several approaches are both justifiable and supportable, but an accountant may not be able to point to specific evidence as to the reasons for the action they chose. Thoughtful and detailed documentation of the actions will help provide a defensible position. This is particularly true if the documentation is made contemporaneous with the advice or action taken, rather than trying to remember later on.

Accountants are kiddingly referred to as "belt and suspenders" professionals when taking action on behalf of a client. Yet, when it comes to their documentation to safeguard their livelihood, many accountants are found to be wanting. Protect yourself and the reputation of the profession by documenting your file. There is no such thing as excessive documentation.

1 See "Economic Downturn Means More Malpractice Claims against Attorneys and Firms," Of Counsel, Vol. 20, No. 8 (2001); European Journal of Law & Economics, Vol. 9, No. 3 (May, 2000); "Trade Secrets Litigation to Rise as Economy Dips," Portfolio Media, Feb. 13, 2008.

Wilhelm Dingler, JD, is an attorney in the professional liability department of Marshall, Dennehey, Warner, Coleman & Goggin in Philadelphia. He can be reached at wxdingler@mdwcg.com.

Win the Battle to Retain Good Employees

bhayes — Thu, 12 Jun 2008 17:41:00 GMT

By Lauren Malensek

Demand for the next generation of finance professionals has skyrocketed, largely due to an increase in corporate governance regulations and the impending retirement of baby boomers. Within this high demand for quality professionals, there is a bigger question: how does a company keep the quality staff it has and avoid becoming another firm searching for top talent? In an era of high turnover and expensive employee training, keeping top-tier employees is just as important as recruiting new employees.

According to a recent study conducted by the Hackett Group, a global strategic advisory firm based in Atlanta, organizations that are successful in attracting and retaining top talent consciously create a culture of engagement. Research shows that engaged employees are more likely to stay with their employers and to contribute in ways that improve business performance. There are many ways to keep employees engaged. The following are some of the key areas where keeping employee interaction is vital.

Communicate frequently - Employee feedback is key to gauging how companies are helping their employees succeed. In turn, it allows employees to understand how their success contributes to the firm’s success. During feedback sessions, employees and leadership will recognize strengths and identify areas for improvement.

Have only the best managers of people - Provide employees with a mentor to help them develop their career. Employee growth is accelerated when on-the-job training is supplemented with informal coaching on the side by a trusted mentor. The idea is to enhance the relationships with your employees, which allows companies to be more proactive in identifying potential issues and resolving them. Employee retention will improve and customer service will be enhanced.

Fix problems immediately and follow up - Ensure that work is a transaction between employees and supervisors, one that requires supervisory hands-on strategies in place of less effective hierarchical tactics. By applying this technique, managers are consistently communicating with their employees and keeping themselves involved within the working environment of their staff. This means conflict can be resolved before it happens or immediately fixed afterwards. Consider instituting a hands-on management program that combines a highly engaged, developmental management style with the techniques, skills, best practices, and habits of other effective managers.

Give credit where credit is due - Acknowledge the strengths and successes of your employees. This will result in more engaged, productive, and passionate employees. Recognize and reward high performers within your organization for exceptional service, extraordinary contributions, or any "above and beyond" efforts that affect overall profitability or success. These recognitions and rewards can come in many different ways, including personalized gifts, bonuses, and additional paid time off.

Make career growth a priority - Employee training is a key engagement component. For companies to be successful, they must hire the right people and refine and develop their talents. This means providing a continuous learning environment where they can experience life-long learning and an environment where professional knowledge, skills, and abilities are continually updated and refreshed.

In addition to engagement strategies, don’t forget that the health, happiness, and well-being of your employees also need to be top priorities. Design your benefit plans to offer a variety of choices and flexibility to best meet your employees’ needs. Offer comprehensive benefit plans to include medical, dental, and vision plans; paid time off and holidays; and 401(k) with company match, profit sharing, and life and disability programs. In addition, an emphasis on work-life balance should be of high importance and may make the difference in whether an employee stays with your company or leaves for another.

While there is no one way to maintain topnotch staff at your organization, using a mentoring process and making your employees a top priority are sure ways to help you remain competitive.

Lauren Malensek is chief human resource officer for Clifton Gunderson. She can be reached at Lauren.Malensek@cliftoncpa.com.

Consider VDAs to Manage Tax and Financial Statement Exposure

bhayes — Thu, 12 Jun 2008 17:35:00 GMT

Over the past several years, the focus for many CFOs, controllers, and tax directors has shifted from rate reduction to risk management. One way to reduce state tax reserves and related risk due to FAS 109/FIN 48 and FAS 5 is through voluntary disclosure agreements (VDAs). VDAs can be entered into when a taxpayer comes forth on its own accord, without being contacted, to notify a state or local jurisdiction that it has underpaid taxes.

The standard for nexus for sales and use taxes is physical presence, but in corporate taxation, several state courts have held that physical presence may not be necessary if an "economic" nexus exists.1 Therefore, based upon taxpayer activities, nexus may occur despite lack of an office or permanent physical presence. The trends toward increasing the relative weight of the sales apportionment factor and sourcing sales for service businesses based upon customer location may cause a surprising amount of tax due. A state-specific exposure analysis will help the taxpayer prioritize and determine remediation strategy. A company that has multistate activity and may unwittingly be exposed to tax, interest, and penalties resulting from not filing returns may wish to enter into a VDA.

Voluntary Disclosure Process
The Multistate Tax Commission’s (MTC’s) VDA program serves as a central point of contact in coordinating VDAs with participating states. This program can be helpful, particularly if requesting VDAs for a large number of states. Another option is to request a VDA through each individual state. Regardless, the process begins by having a taxpayer representative submit an anonymous letter.2 The letter should describe the activity the company has in the state, when nexus first existed, and the proposed terms for the VDA. Some states will allow you to include multiple taxes within one VDA letter; others will require you to send different VDA letters for each tax type. Some states and localities, such as New York State and New York City, will allow you to file a combined request. Others, such as Pennsylvania and Philadelphia, require you to enter into separate VDAs with the locality. Analyze each state’s requirements because the information requested varies by state.

