CBIZ & MHM Executive Education Series™ 2014 Third Quarter Accounting Update

Presented by: Mike Loritz, Mark Winiarski William Smith

September 11, 2014

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Before We Get Started…

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This webinar is eligible for CPE credit. To receive credit, you will need to answer periodic participation markers throughout the webinar.

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The information in this Executive Education Series course is a brief summary and may not include all

the details relevant to your situation.

Please contact your service provider to further discuss the impact on your business.

Disclaimer

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Today’s Presenters Mike Loritz, CPA Shareholder, MHM 913.234.1226 | mloritz@cbiz.com Mike has 18 years of experience in public accounting with diversified financial companies and other service based companies, including banking, broker/dealer, investment companies, and other diversified companies ranging from audits of public entities in the Fortune 100 to small private entities. He is a member of MHM's Professional Standards Group, providing accounting knowledge leadership in the areas of derivative financial instruments, investment securities, share-based compensation, fair value, revenue recognition and others.

Mark Winiarski, CPA Senior Manager, CBIZ MHM 913.234.1656 | mwiniarski@cbiz.com Mark has is located in our Kansas City office in an audit and advisory function. In addition to serving his clients which are primarily in the manufacturing, retail and distribution industries, Mark supports our Professional Standards Group by consulting with clients and engagement teams across the country on accounting and auditing issues in areas including revenue recognition, consolidations and business combinations.

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Today’s Presenters

William M. Smith, Esq. Managing Director, CBIZ National Tax Office 301.951.3636 | billsmith@cbiz.com Bill Smith is a managing director in the CBIZ National Tax Office. Bill monitors federal tax legislation and consults nationally on a broad range of foreign and domestic tax services for businesses and individuals, including mergers and acquisitions, domestic and international investments or divestitures, and the review, negotiation and drafting of tax aspects for business agreements.

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Today’s Agenda

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Financial Accounting Standards Board Update Public Company Accounting Oversight Board Update

Federal Tax Update 3

FASB UPDATE

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Existing US GAAP/GAAS US GAAP requires a presumption of going concern,

until liquidation becomes eminent. Auditing standards require an evaluation of whether

there is “substantial doubt” about an entity’s ability to continue as a going concern.

The evaluation does not exceed one year from the balance sheet date.

The SEC provides guidance regarding going concern disclosures if an audit opinion includes an explanatory paragraph.

Going Concern – Background

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ASU 2014-05 requires management to evaluate: If substantial doubt about an entity’s ability to continue

as a going concern exists

If substantial doubt exists, then management must evaluate if it is probable that:

Management’s plans to alleviate the substantial doubt will be effectively implemented

Management’s plans to alleviate the substantial doubt will mitigate the conditions and events that gave rise to the substantial doubt

Going Concern – New Requirements

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Substantial Doubt…

- Conditions and events, in aggregate, indicate it is probable that the entity will be unable to meet its obligations as they come due within one year after the date the financial statements are issued. (available to be issued)

Probable – events that are likely to occur

This is a higher threshold than more-likely-than-not.

Going Concern – Key Terms

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(not all inclusive)

Qualitative and quantitative information: Financial condition Liquidity Conditional and unconditional obligations Employee disputes and work stoppages Compliance with laws and regulations

Management’s plans Selling assets Borrowing funds or restructuring debt Delay expenditures Raise capital

Going Concern Considerations

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Conditions and events that raise(d) substantial doubt

Management’s evaluation of those conditions and events in relation to the entity’s ability to meet its obligations

Management’s plans that are intended to alleviate (alleviated) the substantial doubt

If the substantial doubt is not alleviated, an explicit statement about the entities ability to continue as a going concern within one year from the date the financial statements are issued

Going Concern Disclosures

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Annual periods ending after December 15, 2016

Calendar-year entities: December 31, 2016

Interim periods within annual periods beginning after December 15, 2016

Early adoption is permitted.

Going Concern – Effective Date

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Applies to mortgage loans that are issued with certain government issued guarantees

Requires an other receivable be recognized upon foreclosure if the following conditions are met: The loan has a government guarantee that is not separable from the

loan before foreclosure. At the time of foreclosure, the creditor has the intent to convey the real

estate property to the guarantor and make a claim on the guarantee, and the creditor has the ability to recover under that claim.

