tax executives institute, inc. detroit chapter all...

BDO USA, LLP, a Delaware limited liability partnership, is the U.S. member of BDO International Limited, a UK company limited by guarantee, and forms part of the international BDO network of independent member firms.

Tax Executives Institute, Inc. Detroit Chapter

All Day Seminar

June 14, 2017

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AGENDATime Topic Presenters

8:00 2017 Mid-Year A&A Update Cathy McNamara, Bill Putz, and Jason Wurz

8:50 Tax Automation and ASC 740 Update Bill Connolly and Barbara Torzewski

9:40 BREAK

10:00 Recent International Tax Developments and Tax Provision Impact Joseph Calianno and Brad Rode

10:50 M&A Trends and Topics Jerry Dentinger and Steve McCullough

11:40 LUNCH

12:50 Sub C Update and More Bob Haran and Kevin Ainsworth

1:40 Unclaimed Property and FAS 5 (ASC 450-20) Joseph Carr and Angela Gebert

2:30 BREAK

2:50 Rate Rec Items: Meals & Entertainment Expenses, DPAD Deduction, and R&D CreditsAndy Zaleski, Brendan Sullivan, and Randy Emmons

3:40 State and Local Tax Accounting Updates Andrea Collins and Paul Lukasik


2017 MID-YEARA&A UPDATE

June 14, 2017

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AgendaAccounting Update FASB Accounting Standards

Updates EITF and PCC matters Revenue StandardSEC Update

SEC and Staffing Developments Rulemaking Disclosure Effectiveness SEC Hot Topics and Comment

Letter Trends Financial Choice Act 2.0 Chief Accountant Speech on

Audit Committee Effectiveness

PCAOB Update

Auditor Reporting Model Audit Quality Indicators On The Horizon

Other Governance Matters

Boards Strategy: Cybersecurity Diversity on Boards Audit Quality Reports

Resources

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Accounting

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Accounting Update Discussion Outline

FASB Accounting Standards Updates

EITF and PCC matters

Revenue (ASC 606) Update

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FASB Update

http://www.fasb.org/homehttp://www.fasb.org/home

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Final ASUS Issued Through May 2017ASU 2017- Title

01 Clarifying the Definition of a Business

02 Clarifying When a Not-for-Profit Entity That Is a General Partner or a Limited Partner Should Consolidate a For-Profit Limited Partnership or Similar Entity

03 Amendments to SEC Paragraphs Pursuant to Staff Announcements at the September 22, 2016 and November 17, 2016 EITF Meetings

04 Simplifying the Test for Goodwill Impairment

05 Clarifying the Scope of Asset Derecognition Guidance and Accounting for Partial Sales of Nonfinancial Assets

06 Employee Benefit Plan Master Trust Reporting

07 Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost

08 Premium Amortization on Purchased Callable Debt Securities

09 Scope of Modification Accounting (Stock Compensation)

10 Determining the Customer of the Operation Services

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ASU 2017-01, Clarifying Definition of a Business

Narrows the definition of a business; key concepts in revised definition include:1. A business is an integrated set of activities and assets that is capable of being

conducted and managed for the purpose of providing a return in the form of dividends, lower costs, or other economic benefits directly to investors or other owners, members, or participants

2. Two essential elementsinputs and substantive process applied to those inputs

Includes practical screen if substantially all of the fair value of the gross assets acquired is concentrated in a single identifiable asset or group of similar identifiable assets, the set is not considered a business

Industry examples provided Effective dates

Public entities annual & interim periods beginning after 12/15/17 Nonpublic entities annual periods beginning after 12/15/18; interim periods

beginning after 12/15/19

BDO Alert: https://www.bdo.com/insights/assurance/fasb/fasb-flash-report-january-2017

https://www.bdo.com/insights/assurance/fasb/fasb-flash-report-january-2017

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ASU 2017-02, Non-Profit Consolidation

Addresses an unintended outcome of ASU 2015-02* which would have required fewer for-profit LPs to be consolidated by NFP general partners