The state will review the request and either request additional information, send an agreement that incorporates your terms, or send an agreement with modified terms. Most states allow you to negotiate the terms, but some states are inflexible. Two common agreement requirements are that the company has not been contacted by the state for the particular tax that is the subject of the VDA and that there has not been any collected, but unremitted, sales tax.

Value of VDAs
One of the most important benefits of a VDA is that it can result in the release of a financial statement reserve. Another valuable aspect is the limitation on the number of years for which the taxpayer will be required to file returns (the "look-back period"). The look-back period generally ranges from three to four years for sales and use tax, and three to six years for corporate tax, instead of having to file returns from the date when nexus was first established in the state. Pennsylvania, for example, has non-negotiable look-back periods of three years plus the current year for sales and use taxes, and five years plus the current year for corporate taxes. New Jersey, specifically with respect to taxpayers who did not file corporate taxes based upon the economic nexus standard set forth in Lanco Inc. v. Director,3 generally has a look-back period to 1996.

With a VDA, states generally abate most or all penalties, and some, such as Texas, may abate some or all interest. An exception is New Jersey, which will not abate its post-amnesty penalties. There are the rare states that may allow a reduction in tax due, depending upon case-specific facts.

Amnesty
An alternative to VDA filing is to participate in a state’s amnesty program. Periodically, states need to raise revenue, and thus offer an amnesty to delinquent taxpayers. In return for coming forward voluntarily, states sometimes offer waivers of penalties and, in some cases, interest. The problem with many amnesty programs relative to VDAs is that they are typically only open for a limited period of time - such as two to three months - and may not allow for limited look-back periods. During 2007, Texas and Iowa offered amnesty programs.

Conclusion
VDAs can be a valuable tool for both states and taxpayers. States collect unanticipated tax revenues and add new taxpayers to the rolls for future filings. The taxpayer pays less tax and interest due to the limited lookback period, penalties are generally waived, and in many cases financial statement reserves can be released.

For taxpayers or practitioners who are considering VDAs, helpful resources include the following:
-- The MTC (www.mtc.gov) handles approximately 85 multistate cases annually, according to Tom Shimkin of MTC.
-- The Pennsylvania Revenue Department has a well-established VDA program (www.revenue.state.pa.us; choose "Business Taxpayers;" select "Voluntary Disclosure Program"). Alicia Fetrow, voluntary disclosure liaison, indicated that Pennsylvania usually has about 200 open VDA cases and has seen an average annual increase of VDA-related collections of 12 percent over the past five years.
-- AICPA’s Tax Section maintains a Voluntary Disclosure Practice Guide (http://tax.aicpa.org/ Resources/State+and+Local), which includes a list of state-specific contacts for voluntary disclosures.

1 Lanco Inc. v. Director, 908 A.2d 176 (N.J. 2006), cert. denied, No. 06-1236 (U.S. June 18, 2007); MBNA America Bank NA v. Tax Commissioner, 640 S.E.2d 226 (2006), cert. denied, No. 06-1228 (U.S. June 18, 2007).
2 There are some states such as Illinois that will not allow the VDA to be done on an anonymous basis.
3 Lanco Inc. v. Director, 908 A.2d 176 (N.J. 2006), cert. denied, No. 06-1236 (U.S. June 18, 2007).

Candice I. Polsky, CPA, JD, is manager at SMART Business Advisory and Consulting LLC in Devon. She can be reached at cpolsky@smartgrp.com.

Matthew D. Melinson, CPA, is managing director at SMART Business Advisory and Consulting, and a member of the Pennsylvania CPA Journal Editorial Board. He can be reached at mmelinson@smartgrp.com.

The Jelke Reversal Won’t Keep You "Trapped-in"

bhayes — Thu, 12 Jun 2008 17:29:00 GMT

By John J. Barton, CPA, ASA

The Federal Court of Appeals, Eleventh Circuit, reversed the Tax Court’s decision regarding the Estate of Frazier Jelke III1 on Nov. 15, 2007. Business appraisers, especially those performing valuations for the purposes of estate and gift tax, will be pleased with the prospect of taking a 100 percent, dollar-for-dollar discount for trapped-in capital gains when valuing C corporations. But don’t push this too far. The Jelke decision does not shed any light on trapped-in gains in pass-through entities and it does not necessarily apply to C corporations outside the Eleventh Circuit.

First, I will review the trapped-in capital gain controversy. After the repeal of the General Utilities Doctrine in 1986, C corporations became susceptible to double-taxation in a transaction scenario. For example, assume a C corporation that owns long-term real estate is sold. The real estate has a cost basis of $1 million and a fair market value of $10 million. Also, assume the land is the only asset, and the land value equals the business value. In this case, the C corporation would have to pay capital gains tax on the $9 million gain. The net proceeds after the gains tax would be distributed to the shareholder, who would then be taxed on the gain between his basis and the proceeds. This double taxation motivated most small, closely held companies to set themselves up as either S corporations, partnerships, or LLCs, which are taxed only once, at the shareholder level.

Business appraisers have argued that the double-taxation disadvantage represents a separate marketability issue in a fair market value appraisal. Any buyer who acquires the stock of the C corporation in the above example would recognize that he or she is assuming a trapped-in gain at the corporate level, and negotiate a lower sale price accordingly. In the estate and gift tax arena, however, the IRS argued against this position on two points: the tax law allows avoidance since a C corporation can change to an S corporation and liquidate after 10 years; and liquidation is speculative, and an actual sale that would trigger the gains tax may not occur for years after the valuation date. In the Jelke case, the estate deducted the full $51 million gain from a preliminary value indication, then also deducted a 20 percent discount for lack of control and a 35 percent discount for lack of marketability. The IRS deducted a partial $21 million discount, assuming a sale 16 years in the future and discounting the future gain to present value. The Tax Court, relying on the speculative nature of the trapped-in gain issue, sided with the IRS.