At the time of foreclosure, any amount of the claim that is determined on the basis of the fair value of the real estate is fixed.

ASU 2014-14: Government Issued Guarantees

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Public business entities: annual periods beginning after December 15, 2014 and interim periods beginning after that date

All other entities: Annual and interim periods ending after December 15,

2015

Early adoption is permitted if ASU 2014-04 on Troubled Debt Restructuring has also been adopted.

When adopted, requirements may be applied prospectively or under a modified retrospective method.

Effective Date

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Issue: When consolidating a collateralized financing entity (CDO or CLO) under the VIE consolidation guidance there can be a difference between the fair value of the assets and liabilities measured.

ASU 2014-13 provides for the following: Election to measure the more observable of assets and

liabilities and requirements for accounting for the unobserved component

Requires that if the election is not made the difference between the assets and liabilities be attributed to earnings

Consolidation – Collateralized Financing Entity

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Public business entities: annual periods, and interim periods within them, beginning after December 15, 2015

All other entities: Annual periods ending after December 15, 2016 Interim periods beginning after December 15, 2016

Early adoption is permitted.

When adopted, it is applied retrospectively or under a modified retrospective method.

Consolidation - Effective Date

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Revenue Recognition – Interpreting the standard Transition Resource Group AICPA Accounting Guides SEC Activities

Leasing – Continued redeliberations Differences developing between IASB and FASB

Insurance Expect a final standard on short duration contracts.

Convergence Projects Update

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Financial Instruments – Deliberations Debt securities classified as AFS will no longer follow the

expected credit loss impairment model. Rather, they will continue to apply the OTTI model.

Financial assets with similar risk characteristics are required to collectively assess impairment on the pool of assets Probability-weighted assessment no longer

required/permitted Collateral-based practical expedient allowed Guidance on periods beyond “supportable forecasts”

Discussion of impairment model for non-marketable equity securities

Convergence Projects Update

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Consolidation – Principle vs. Agent

All entities will need to re-evaluate entities in which they hold a variable interest upon adoption Removes the deferral from the VIE model for investment

companies, but scopes out money market funds Expected to expand the number of limited partnerships

that are considered VIEs Narrows the circumstances when a decision maker

fee/service arrangement is a variable interest Modifies the related party rules

Other Projects Update

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Consolidation – Principle vs. Agent

Consolidation model for partnerships will be eliminated, therefore there will not be presumption of control by the general partner.

Final standard is expected in the 4th quarter

Expected to be effective in 2016 for public business entities with early adoption permitted

Other Projects Update

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Short-term projects designed to reduce complexity in accounting standards: Narrow in scope Improve or maintain the usefulness of information Reduce costs and complexity in financial reporting

Suggestions for topics can be submitted to fasbcomments@fasb.org

Simplification Initiative

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Proposal to simplify the accounting for inventory at lower of cost or market by changing the measurement to be lower of cost or net realizable value.

Generally, market is replacement cost as long as replacement cost is: Not more than net realizable value, and Not less than net realizable value less a normal profit

margin

Inventory

Comments are due September 30, 2014.

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Proposal to simplify financial reporting by eliminating extraordinary items from separate presentation

Extraordinary items are those that are both unusual in nature and infrequent of occurrence.

Extremely rare in practice to have an event or transaction to meet both requirements

Extraordinary Items

Comments are due September 30, 2014

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Proposal to clarify that a customer purchasing hosted software should only account for it as internal-use software if:

The customer has the contractual right to take possession of the software at any time during the hosting period without significant penalty, and

It is feasible for the customer to run the software on its own hardware or contract with a third-party vendor to host the software

Cloud Based Software

Comments are due November 18, 2014.