Reinstates the Subtopic 810-20 consolidation guidance for NFPs (moved to Subtopic 958-810): NFPs, as general partners still presumed to have control of a for-profit LP, regardless

ownership interest %, unless that presumption is overcome by certain rights of the limited partners

Additional guidance for when NFPs, as limited partners, should consolidate LP Effective date

Annual periods beginning after 12/15/16; interim periods beginning after 12/15/17 Apply concurrently with ASU 2015-02, or retrospectively to all periods impacted by

adoption of 2015-02

*Amendments to the Consolidation Analysis

BDO Alert: https://www.bdo.com/insights/assurance/fasb/fasb-flash-report-february-2017

https://www.bdo.com/insights/assurance/fasb/fasb-flash-report-february-2017

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ASU 2017-04, Simplifying Goodwill Impairment

Eliminates Step 2 from the goodwill (GW) impairment test New one step test comparing the fair value of a reporting unit (RU) with its

carrying amount Recognize impairment charge for amount by which carrying amount exceeds

RUs fair value (up to amount of GW attributed to that RU) Retains optional qualitative impairment test (Step 0) Eliminates requirement to perform Step 0 for RU with zero or negative carrying

amount, but requires additional disclosure Does not eliminate private company alternative in ASU 2014-02*

If previously elected 2014-02, can voluntarily adopt 2017-04 (no preferability assessment)

If previously elected ASU 2014-18** must demonstrate preferability to adopt 2017-04

*Accounting for Goodwill (a consensus of the Private Company Council)**Accounting for Identifiable Intangible Assets in a Business Combination (a consensus of the Private Company Council)

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(continued) Effective dates

Public entities (SEC filers) fiscal periods beginning after 12/15/19 Public entities (non-SEC filers) fiscal periods beginning after 12/15/20 Nonpublic entities annual periods beginning after 12/15/21

Early adoption permitted for interim or annual GW impairment tests performed after 1/1/17

BDO Alert: https://www.bdo.com/insights/assurance/fasb/fasb-flash-report-february-2017-(1)

https://www.bdo.com/insights/assurance/fasb/fasb-flash-report-february-2017-(1)

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(continued early adoption)

BC64: an entity should apply the same guidance to an interim impairment test as the guidance it plans to use for its annual test in the year of adoption.

Example: Company A with a calendar year-end, performs its annual goodwill impairment test on the first day of Q4. During Q2 2017, Company A disposes of a subsidiary, and this transaction is a triggering event for goodwill impairment testing. In order to early adopt ASU 2017-04 for its annual 2017 impairment testing, Company A must adopt this guidance for its interim test during Q2 2017.

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(continued early adoption)

BC66: an entity may have an indicator of impairment at the beginning of the annual period in which the amendments are adopted.

Example: if a reporting units carrying amount exceeded its fair value during the most recent impairment test before adoption (Q4 2016) but the implied fair value of goodwill exceeded its carrying amount when applying Step 2 and no impairment was recognized, the entity likely would have an indicator of impairment for that reporting unit as of the beginning of the period of adoption (Q1 2017) based on the change in how goodwill impairment is measured.

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ASU 2017-05, Nonfinancial Asset Derecognition

Clarifies scope of ASC 610-20* Defines in substance nonfinancial asset - if substantially all fair value of assets

(recognized and unrecognized) promised to a counterparty is concentrated in nonfinancial assets, a financial asset in the same arrangement would still be considered part of an in substance nonfinancial asset

Nonfinancial assets may include nonfinancial assets contained within a legal entity that is transferred to a counterparty (e.g., through transfer of ownership interest)

Derecognition of businesses not in scope of ASC 610-20 (governed by ASC 810) Clarifies treatment of distinct nonfinancial assets

Derecognize when counterparty obtains control Apply guidance in ASC 606 on allocating consideration to each distinct asset

*Other IncomeGains and Losses from the Derecognition of Nonfinancial Assets

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ASU 2017-05, Nonfinancial Asset Derecognition