The Federal Appeals Court, in a strongly worded 2-1 decision, rejected the Tax Court’s decision in Jelke. Using reasoning that the valuation community has relied on for many years, as well as prior decisions,2 the Appeals Court found that since the fair market value standard requires the assumption of a transaction, it is not possible to assume that the gains tax would be paid at some indiscriminate point in the future. Although not specifically stated by the Appeals Court, it is also true that even if one accepts the reasoning of post-dating the gains tax, it is financially and logically impossible that a current tax liability would be identical to the tax liability five, 10, or 20 years later.

Remember, Jelke only applies to C corporations. If the subject company is a partnership, the IRS’s rejection of a discount for trapped-in capital gains has generally held, since partnerships have the option of taking a 754 election in a transaction. In the case of a sale and a 754 election, the inside basis of the partnership’s assets is raised to match the cost basis of the transferee in the transferred partnership interest - the outside basis - for the benefit of the transferee. Although it is argued that a basis for a trapped-in gain discount also exists for partnerships, that argument is not as sound for C corporations, and is beyond the scope of this article.

Similarly, S corporations can avoid the trapped-in gains scenario because the buyers and sellers have the option to take a 338(h)(10) election, which treats a stock sale as if it were an asset sale so the buyer is able to write up the depreciated assets to current value. Similar to partnerships, the valuation community has argued that an additional discount for trapped-in gains should be allowed for S corporations. Those arguments, which are also beyond the scope of this article, have not been widely tested in the courts.

In closing, practitioners should be aware that Jelke does not signal a Wild West of marketability discounts in stock valuations. The Tax Court and the Appeals Court have a history of not suffering fools when it comes to appraisal support for such discounts. If separate discounts for trapped-in gains, market-ability, and control are applied, care should be taken that each is supported separately from the other.

1 Estate of Frazier Jelke III et al. v. Commissioner, No.05-15549 (15 Nov. 2007)
2 Estate of Eisenberg v. Commissioner, 155 F. 3d 50, 57 (2d Cir. 1998); Estate of Davis v. Commissioner, 110 T.C. 530 (1998); Estate of Dunn v. Commissioner, 301 F.3d 339 (5th Cir. 2002)

John J. Barton, CPA, ASA, is president of Brandywine Valuation Consultants LLC. He can be reached at jbarton@bwvaluations.com.

Working through Benefit-Responsive Investment Contract Guidelines

bhayes — Thu, 12 Jun 2008 17:26:00 GMT

By Donna M. Massanova, CPA

The Financial Accounting Standards Board’s (FASB’s) Staff Position (FSP) AAGINV-1 and SOP 94-4-1, which is effective for periods ending after Dec. 15, 2006, significantly changed the reporting of certain guaranteed investment contracts in the financial statements of defined contribution pension and health and welfare plans. This FSP effectively removed the scope exception provided for fully benefit-responsive investment contracts reported at contract value in accordance with SOP 94-4, thus requiring these contracts to be reported at fair value. The FSP also requires additional financial statement disclosure. Defined benefit plans are not affected by this FSP and continue to report investment contracts at fair value.

AICPA issued three Technical Practice Aids (TPAs) to provide guidance related to the FSP. TPA 6931.08 defined the investments where the FSP applies: traditional or separate account guaranteed investment contract (GIC); a bank investment contract (BIC); a synthetic GIC composed of a wrapper contract and the underlying wrapped portfolio of individuals; or a contract with similar characteristics. TPA 6931.09 disclosed the FSP’s application to a plan’s investment in a common collective trust (CCT) fund or a master trust that holds fully benefit-responsive investment contracts. TPA 6931.10 provided guidance on disclosure requirements when a plan invests in CCT funds or a master trust that holds fully benefit-responsive investment contracts.

GICs are very popular with defined contribution plan sponsors and participants due to their relatively high yield, stability of return, and safety of principal. GICs are individually negotiated between the purchaser and the issuer to provide for liquidity, which protects the plan participant from fluctuations experienced in the market. Generally, the issuer will absorb the risk and provide participants with full book value when they withdraw from the fund. This is noted in the FSP, which states that although the requirement is to report these fully benefit-responsive contracts at fair value, contract value is the relevant measurement because contract value is the amount participants would receive if they were to initiate permitted transactions under the terms of the plan.

To be considered fully benefit-responsive, contracts must meet the following criteria: the contract must be between the plan and issuer, and cannot be sold or assigned; the contract issuer must be obligated to repay principal and interest or provide prospective crediting rate adjustments that cannot be less than zero; all participant-initiated transactions occur at contract value; an event that limits the ability to transact at contract value is not probable; and the plan must allow participants reasonable access to their funds. Plans may hold these investments through direct contracts with issuers, ownership of CCTs, or pooled separate accounts.

The required financial statement presentation is in the statement of net assets available for benefits. The change is reflected in all investments at fair value to include those for which the FSP applies, such as GICs, BICs, and so on. The difference in fair value and contract value is presented as a single line item, and is disclosed as "Adjustment from fair value to contract value for fully benefit-responsive investment contracts," and the final presentation of net assets available for benefits. Footnote disclosure requirements include the nature of the contracts, how they operate, the methodology for calculating the interest crediting rates, key factors that could influence future average interest crediting rate resets, minimum interest crediting rate, and the relationship between future interest crediting rates and the adjustment to contract value reported in the statement of net assets available for benefits.

This FSP affects financial statement reporting for plans that begin after Dec. 15, 2006. In accordance with AU Section 328.04, plan sponsors had the responsibility to assess the fair value of these investments for plan years ended Dec. 31, 2006, to evaluate differences in fair and contract value, and to calculate the adjustment for the current and prior years presented in accordance with the FSP. Valuation and auditing procedures have been significantly affected. In full-scope audits, valuation testing includes, but is not limited to, assessment of the model, testing of inputs, and value and materiality considerations. Limited-scope audits require additional certifications for these investments from trustees and/or custodians, and if they are not obtained, the necessity to perform full-scope procedures in respect to valuation of these investments.

As we approach the second year of the implementation of this FSP, there is an expectation that the level of uncertainty has declined as sponsors gain an understanding of the requirements and their role in the valuation process. The difficulties experienced in the first year of implementation may have been alleviated, but that remains to be seen.