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Simplify accounting for debt issuance costs

Simplify the balance sheet classification of debt

Simplify the measurement date for defined benefit plans

Emerging Issues Task Force

Accounting for income taxes

Intra-entity asset transfers

Classification of deferred taxes

New Projects

PUBLIC COMPANY UPDATE

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PCAOB – Standard Setting Agenda

Early 2014 Actions

Project Action Taken

1. Auditor’s Reporting Model Public meeting held on April 2-3, 2014 Comment period closed May 2, 2014

2. Framework for Reorganization of PCAOB Auditing Standards

Supplemental Request for Comment issued for public comment through July 8, 2014

3. Related Parties Adopted on June 10, 2014, pending SEC approval

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PCAOB – Standard Setting Agenda

July to December 2014

Project Action Taken

4. Improving Transparency Through Disclosure of Engagement Partner and Certain Other Participants in Audits

Adoption under consideration

5. Auditors’ Responsibilities with Respect to Other Accounting Firms, Individual Accountants and Specialists

Proposal under consideration

6. Auditing Accounting Estimates, Including Fair Value Measurements and Related Disclosures

Issue Staff Consultation Paper

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PCAOB – Standard Setting Agenda

Other Projects

Project Action Taken

7. Going Concern Proposal

8. Quality Control Standards, Including Assignment and Documentation of Firm Supervisory Responsibilities

Concept release

9 Auditor Independence, Objectivity and Professional Skepticism

Next steps under consideration

10. Confirmation Reproposal

11. Subsequent Events Proposal

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Auditing Accounting Estimates and Fair Value Measurements

Staff Consultation Paper issued August 19, 2014 Seeks input related to the potential need for changes to

the PCAOB standards and a possible approach for a new auditing standard Potential changes to standards Possible alternative actions

Describes the staff's preliminary views on a potential approach to changing the PCAOB's existing standards and seeks views and other information on that approach

PCAOB Update

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Office of Compliance Inspections and Examinations (OCIE) – Examination initiative directed at newly regulated municipal advisors Establish presence with newly registered municipal

advisors Adopts reform rules for: Credit rating agencies Asset-backed securities

SEC Activities

FEDERAL TAX UPDATE

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2014-2 U.S.T.C. ¶50,341 (S. Ct. 6/30/ 2014) The ACA added a provision to the Public Health Services Act (“PHSA”)

requiring group health plans to provide preventative health services without cost-sharing requirements and specifically requires the provision of contraceptive care on a no-cost basis (the “contraceptive mandate”). Religious employers (e.g., churches) and religious nonprofits are

exempt. HHS regulations require non-exempt employers to provide coverage

for 20 contraceptive methods, including 4 that operate post-fertilization.

Owners of a for-profit closely held business sued, saying the regulations regarding the 4 post-fertilization contraceptive methods violated their Christian beliefs that life begins at conception and were barred by the Religious Freedom Restoration Act of 1993 (RFRA).

Burwell v. Hobby Lobby Stores, Inc. – ACA & Contraceptive Mandate

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Majority Opinion (5-4): RFRA prohibits the government from “substantially burdening a person’s

exercise of religion” unless government demonstrates that: Government has compelling interest, and The method chosen is the least restrictive means of furthering

that compelling interest The RFRA applies to “a person’s” exercise of religion and the definition of

a person includes corporations. Regulations substantially burdened the business owners because of the

financial consequences There are other ways to further cost-free access to the contraceptives (in

place for religious employers and non-profits), so the regulations were not the least restrictive method.

Decision is limited to the contraceptive mandate, and does not mean any conflict between religion and insurance coverage must fail (e.g., blood transfusions)

Burwell v. Hobby Lobby Stores, Inc. – ACA & Contraceptive Mandate

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Dissenting Opinion: Majority opinion requires that RFRA must accommodate

for-profit corporation’s religious beliefs no matter the impact that such accommodation may have on third parties who do not share the corporation owner’s faith.

Drew a distinction between religious non-profit organizations and for-profit corporations, noting that while religious organizations exist to serve a community of believers, “for-profit corporations do not fit that bill.”

Burwell v. Hobby Lobby Stores, Inc. – ACA & Contraceptive Mandate

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2014-1 U.S.T.C ¶50,317 (S. Ct. 6/12/14) Under the Bankruptcy Code, all of a debtor’s interests in

property become part of the bankruptcy estate, unless there is an exemption.

“Retirement funds” are exempt. The debtor had inherited an IRA and claimed it was exempt as a “retirement fund.”