(continued) Adds guidance on accounting for partial sales of nonfinancial assets

Derecognize a distinct nonfinancial asset or distinct in substance nonfinancial asset in a partial sale transaction when both:1. The entity does not have (or ceases to have) a controlling financial interest in the legal entity

that holds the asset in accordance with Topic 810, and 2. The entity transfers control of the asset in accordance with Topic 606

Effective Dates (concurrent with ASC 606) Public entities annual and interim periods beginning after 12/15/17 Nonpublic entities annual periods beginning after 12/15/18; interim

periods beginning after 12/15/19

BDO Alert: https://www.bdo.com/insights/assurance/fasb/fasb-flash-report-march-2017-(1)

https://www.bdo.com/insights/assurance/fasb/fasb-flash-report-march-2017-(1)

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ASU 2017-06, EBP Master Trust Reporting

Employee benefit plans must present interest in a master trust and the change in interest in that master trust as single line items in the statement of net assets available for benefits and the statement of changes in net assets available for benefits

Updated disclosure requirements for interest in a master trust: Undivided (proportionate) interest - continue to disclose % Divided interest - disclose dollar amount of interest in specific investments of the

trust Disclose a master trusts other asset and liability balances and the dollar amount of

the plans interest in each of those balances Eliminates health and welfare plans investment disclosures for 401(h) account assets;

instead, the plan financials will disclose the name of the defined benefit pension plan which includes such investment disclosures

Effective for fiscal years beginning after 12/15/18

BDO Alert: https://www.bdo.com/insights/assurance/fasb/fasb-flash-report-march-2017

https://www.bdo.com/insights/assurance/fasb/fasb-flash-report-march-2017

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ASU 2017-07, Net Benefit Cost Presentation

An employer that sponsors a defined benefit plan must disaggregate components of net benefit cost Service cost

Present within same line item(s) as other employee compensation costs Generally included within income from continuing operations, but in some cases may be

eligible for capitalization

All other components of net benefit cost Present in income statement separately from service cost component and outside a subtotal of

income from operations, if one is presented E.g., interest cost, actual return on plan assets, amortization of prior service cost included in

AOCI, and gains or losses from changes in the value of the projected benefit obligation or plan assets

These costs may not be capitalized

Effective dates Public entities annual and interim periods beginning after 12/15/17 Nonpublic entities annual periods beginning after 12/15/18; interim periods

beginning after 12/15/19BDO Alert: https://www.bdo.com/insights/assurance/fasb/fasb-flash-report-march-2017-(2)

https://www.bdo.com/insights/assurance/fasb/fasb-flash-report-march-2017-(2)

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ASU 2017-08, Premium Amortization

Historically entities generally have amortized the premium on these instruments as a yield adjustment (reduction of interest income) over the securitys contractual life (i.e. to maturity), even if they are certain the issuer will exercise the option at the earliest call date.

The Standard shortens the amortization period for purchased callable debt securities held at a premium to the earliest issuer call date, rather than amortizing over the full contractual term.

Securities held at a discount continue to be amortized to maturity

Effective dates Public entities annual and interim periods beginning after 12/15/18 Nonpublic entities annual periods beginning after 12/15/19; interim

periods beginning after 12/15/20

BDO Alert: https://www.bdo.com/insights/assurance/fasb/fasb-flash-report-april-2017

https://www.bdo.com/insights/assurance/fasb/fasb-flash-report-april-2017

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ASU 2017-09, Scope of Modification Accounting

Clarifies that modification accounting applies to changes in the terms or conditions of a share-based payment award unless all of the following criteria are met:

Fair value (or calculated value or intrinsic value) is the same before and after modification Practical expedient - if the modification does not affect any valuation inputs, no

requirement to value award immediately before and after modification

Vesting conditions are the same before and after modification Classification as an equity or liability instrument is the same before and after

modification

Effective date annual and interim periods beginning after 12/15/17 (all entities)

BDO Alert: https://www.bdo.com/insights/assurance/fasb/fasb-flash-report-may-2017

https://www.bdo.com/insights/assurance/fasb/fasb-flash-report-may-2017

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ASU 2017-10, Determining the Customer of the Operation Services

Clarifies service concession arrangements guidance in Topic 853 When applying ASC 606, operating entity should consider the grantor the

customer of both construction and operation services it provides The effective date of ASU 2017-10 depend on whether an entity has already

adopted Topic 606:- If Topic 606 not adopted previously, the effective date and transition requirements

generally the same as those of Topic 606. Early adoption permitted, including within an interim period, even though the entity has not yet adopted Topic 606, but specific transition requirements apply.