Donna M. Massanova, CPA, is a principal and director of the employee benefit plan practice with Parente Randolph LLC. She can be reached at dmassanova@parentenet.com.

Business Combinations in a New World

bhayes — Thu, 12 Jun 2008 17:21:00 GMT

By Jay J. Jacobs, CPA

A long-awaited overhaul of accounting for business combinations and consolidations was recently completed by the Financial Accounting Standards Board (FASB). FASB issued a revised FAS 141, Business Combinations (FAS 141R) and the new FAS 160, Noncontrolling Interests in Consolidated Financial Statements, which is an amendment of ARB No. 51.

The pronouncements represent FASB’s continuing efforts with regard to convergence with international financial reporting standards (IFRS), incorporating fair value into GAAP, and providing greater transparency, relevance, and understandability to financial statements. Each pronouncement amends existing GAAP.

The changes contained within these two pronouncements represent significant improvements to FASB’s approach: they expand coverage to more transactions and entities than before, covering entities that consolidate or deconsolidate; they incorporate more fair value usage, often at the expense of FAS 5; they define noncontrolling (minority) interest as equity; and they adjust carrying amounts to fair value upon consolidation or deconsolidation.

Both statements are effective for fiscal years, and their interim periods, beginning on or after Dec. 15, 2008. The statements provide transitional guidance, including dealing with initial adoption, calculating earnings per share, and recording taxes under FAS 109 and FIN 48.

Both statements must be adopted simultaneously and applied prospectively. No restatement of prior periods is permitted, except for retrospective presentation and disclosure, including reclassifications, to conform to current statements. Retroactive adjustment of prior combinations is not permitted, and early adoption is prohibited.

FAS 141R
According to FAS 141R, business combinations must follow the "acquisition method," previously called the "purchase method." The name change acknowledges that control can be obtained without a purchase. FAS 141R applies to all business combinations, with specific exceptions for areas covered elsewhere in GAAP, including joint ventures, acquisition of assets that are not a business, combinations of entities or businesses under common control, and combinations involving not-for-profits.

Acquisitions occur by transferring cash or other assets, assuming liabilities, issuing equity, or by contract alone, and, perhaps, without consideration. Consolidations may arise from variable interest entities (VIEs) under FIN 46R, lapse of minority rights that prevent the majority owner from asserting control, and investee reacquisition of equity to cause an investment to become a majority interest. Know that there are other types of transactions that may not qualify as business combinations.

When identifying the acquirer, remember that the legal acquirer and accounting acquirer may not be the same. For accounting purposes, the acquirer is generally the larger or the survivor, the company whose name or location continues, or the entity that controls management, paid a premium on the other’s stock, or initiated the transaction. Facts and circumstances, however, will be the ultimate decider, since a new entity may be formed from several others or the acquiree’s name and location may be adopted.

Recognition and Measurement - Acquisitions are measured as of the acquisition date at fair value of the total identifiable assets acquired - including goodwill - liabilities assumed, and any previous noncontrolling interest in the acquiree. Despite flaws in measurement, accuracy, and verifiability, fair value is the best measure of an acquisition, replacing the FAS 141 process that used fair-value-based cost allocations.

The acquirer may recognize intangibles that were written off, developed internally, or expensed and never capitalized. Assets producing uncertain cash flows are measured without valuation allowances. For example, receivables of $1 million, with a presumed valuation allowance of $50,000, are recorded at $950,000, without a valuation allowance. There may be practical issues in determining which receivables to adjust. You must now reduce fair value of assets the acquirer does not intend to use or will use but not at the highest and best-use.

Fair value is separate from the business combination, so acquiring another entity virtually requires an appraisal or independent measurement. One cannot assume purchase price equals value.

Items covered elsewhere in GAAP follow their own recognition and measurement requirements, such as income taxes, employee benefits, and share-based payments. The cost of reacquired rights is amortized over their remaining contractual term without regard to renewals or extensions. There may be a gain or loss on reacquisition or disposition.

Contingencies - Contingencies qualifying as assets or liabilities are to be recorded at fair value when the probability of occurrence is more-likely-than-not (greater than 50 percent). This is a move away from FAS 5, which required high probabilities for liabilities and certainty for assets. Contractual contingencies are recorded at the acquisition-date fair value, while noncontractual contingencies follow the more-likely-than-not test. Thus, a $1 million contingency with 70 percent probability would be recorded at $700,000, and later adjusted upward or downward as more information becomes available. Record nothing for probabilities equal to or less than 50 percent. Earn-out and similar provisions are now much likelier to be recorded.

Remeasure contingencies that change during the measurement or provisional post-acquisition period as if occurring at acquisition. Those resolved may require retrospective adjustment, adjustment of goodwill, or a change in accounting estimate.

Contingent consideration involving equity is not remeasured, and subsequent settlements are equity transactions. Contingent consideration involving assets and liabilities are remeasured at fair value at each subsequent reporting date until resolution. Remeasure liabilities at the higher of either acquisition-date fair value or the FAS 5 amount. Remeasure assets at the lower of either acquisition-date fair value or the best estimate of future settlement. Derecognize contingent assets or liabilities only if the contingency is resolved, settled, cancelled, expired, or the rights to assets are used or lost.

Acquired Research and Development - Acquired research and development is no longer directly written off. Instead, it is retained until impaired without depreciation or amortization. Research and development may be an acquisition trigger, and clearly has value, although it is difficult to measure. The revision in this area represents a major shift in GAAP, and a significant move toward IFRS and fair value. Capitalized research and development is an intangible with an indefinite life, subject to impairment but not amortization. FASB included guidance to evaluate impairment.

Goodwill and Bargain Purchases - Goodwill is the excess of the fair value of a consideration transferred plus any noncontrolling interest in the acquiree, and, in step-acquisitions, the acquirer’s previously held interest over acquisition-date fair value of all identified assets acquired and liabilities assumed. Bargain purchases, on the other hand, arise when there is a motivated or compelled seller, the seller undervalues or buyer overvalues, or synergies dictate a value in excess of market to the buyer.