Court disagreed. Three characteristics of an inherited IRA indicate the inherited IRA should not qualify as a “retirement fund”: Additional money may not be invested by the holder into the IRA. Withdrawals from inherited IRAs are required, even if the holder hasn’t

reached retirement age. The holder of the inherited IRA may withdraw the entire balance of the

account at any time, without penalty.

Clark v. Rameker — Inherited IRAs are Part of the Bankruptcy Estate

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T.C. Memo. 2014-107 IRS issued notices of deficiency to the taxpayer (Bross Trucking) for $1

million of deficiencies and accuracy related penalties and to Mr. and Mrs. Bross for gift tax deficiencies.

IRS claimed Bross Trucking distributed appreciated intangibles (goodwill) to Mr. Bross, who then gifted them to his sons who subsequently opened a new trucking company.

The distribution of appreciated intangible assets to a shareholder may be taxed under Code §311(b), causing the corporation to recognize gain as if the appreciated property had been sold for its fair market value.

The Court determined the intangible belonged to Mr. Bross (personal goodwill) , not to Bross Trucking, relying on Martin’s Ice Cream: Bross never conveyed or otherwise transferred his personal goodwill to the

company and was neither obligated to do so by contract (e.g., an employment agreement) nor was he limited by a non-compete agreement.

Bross Trucking Co. v. Comm’r – Personal Goodwill

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T.C. Memo. 2014-1055 IRS issued notices of deficiency to the taxpayer (Estate of Franklin Z.

Adell) for $40 million of deficiencies and gross valuation understatement penalties of $15 million.

Father owned TV station (“STN”) that broadcast urban religious programming provided exclusively by a nonprofit (“The Word”) run by his son. The Word paid 95% of its revenues to STN. Son was president of the STN and on its board of directors, and received the vast majority of his income from STN.

The Court determined the son’s personal goodwill could not be attributed to the valuation of STN, relying on Martin’s Ice Cream: Son never conveyed or otherwise transferred his personal goodwill to the

company and was neither obligated to do so by contract (e.g., an employment agreement) nor was he limited by a non-compete agreement.

Adell v. Comm’r – Personal Goodwill

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2014-2 USTC ¶50,359 (D. D.C. July 16) Mr. Ridgely was a CPA who charged his clients a contingent fee for the

preparation of an ordinary refund claim. A contingent fee is barred by Circular 230, §10.27, except in very limited circumstances.

Ridgley maintained that §10.27 caused him to suffer “a loss of clients and significant revenue” and that “his ability to represent and assist clients in the preparation and filing of ordinary refund claims and to practice before the IRS has been severely restricted.”

The Court, relying on the Loving decision (striking down the IRS regime for registering tax return preparers), found that the IRS exceeded its statutory authority when it prohibited contingent fees for the preparation of ordinary refund claims.

The Court reasoned that return preparation was not “practice before the IRS” as envisioned by 31 U.S.C. §330 (authorizing the Treasury Secretary to regulate the practice of representatives before the Treasury Department).

Further erodes the IRS authorities to regulate return preparers, and opens up the possibility of renewed tax shelter activity.

Ridgely v. Lew – IRS Enjoined From Imposing Contingent Fee Ban Under Cir. 230

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T.C. Memo. 2014-108 A taxpayer attempted to purchase real property through his self-directed

IRA. Custodian (Schwab) informed Dabney that Schwab did not allow IRAs to

hold alternative investments, including real property. Schwab wired money to escrow instructing title company to put title in name

of IRA, but title company mistakenly titled in Dabney’s name. Tax Court held that because Schwab did not allow real property, even if

correct name had been used it would not have been held in his IRA. Further, although he could have transferred the IRA to a custodian who

allowed alternative investments and completed the transaction, he did not. Instead, he checked the box stating he was taking an early distribution with no know exception to taxation.

Taxpayer liable for income tax and early withdrawal penalty on full amount.

Dabney v. Commissioner – Blown attempt to have IRA Invest in Real Property

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Questions?

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Join us for these courses: 10/14 or 11/13: Revenue Recognition for the Technology

Industry 10/29, 11/11 or 11/12: Eye on Washington: Quarterly Business

Tax Update

Read this related publication: MHM Messenger: Third Quarter Accounting Update

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