- If Topic 606 previously adopted, effective dates of ASU 2017-10:1. Public business entities - fiscal years and interim periods beginning after

12/15/172. All others - fiscal years beginning after 12/15/18, and interim periods within

fiscal years beginning after 12/15/19

BDO Alert: https://www.bdo.com/insights/assurance/fasb/fasb-flash-report-may-2017-(1)

https://www.bdo.com/insights/assurance/fasb/fasb-flash-report-may-2017-(1)

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EITF and PCC Update

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EITF Update

EITF meeting March 2017 Finalized Issue 16-C, Determining the Customer of the Operation

Services in a Service Concession Arrangement see ASU 2017-10 No current issues on EITF agenda for possible meetings in May or June

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PCC Update

April 4, 2017 meeting: Disclosure framework Accounting for financial instruments, hedging Consolidations Liabilities and equity: down rounds Cloud computing Invitation to comment on Agenda Consultation

Meeting recap: http://www.fasb.org/cs/ContentServer?c=Document_C&pagename=FASB%2FDocument_C%2FDocumentPage&cid=1176168947553

Next meeting July 11, 2017

http://www.fasb.org/cs/ContentServer?c=Document_C&pagename=FASB/Document_C/DocumentPage&cid=1176168947553

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ASC 606, Revenue from Contracts with Customers

ASU 2014-09, Revenue from Contracts with Customers (Topic 606), as amended, becomes effective on January 1, 2019 for calendar-year nonpublic entities, but early adoption is permitted as of January 1, 2017

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Impact will vary by industry. No more industry-specific rules. Key concepts:

Transfer of control Identification of performance obligations in a contract Allocating the transaction price to performance obligations based on relative

standalone selling prices Measurement of revenue point in time or over time

Disclosures Other technical aspects

Contract costs Warranties Licenses Principal vs. agent

Internal controls

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Things To Consider What steps has the company taken to familiarize itself with the new standard? Has the company determined which method of adoption it will use (full

retrospective or modified retrospective)? Has the company trained relevant personnel, including accounting, finance,

legal, sales, contract management, human resources, and others? Has the company documented its preliminary assessment about the impact of

adoption, including the impact on accounting for income taxes?* *Standard setters and regulators have emphasized the importance of beginning

implementation ASAP Has the company updated its SAB 74 disclosures to reflect the above

assessment?

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Things To Consider For key financial systems used to process customer orders and/or record

transactions, has consideration been given to any needed changes**?

**System implementations and upgrades can often take 12+ months to complete

Has the company communicated with any existing or potential third party processing agents and other service providers about changes needed for transaction processing?

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BDO Resources BDO Revenue Recognition Resource Center and Corporate Governance Center

BDO Knows: FASBTopic 606, Revenue from Contracts with Customers BDO Practice Aid: ASC Topic 606 BDO industry publications and flash reports

Audit tools Revenue Audit Workbook Industry guidance

Accounting advisory services BDO Revenue Recognition Advisory Team

External Resources FASB Transition Resource Group for Revenue Recognition AICPA Industry Task Forces / Revenue Recognition Guide FASB technical inquiry process SEC pre-clearance process

https://www.bdo.com/services/assurance/revenue-recognition/overviewhttps://www.bdo.com/services/assurance/revenue-recognition/overview

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Revenue BDO Resources

Updated Newsletterhttps://www.bdo.com/insights/assurance/fasb/fasb-newsletter-march-2017