Excess value is offset against goodwill. If goodwill is eliminated, the remaining unabsorbed excess is a gain upon acquisition. This differs from previous GAAP, where gain was first offset against goodwill and then long-term tangible and intangible assets, and only recognized after those assets were eliminated. Since fair value measurements of long-term assets are feasible, there should be no reduction or elimination.

No immediate loss is taken if the buyer overpays. Overpayment is difficult to detect initially, but if the acquirer overpaid, goodwill or other assets eventually become impaired. Some entities may accept the tradeoff, but most organizations consider losses in credibility from subsequent impairments to far outweigh gains from higher valuations.

Underpayments are not necessarily bargain purchases. Lower prices may reflect anticipated underutilization, underperformance, or future losses.

Costs - Certain costs previously capitalized as acquisition cost are now expensed. These costs had increased goodwill by effectively raising the purchase price. Since these costs - legal, valuation, accounting, finder’s fees, administration, and so on - lack attributes of acquisition, they are to be expensed when incurred. That includes reimbursements paid the acquiree or its former owners for the acquirer’s expenses.

There is no change in accounting for issuing debt and equity. Although the exposure draft required expensing these costs, FASB deferred final resolution to its Liabilities and Equity Project. Post-combination restructuring costs are expensed, without regard to FAS 146 requirements, whether or not contemplated, as they are not acquisition costs.

Share-based awards to acquiree employees paid by the acquirer, or by acquiree at acquirer’s request, are expensed at fair value when replacing or retiring other awards. The acquirer is obligated if the acquiree or its employees can enforce replacement. Depending on their nature, some awards may be FAS 150 liabilities. The acquirer attributes part of awards requiring post-combination services to the post-combination period, even when employees rendered services before acquisition. Replacement or new awards to acquiree employees subsequent to acquisition are compensation at fair value under FAS 123R. Post-combination awards are not considered.

Step Acquisitions - Some acquisitions occur in stages. When a greater-than-50-percent threshold is attained, suspend the cost-accumulation basis and remeasure all assets and liabilities, and noncontrolling (minority) interest and controlling (majority) interest at fair value. The write-up to market provides increased completeness and better comparability. Carrying amounts are written up or down, previously unrealized holding gains and losses are taken into income, and a gain or loss is recognized.

For example, Company A carries a 40 percent equity method investment in Company B at $1 million, and then acquires another 20 percent for $1 million. Company A’s interest is now 60 percent, with a basis of $2 million. Noncontrolling interest increases from its carrying amount on Company B’s books to $2 million, or 40 percent, and controlling interest of $3 million (60 percent). Assets, goodwill, and liabilities would be remeasured at fair value, and Company A would recognize a gain or loss upon acquisition.

Acquisitions or sales of ownership interest without changing control are equity transactions without gain or loss, not subsequent steps or parts of the combination.

Disclosures - FAS 141R enumerates many disclosure requirements. These disclosures provide information that enables statement readers to evaluate the nature and effect of combinations occurring during the current period, or after the report date but before statements are issued. Be sure to provide the necessary information for complete and understandable disclosure, including initial accounting; what information is incomplete and why; changes made though collection, settlement, revaluation; and outstanding unresolved issues. See FAS 141R for a complete listing.

FAS 160
FAS 160 applies to all consolidations and deconsolidations, other than those involving not-for-profits. There is, however, no change in consolidations as to purpose or policy, eliminating intercompany balances, or parent consolidating all entities it controls.

FASB changed "majority interest" and "minority interest" to "controlling interest" and "noncontrolling interest" to emphasize that control, not ownership, drives consolidations.

A noncontrolling interest is equity not attributable to, or under control of, the parent. It is equity because it represents a residual interest in subsidiary net assets. Only instruments comprising equity on the subsidiary’s balance sheet are noncontrolling interests in consolidated statements. Noncontrolling interests must be clearly identified, labeled, and presented on the consolidated balance sheet within equity, but separate from parent equity. It is not a "deferred credit," or a liability.

Earnings and Equity - You will have to differentiate between the interests of the parent and noncontrolling owners. Noncontrolling interests are presented in total. Otherwise, the parent company must separately disclose noncontrolling interests for all its subsidiaries.

Consolidated net income attributable to the parent and noncontrolling interest must be separately identified and presented on the face of the consolidated income statement. Major components of net income appear in total, as well as by components attributable to each ownership group. Adjust income allocations for prior claims on income. A similar breakdown applies to comprehensive income and its components. Reconcile beginning and ending total equity, as well as those parts attributable to the parent and subsidiaries. Also required is a separate schedule that shows the effects of changes in the parent’s ownership in a subsidiary on the parent’s equity.

The exposure draft for FAS 160 called for per-share amounts of income components for both controlling and noncontrolling interests, but this was excluded from the final statement. However, both total and parent per-share amounts are required.

Losses will continue to be attributed to noncontrolling interests, even if doing so creates a deficit balance in noncontrolling equity, since additional capital contributions are not required. Previous GAAP required deficits to be reallocated against controlling interest.

Ownership changes without changes in control are capital transactions, without gain or loss. Thus, an equity transaction occurs when a parent owning greater than 50 percent of subsidiary stock buys or sells shares without affecting control. Similarly, subsidiary stock dividends are equity transactions only of the subsidiary. As in previous GAAP, a subsidiary’s retained earnings, or accumulated deficit, is eliminated in consolidation.

At initial consolidation, the consolidated financials include subsidiary revenues, expenses, gains, and losses from the consolidation date forward. GAAP no longer permits including subsidiary operations for the year with a deduction for the preconsolidation part. Additional pro forma disclosures require operations to be presented as if the consolidation occurred at the beginning of the parent’s year and pro forma prior year consolidated statements including the subsidiary.

Deconsolidations - Deconsolidations occur when a parent no longer controls a subsidiary for some reason, such as the following:
-- The parent sold all or enough of its interest to no longer hold more than 50 percent ownership.
-- A contract that gave control to the parent expired.
-- The subsidiary issued additional shares that reduced parent ownership below control.
-- The subsidiary became subject to control of a government, court, administrator, or regulator.