Upcoming/Recent WebinarsASC 606, Revenue from Contracts with Customers (self-study available) https://www.bdo.com/events/bdo-knowledge-asc-606,-revenue-from-contracts-witApplying the New Revenue Standard, Part 1 (6/8/17, followed be self-study)https://www.bdo.com/events/bdo-knowledge-applying-the-new-revenue-standard-1Applying the New Revenue Standard, Part 2 (6/15/17, followed by self-study)https://www.bdo.com/events/bdo-knowledge-applying-the-new-revenue-standar-2

BDO Revenue Resource Centerhttps://www.bdo.com/services/assurance/revenue-recognition/overview

https://www.bdo.com/insights/assurance/fasb/fasb-newsletter-march-2017https://www.bdo.com/events/bdo-knowledge-asc-606,-revenue-from-contracts-withttps://www.bdo.com/events/bdo-knowledge-applying-the-new-revenue-standard-1https://www.bdo.com/events/bdo-knowledge-applying-the-new-revenue-standar-2https://www.bdo.com/services/assurance/revenue-recognition/overview

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SEC Update

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SEC & Staff Developments

Commission Changes- Jay Clayton named new Chairman- 2 Commissioner seats remain open

Staff Changes- William Hinman named Director of the Division of Corporation

Finance- Sagar Teotia named Deputy Chief Accountant, OCA- Other changes in senior staff positions

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SEC Developments

Statements by Commissioner Piwowar* - Pay Ratio Rule- Conflict Minerals Rule

Portions of Conflict Minerals rule not enforced following U.S. District Court Ruling- Staff guidance - Commissioner Piwowar statement

Resource Extraction Issuers rule nullified

*Acting Chairman from late January early May

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SEC Rulemaking

Final rule and technical amendments related to the JOBS Act- Conforms rules and forms to securities law amendments in JOBS Act- Inflation-adjusted EGC revenue threshold - $1,070,000,000

Proposal to require Inline XBRL - Would require issuers to embed XBRL data within the financial statements

instead of an exhibit- Follows the voluntary program from June 2016

Release regarding availability of IFRS Taxonomy

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Disclosure Effectiveness

What is it?

- Providing better information to investors more understandable, more useful and eliminating excessive disclosure

- Disclosure effectiveness less disclosure

What has the SEC staff done lately?

- Request for commentReg S-X (other entity financial statements)comment period closed November 30, 2015

- S-K concept releasecomment period closed July 21, 2016

- Subpart 400 of Reg S-K comment period closed October 31, 2016

- Disclosure Update and Simplification closed Nov 2, 2016

Report on Modernization and Simplification of Reg S-K released on November 23, 2016

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Disclosure Effectiveness

Disclosure Effectiveness Initiative Final rule requiring the use of hyperlinks to exhibits

- Effective for filings submitted on or after September 1, 2017 (or September 1, 2018 for certain filers)

Request for comment on Industry Guide 3 (Statistical Disclosure by Bank Holding Companies)

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SEC Hot Topics

ICFR New Accounting Standards & SEC Reporting Implications Non-GAAP Financial Measures Income Taxes Segments Goodwill Impairment Other Comment Areas

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SEC Hot Topics

NEW ACCOUNTING STANDARDS SAB Topic 11M (SAB 74) Disclosures

- Expect comment letters on deficient disclosure in 2017 ICFR Considerations SEC Reporting Implications in Year of Adoption

- Selected financial data- S-3 considerations

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SEC Hot TopicsNON-GAAP FINANCIAL MEASURES Non-GAAP measures should supplement, not supplant GAAP

presentation Reminder on Non-GAAP C&DIs issued in May 2016

- Provide:- Guidance on adjustments and measures that may be misleading- Examples of placing undue prominence on non-GAAP measures- Guidance on computing income taxes in non-GAAP measures

- Communicate that: - Presenting non-GAAP that tailors GAAP (e.g., revenue) is generally not permitted- Presenting non-GAAP liquidity measures on a per share basis is prohibited

KEY OPERATING METRICS Recent topic in staff speeches Similar concerns as non-GAAP companies should focus on disclosure

controls and procedures over metrics

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SEC Hot Topics

INCOME TAXES Realizability of Deferred Tax Assets Effective Tax Rate Separate disclosure for U.S. operations versus foreign

jurisdictions- Pre-tax earnings - Income tax provision or benefit

Assertions related to indefinite reinvestment of foreign earnings

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SEC Hot Topics

SEGMENTS Identification of operating segments

- Factors used, including basis of organization- Clearly defining who is the CODM

Aggregation of operating segments Changes in business and organizational structure Disclosures

- Revenues by product category- Geographic information

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SEC Hot Topics

GOODWILL IMPAIRMENT Impairment analysis disclosures in MD&A

- Reporting units at risk of failing Step 1 of the goodwill impairment test (see FRM Topic 9510)

- Material uncertainties associated with methods and assumptions Interim impairment test

- Events occurring since impairment test that may be impairment indicators

- Sustained decline in market capitalization- Why an impairment charge/test was not necessary prior to Q4

Reporting units- Aggregation of components- Changes

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SEC Hot Topics

OTHER FREQUENT COMMENT AREAS MD&A Loss Contingencies Revenue Recognition (ASC 605 & SAB 74 Disclosures) Business Combinations & Related Issues

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Financial Choice Act 2.0Background

Main provisions would eliminate or modify - many banking provisions of Dodd-Frank Act- several Dodd-Frank Acts disclosure and corporate

governance requirements- SEC enforcement and rulemaking authority- securities laws governing capital raising and ongoing

reporting requirements

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Financial Choice Act 2.0Impact on Reporting Requirements

Executive Compensation- Requires say-on-pay vote each year in which there has been a

material change to executive compensation- Limits clawbacks to those current or former executives who had

control or authority over the companys financial reporting that resulted in the restatement

- Repeals the following Dodd- Frank Act disclosure requirements: Pay ratio Conflict minerals, coal or other mine safety, payments by resource extraction

issuers

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Financial Choice Act 2.0Impact on Reporting Requirements

Sarbanes Oxley 404(b) extends exemption from auditor attestation requirement- to any issuer with total market cap of less than $500M - for an additional 5 years for any issuer that ceased to be an EGC on

the last day of the FY after the 5th anniversary of its IPO, provided its average annual gross revenues are less than $50M and its not a large accelerated filer

Select capital formation/raising- Extend certain of the IPO on-ramp provisions of the JOBS Act,

currently available only to EGCs, to all issuers

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Advancing the Role and Effectiveness of Audit Committees SEC Chief Accountant Wes Brickers March 2017 speech

addressing the audit committees (AC) critical role in contributing to financial statement credibility through their oversight and resulting impact on the integrity of a companys culture and ICFR, the quality of financial reporting, and the quality of audits performed on behalf of investors

References: Speech: https://www.sec.gov/news/speech/bricker-university-tennessee-032417BDO Alert: https://www.bdo.com/insights/assurance/corporate-governance/sec-chief-accountant-speech-advancing-the-role-an

https://www.sec.gov/news/speech/bricker-university-tennessee-032417https://www.sec.gov/news/speech/bricker-university-tennessee-032417https://www.bdo.com/insights/assurance/corporate-governance/sec-chief-accountant-speech-advancing-the-role-an

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PCAOB Update

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PCAOB Current Projects Standard Setting

Refer to: https://pcaobus.org/Standards/Documents/Q22017-standard-setting-update.pdf

Project Current Stage Timing

Auditors Reporting Model Final standard issued - AS 3101 June 2017

Auditing Accounting Estimates, Including Fair Value Measurements

Proposed for public comment on June 1, 2017

Q2 2017

The Auditors Use of the Work of Specialists

Drafting proposal Q2 2017

Supervision of Audits Involving Other Auditors

Determining next action

Going Concern Outreach, monitoring, and research


https://pcaobus.org/Standards/Documents/Q22017-standard-setting-update.pdfhttps://pcaobus.org/Standards/Documents/Q22017-standard-setting-update.pdf

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PCAOB Current Projects Research


Project

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

Changes in the Use of Data and Technology in the Conduct of Audits

The Auditor's Role Regarding Other Information and Company Performance Measures, Including Non-GAAP Measures