Upon deconsolidation, the parent eliminates equity attributable to other noncontrolling owners and becomes a noncontrolling owner. Any retained noncontrolling interest should be remeasured at fair value, and recognize the gain or loss on deconsolidation. There is no gain or loss if deconsolidation is by nonreciprocal transfer to owners, such as a spinoff.

A parent that later reacquires control could write the investment up to fair value at that time, as in a step acquisition. In theory, a company could acquire control and write up the subsidiary to fair value, subsequently lose control and reset to new fair value while recognizing a gain or loss on the transaction, then regain control and write up again. The process could continue indefinitely. Realistically, for this to happen, the company would have to relinquish and regain control each time, which is difficult to demonstrate.

Consolidated Statement Requirements - Consolidated financial statements represent general-purpose statements of a parent and its subsidiaries. Although each entity within a consolidation may issue its own financials, a parent-only financial statement cannot substitute for a consolidated statement. Nothing precludes the enterprise from issuing a consolidated statement.

Combined or combining statements may be used when consolidated statements are not required and the enterprise presents the financial position and operations of companies under common management or control.

Conclusion
The new world of business consolidations and combinations commences in 2009. Statement preparers, statement users, and auditors need to understand how this new guidance will affect what they do. FASB’s movement toward fair value, principles-based standards, and international convergence involves significant policy and technical changes. These statements are part of that movement, and you need to know what these changes entail.

Jay J. Jacobs, CPA, is a director of CPE Inc. in Broomall, and is a member of the Pennsylvania CPA Journal Editorial Board. He can be reached at jjacobs@cpeincmail.com.

The Check is (Not) in the Mail

bhayes — Thu, 12 Jun 2008 17:16:00 GMT

By John Alarcon, CPA, CTP, and Robert Hansell, CTP

Electronic payments, which were once a means of expediting the exchange of funds between corporations, have become a standard instrument of doing business. Over the past 15 years, new products and operational changes have made electronic payments a substantially more attractive option for corporations.

Since 2000, the global use of electronic payments versus checks has grown from 55 percent to over 80 percent today. The use is projected to grow to 90 percent by the end of 2010, according to TowerGroup Inc. In the United States, the growth of electronic payments has increased at a rate of 18 percent since 2003. The volume of Automated Clearing House (ACH) payments has doubled in the last five years, and is expected to double again in the next five years, according to the National Automated Clearing House Association (NACHA).

As more and more payments are executed electronically, the fees and costs associated with checks will continue to rise. Corporate financial departments must evaluate the various electronic payment solutions currently available and examine how they might affect their business processes moving forward.

The key driver for the mass movement to electronic payments is cost savings. Savings as a measurable transaction cost, as well as improved cash management, enhanced forecasting, and reduction in clearing float for receivables. For example, assume a corporation issues an approximate volume of 120,000 checks per year, at an estimated cost of $2.00 per check, taking into account all expenses from the materials, postage, reconciliation, and bank services. The total would be $240,000 in check processing alone. The cost for processing the same number of electronic payments could be a third to a tenth of this, a dramatically small fraction of the check processing cost.

While electronic payment progression has been rapid in the United States, the progression in Europe has been at an even more accelerated pace. The use of checks, or cheques as they say in Europe, has been steadily decreasing for more than a decade. There have been many more advancements in Europe compared to the United States, because European countries face numerous cross-border payment requirements and need to operate with multiple currency accounts and cross-currency transactions. SWIFT (Society for the Worldwide Interbank Financial Telecommunication) is the primary method of exchange of financial information among financial institutions in Europe, and is used by more than 8,000 member banks across the globe. There are other international clearing systems, such as CHIPS (Clearing House Interbank Payment System) and CHAPS Clearing Company (UK). The clearing systems typically are associated with either urgent - same-day clearing - or ACH-type payments - one-plus day clearing. Other areas of the globe have advanced at different rates and adopted other payment methods.

In Europe, electronic fund transfers are not relegated to the business-to-business realm. With respect to consumer payments, most European consumer bills are paid by direct debit transactions. On the due date of an invoice, a payment is debited from an individual’s account and credited to the corporation’s account. Benefits of the electronic bill payment include assisting in corporate forecasting, reducing paper mailing costs, and saving consumers time and money by not requiring the issuance of a check or postage.

Key initiatives will continue to develop in the form of regulations, policies, and new technologies to grow electronic payments. The evaluation of new payment solution offerings from financial institutions are now being incorporated into the strategy of corporations.

Trends and Outlook
There are many key trends that are contributing to the acceleration of change in payment practices. The following are some details on International ACH, Check Conversion, Single European Payments Area, SWIFT Standardized Corporate Environment, and other payment mechanisms.

International ACH - Historically, payments through the U.S. clearing house had been associated with U.S. dollar payments. In 2001, the International ACH offered Canadian dollar transfers and, since that time, electronic payments via ACH have been available to Mexico (peso), Austria (euro), Germany (euro), Netherlands (euro), Switzerland (Swiss franc), and the United Kingdom (British pound). The transaction is initiated in U.S. dollars, and converted (rates are posted on the Federal Reserve Internet site) at the point of entering the country of the beneficiary account. It is now possible for a company to use existing transaction interfaces to electronically make payments to global vendors.

Check Conversion: Check 21 and Accounts Receivable Conversion (ARC) - The Check 21 Act, which went into effect in October 2004, allows banks to scan and clear checks using images, rather than the physical documents. Corporations can now perform remote deposits from all its geographic collection locations across the country to a single financial institution. Benefits include the reduction of cash processing and availability float, as well as the reduction in the number of bank accounts and bank relationships, while still having dispersed collection points. The scanned collected checks are converted to an electronic format, and the electronic format is transferred to the financial institution.