Auditor's Consideration of Noncompliance with Laws and Regulations

https://pcaobus.org/Standards/Documents/Q22017-standard-setting-update.pdf

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Auditor Report - AS 3101 The new standard and related amendments retain the pass/fail opinion in the existing

auditors report, but significantly changes the existing auditors report through the following requirements: The new standard requires the auditor to communicate in the auditors report any

critical audit matters (CAMs) arising from the audit, or state that the auditor determined that there were no CAMs. CAMs are matters that were communicated or required to be communicated to the audit committee, and that (1) relate to accounts or disclosures that are material to the financial statements, and (2) involve especially challenging, subjective, or complex auditor judgment.

The auditors report will include disclosure of the auditors tenure, i.e., the year in which the auditor began serving consecutively as the companys auditor.

The auditors report will also include a statement that the auditor is required to be independent.

The phrase, whether due to error or fraud, will be included in the auditors report in describing the auditors responsibility under PCAOB standards to plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatements.

The opinion will appear in the first section of the auditors report, and section titles will be added to the report.

The auditors report will be addressed to the companys shareholders and board of directors or equivalents (additional addressees are also permitted).

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Auditor Report - AS 3101

The PCAOB adopted a phased approach to the effective date for the new standard and amendments, to provide accounting firms, companies, and audit committees more time to prepare for implementation of the critical audit matter requirements, which are expected to require more effort to implement than the other improvements to the auditors report. Subject to approval by the Securities and Exchange Commission, the final standard and amendments will take effect as follows:

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Audit Quality Indicators

PCAOB 2015 Concept Release on Audit Quality Indicators - identified 28 potential quantitative audit quality indicators (AQIs) at both the firm and engagement level intended to provide additional information about whether audit work being performed is being conducted by the appropriate individuals with the requisite experience, skills, resources, and tools. The potential AQIs related to the following areas:

Audit Professionals measures dealing with the availability, competence, and focus of those performing the audit.Audit Process measures concerning an audit firm's tone at the top and

leadership, incentives, independence, investment in infrastructure needed to support quality auditing, and monitoring and remediation activities.Audit Results measures relating to financial statements (such as the

number and impact of restatements, and measures of financial reporting quality), internal control over financial reporting, going concern reporting, communications between auditors and Audit Committees, and enforcement and litigation.

http://pcaobus.org/Rules/Rulemaking/Docket%20041/Release_2015_005.pdf

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Audit Quality IndicatorsCAQ had developed its own approach to AQI and performed extensive outreach, including a pilot program and several public forums. Early in 2016, the CAQ released Audit Quality Indicators: Journey and Path Ahead describing its work and a suggested path forward to continue to identify more effective ways to determine and assess audit quality.

Both the PCAOB and the CAQ continue to monitor audit quality and how indicators about audit quality can best be identified, collected, and used to inform capital markets both in the U.S. and globally.

Recommended Resources Release DateCAQ Approach to Audit Quality Indicators April 2014

CAQ Audit Quality Indicators: Journey and Path Ahead January2016PCAOB Concept Release on Audit Quality Indicators July 2015

BDO Approach to Audit Quality August2016

http://www.thecaq.org/caq-approach-audit-quality-indicatorshttp://thecaq.org/audit-quality-indicators-journey-and-path-aheadhttp://www.thecaq.org/caq-approach-audit-quality-indicatorshttp://thecaq.org/audit-quality-indicators-journey-and-path-aheadhttp://pcaobus.org/Rules/Rulemaking/Docket%20041/Release_2015_005.pdfhttps://www.bdo.com/insights/assurance/corporate-governance/bdo-audit-quality-report

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PCAOB Enforcement Transparency Act

In March 2017, Senators Jack Reed and Charles Grassley reintroduced the PCAOB Enforcement Transparency Act of 2017 (Bill S. 610)

Intent of the bill is to make PCAOB disciplinary proceedings public to bring auditing deficiencies at the firms or the companies they audit to light in a timely manner and help deter violations.