In the case of ARC, the check is converted to an ACH. The ACH entries are executed as a direct debit against the originator’s bank account. The company will scan the check, extracting all details. The details are then formatted and transmitted to the financial institution to be cleared through the ACH network. The corporation must provide a general notification to the originator, prior to the conversion process, regarding the process that will be used to clear the payment. ARC has been available since 2001. Converted checks represent 17.6 percent of ACH payments, and, according to NACHA, ARC accounted for 35 percent of financial institutions’ ACH transaction growth in 2006.

Single European Payments Area - With the introduction of the euro in 1999, and the subsequent release of physical notes and coins in 2002, a single currency was established across the Eurozone. One main goal was to eliminate exchange rates among the member countries. There were still roadblocks among the multination European Union, however, making the transition incomplete. The banking systems, even though they supported the euro, didn’t support the ability to send payments outside of the country to other euro-supporting countries. International euro payments were still considered cross-border. This changed in late 2004, when the roadmap to a Single European Payments Area (SEPA) was created. SEPA was formed to provide a framework for allowing the execution of euro transactions without treatment as a cross-border payment. The rollout started this past January with the first payment scheme, the SEPA Credit Transfer (SCT).

Corporations now have the ability to centralize their euro bank accounts and initiate local payments throughout the entire Eurozone without incurring cross-border transaction fees. All payments through this system are considered a domestic transaction.

SWIFT Standardized Corporate Environment (SCORE) - Over 8,000 financial institutions across the globe use SWIFT as a secure communication channel. In 2001, SWIFT opened membership to corporations. A corporation would join SWIFT, and then join each financial institution’s user group. The solution was named a Member Administered Closed User Group (MACUG). This was not very efficient. In January 2007, SWIFT began offering the SCORE model, a solution that enabled corporations to join a single closed user group, where they can establish data exchange relationships with multiple financial institutions. There is an increasing number of corporations joining SWIFT. In 2007, there were more than 200 SWIFT corporate members, compared to 22 corporate members in 2003.

Through SWIFT, corporations have the benefit of using the same financial message types that are being used by financial institutions. Corporations with a large number of banking relationships are standardizing the method of exchanging financial data. This improves support and reduces the amount of audit and IT resources required.

Corporations that benefit from the use of SWIFT are typically global organizations seeking to improve visibility into their bank positions around the world, as well as to gain enhanced data exchange capabilities for international and domestic payments.

Other Payment Mechanisms - In addition to the traditional means of initiating electronic payments, many new options are being presented to corporations. To enhance payment options, where purchases are made over the Internet, PayPal continues to expand its offerings. PayPal’s roots were associated with the settlement of eBay auctions. In 2006, PayPal performed $24 billion in transactions. In the fourth quarter of 2007 alone, PayPal performed $14 billion in transaction activity. PayPal is an interesting alternative to credit cards, and is leveraging its secure transaction capability and the back-end processing options it uses for payment settlement.

Third-party payment providers allow corporations that have multiple banking relationships and payment types to send a single file with all payment types contained. The provider then separates the payments into the relevant categories, maps the data into the required formats, and exchanges the information with the required financial institutions. The corporation reduces the number of interfaces from its internal systems, but this system still provides flexibility when new bank relationships are formed or existing relationships ended.

Converting from checks to electronic payments requires corporations to share their banking details, and some organizations are not comfortable providing this information. In the early 2000s, a coding mechanism called Universal Payment Identification Code (UPIC) was introduced. The UPIC allows a company to register its bank and account number to a standard registry. As a result, a UPIC ABA number and UPIC account number are provided to the corporation. The corporation can then provide this pair of codes to its customers and partners to receive payments electronically. When a payment is made to the UPIC, it will automatically map to the companies actual bank and account during the clearing process.

In addition to cost savings, growth in the use of electronic payments also has been driven by new regulations, such as the Sarbanes-Oxley Act. Sarbanes-Oxley requires organizations to evaluate internal controls to prevent fraud and ensure accurate and complete financial reporting. Payments are only one part of the corporate financial workflow, but can be highly susceptible to fraud. Enhanced technology solutions to centralize the payment workflow, for all payment instruments, have been introduced into the market to tighten up controls. The solutions provide a robust, highly secure, flexible means of data exchange with the corporation’s financial institutions. Centralizing the payment operations reduces the number of systems and processes to be audited, while enabling increased visibility and efficiency gains.

Electronic payments are used by all large corporations today, and are becoming a standard way of doing business for small and medium-sized businesses as well. The use of electronic payments is continuing to grow in the United States and throughout the globe, so now is the time to evaluate if you, too, should be moving in this direction.

John Alarcon, CPA, CTP, is vice president, finance, and controller at ISGN, and is a member of the Pennsylvania CPA Journal Editorial Board. He can be reached at john.alarcon@isgn.com.

Robert Hansell, CTP, is product specialist, payments and messaging, at SunGard AvantGard. He can be reached at robert.hansell@sungard.com.

Choose Your Direction: The Right Network or Association Can Point the Way

bhayes — Thu, 12 Jun 2008 17:12:00 GMT

By Kevin Mead, CIA, CAE

Going it alone is tough in the accounting industry. Small local practices and large regional firms all know that growing a business requires a competitive edge. Better connections, improved ability to handle inter-regional and international business, better employee recruiting, and greater operating efficiencies are just a few of the elements needed to continue a healthy, upward curve. Gaining these advantages, however, isn’t always easy. That is why many firms make the choice to join either an accounting network or an accounting association.

No matter where a business is located or what niches and industries are being served, becoming part of a network or reaching out for an association affiliation can provide the tools necessary to build a stronger business. Membership in one of these groups can provide some of the following benefits:
-- Benchmarking - Determine how your business measures up with other successful firms in the industry.
-- Inbound business referrals - Get new business leads from firms whose quality you can trust, because you know them as part of your network.
-- Geographic reach - Get greater access to regional and international experts that you may not have locally.
-- Niche coverage - You are an expert in your niche to be called upon, and you can tap other firms’ experts in their niches.
-- Best practices - Learn how to streamline and improve operations from top to bottom.

Reaching out and joining a network or association can make a tangible difference in a firm’s future, but how does one choose which group to join? There are many different options for accounting practices to choose from, each with its own benefits and limitations. The following provides some guidelines as to how to make the best membership decision for your firm.

Operating Models
Over the past four decades, accounting networking groups and associations have evolved. There are now several different operating models to meet the many needs of firms around the world:
The "Mother Ship" - Under this structure, member firms meld into the identity of the organizing firm, or "mother ship," in virtually every sense. The mother-ship firm may provide guidelines and operating procedures for member firms to follow, and most firms change their names to include the mother-ship firm. The dual purpose of the model is to provide service and guidance to member firms while simultaneously providing referrals and a source of income for the mother-ship firm. Governance of the affiliation is provided by the mother-ship firm, with potential input from its members. Grant Thornton’s alliance and Moore Stephens follow this model to varying extents.

Nonprofit, member-owned - In this structure, member firms remain strictly independent and do not share common operating procedures. The entity exists strictly for benchmarking, information sharing, and education purposes. Member firms are the owners of the entity, and they exercise governance through boards and committees over a paid staff. Dues are assessed, but no profits are derived by the membership group. AGN, IGAF Worldwide, and PKF North American Network follow this model.

Independent, for-profit - This structure is similar to the nonprofit model above, with the exception that oversight is provided by a company owner, often with input from an advisory board. TIAG follows this model.

Will Parmalat Change Everything?
The 2003 scandal surrounding Italian dairy giant Parmalat and accounting group Grant Thornton, in which over $9 billion in assets vanished in the affair, could mark a change for accounting associations around the world, regardless of their chosen operating model.

The firm directly involved in the crisis was Italy’s Grant Thornton SPA, a small, member firm of Grant Thornton International. As the crisis unfolded, Grant Thornton declared that the fraud occurred only within that one regional firm, and that Grant Thornton International and its member firms should not be legally liable for Grant Thornton SPA’s actions. To date, many legal jurisdictions have yet to decide whether other Grant Thornton entities should bear some of the liability for the massive scandal at Parmalat. The question of association and network structures and the legal liability that comes with membership and centralized administration is in the process of being defined.

During 2006, the International Federation of Accountants (IFAC), reacting to the Parmalat scandal and passage of the European Union’s 8th Directive, set out to define the term "network" as it relates to a group of accounting firms.

Under the IFAC and EU definition, a network is "a structure which is aimed at cooperation and to which a statutory auditor or an audit firm belongs, and which is clearly aimed at profit or cost sharing or shares common ownership, control or management, common quality control policies and procedures, a common business strategy, the use of a common brand name, or a significant part of professional resources."

Groups qualifying as a "network" are subject to new, stringent rules of conduct that include the sharing of client data with a central source, potential of vicarious liability in the event of lawsuits, and much more.

In the United States, the AICPA Professional Ethics Executive Committee (PEEC) also is creating a definition for networks, and it will have similar requirements for U.S.-based accounting firms that join a group of peers.
Case law on the issue of vicarious liability is still evolving. Associations and networks are looking at how laws regarding agency, partnership, and the tort issue of holding out might cause a liability to be created, even when a firm is uninvolved in the work in question.

Associations and networks have disclaimer language designed to alert the consumer as to the true nature of the relationship among firms within an entity. Some organizations have also taken out vicarious liability insurance coverage to protect themselves, their officers, and the members.

Association vs. Network
With all the vicarious liability issues being sorted out, accounting membership groups of every stripe must now clearly define themselves as an "association" or a "network." To some extent, the operating model can dictate the camp into which the group falls. There are, however, a number of other subtleties at work, and you should be aware of them before making a decision.

Associations must have an operating model that ensures strict independence between the various member firms. There can be no common naming structure or operation manuals, and the firms cannot present themselves as a common entity to clients. Under this framework, the governing body of the association must provide regular "policing checks" to ensure that member firms are not incorrectly representing themselves in their literature, proposals, or Web sites.

The association may need to drop certain services or operations to ensure that strict independence is maintained.

The network operating model allows for both a common naming structure and common operating procedures across member firms, and the firms are permitted to market themselves as a group entity. In this case, the governing body must engage in regular, formal independence checks between member firms, which include firms providing their client lists to the governing body to ensure that proscribed services for any given client are not being performed by firms within the network. As with an association, the network may cease to offer certain services or operations that do not fit within the purview of its operating model.

How to Evaluate Where You Belong
If you decide to become part of a membership group, you need to evaluate what benefits your firm wants to derive from a membership relationship. If your firm is already part of a group, you will want to review your status to make sure you are gaining everything you had hoped.

A network may be the best choice for your firm if you are seeking the following:
-- A strong brand, with global recognition, with which to associate your firm
-- The ability to market your firm as an integral part of a larger entity
-- The ability to access and benefit from an external operating model for audit, accounting, or tax procedures

An association may be best for your needs if the following matter to you:
-- Strong independence of your firm’s brand in its marketplace
-- An emphasis on benchmarking and best practices sharing
-- Intensive education and information-sharing programs
-- Lower overhead and dues costs because of less-intensive administration needs

With a network, there is a slightly increased risk of vicarious liability; and with an association there is a slightly lesser risk. Whichever one you choose, or have chosen, find out whether the group offers your firm specific vicarious liability coverage in the event that a problem does occurs with any individual member firm.

Once you’ve decided which overall model is best for you, then review the operating models above (mother ship, not-for-profit, for-profit) and start narrowing down which type of group will best suit your firm.

Whether this will be your first foray into joining a membership group, or whether you’ve decided, based on current conditions, that it’s time for a change, the final and most important part of your search is getting to know the member firms of the groups that you are leaning toward.

Each association and network has its own personality, based on the cultures of the group’s current member firms. Some associations and networks may be more aggressive than others; some may be more internationally focused; some may be for big firms only; while others may have a strong focus on an entrepreneurial spirit. Only by meeting the partners from the member firms will you have a good feel for where the association is headed and whether your firm will be happy there.

Kevin Mead, CIA, CAE, is president of IGAF Worldwide. He can be reached at kmead@igafworldwide.org.