Similar attempts were made in previous years to get such legislation through congress.

https://na01.safelinks.protection.outlook.com/?url=http://CAQ.informz.net/z/cjUucD9taT02NDE3MjQyJnA9MSZ1PTEwNzg3NDQ5NjgmbGk9NDIyMTQyODM/index.html&data=02|01|[email protected]|41844fc2840e49afc63408d4711812c9|6e57fc1a413e405091da7d2dc8543e3c|0|0|636257795601675062&sdata=lenp50Jh1EWS/QUTL0Ei%2BFbgqV9EOFH4H/f6X4vPyQ8%3D&reserved=0

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Other Governance Matters

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The Boards Role in CybersecurityAICPA Cybersecurity Risk Management Framework to assist boards, management, and other pertinent stakeholders. The subject matter of such a cybersecurity examination engagement will be composed of three key elements:

1. Managements narrative description of the entitys cybersecurity risk management program

2. Managements written assertion that the controls implemented as part of the program were effective to achieve the entitys cybersecurity objectives

3. Practitioners examination report expressing an opinion about whether managements description of the entitys cybersecurity risk management program and the effectiveness of controls within that program achieve the entitys cybersecurity objectives.

AICPA Cybersecurity Resource Center:https://www.aicpa.org/interestareas/frc/assuranceadvisoryservices/pages/cyber-security-resource-center.aspx

https://www.aicpa.org/InterestAreas/FRC/AssuranceAdvisoryServices/Pages/AICPACybersecurityInitiative.aspxhttps://www.aicpa.org/interestareas/frc/assuranceadvisoryservices/pages/cyber-security-resource-center.aspx

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Cybersecurity Resources

Here are recent archived webinars for use by Audit Committees in this area:

Recommended Resources Release Date

AICPAs New Examination Engagement: SOC for Cybersecurity May 2017

BDO Archived Webinar: A New Normal: The NY FDS Cybersecurity Regulationand the Financial Services Industry April 2017

BDO Archived Webinar: What Boards Need to Know About Cybersecurity (ButMay Be Afraid to Ask) March 2017

BDO Archived Webinar: Navigating the Rising Tide of CybersecurityRegulation How is Your Board Preparing? July 2016

BDO Archived Webinar: Management Risk Elevation of Cybersecurity to theBoardroom

February2016

http://www.aicpastore.com/InformationManagementTechnologyAssurance/aicpa-s-new-examination-engagement--soc-for-cybers/PRDOVR%7EPC-WC1415638/PC-WC1415638.jsp?_ga=2.190548527.564792482.1495194188-1081748325.1487865943https://www.bdo.com/events/a-new-normal-the-nydfs-cybersecurity-reg-fshttps://www.bdo.com/events/what-boards-need-to-know-about-cybersecurity-(buthttps://www.bdo.com/events/navigating-the-rising-tide-of-cybersecurity-regulahttps://www.bdo.com/events/managing-risk-elevation-of-cybersecurity

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Cybersecurity Resources

Recommended Resources Release Date

NACD and ISA Cyber Risk Oversight Directors Handbook Series 2017

CAQ Comment Letter: Enhanced Cyber Risk Management Standards JointAdvance Notice of Proposed Rulemaking

January2017

Directors & Boards Article: Cyber Responsibility Officially Reaches theBoard

January2017

CAQ Cybersecurity: How CPAs Are Addressing a Dynamic and Complex Risk October2016

BDO Knows Cybersecurity Alert August 2016

BDO Article: Cyber for the C-Suite 3 Tips for Closing the Information gap June 2016

BDO Practice Aid: Elevating Cybersecurity to the Board Questions BoardsShould Be Asking March 2016

CAQ Understanding Cybersecurity and the External Audit February2016

https://www.nacdonline.org/Cyberhttp://www.thecaq.org/federal-reserve-occ-fdic-enhanced-cyber-risk-management-standards-joint-advance-notice-proposedhttps://www.directorsandboards.com/articles/singlecyber-responsibility-officially-reaches-boardhttp://thecaq.org/cybersecurity-how-cpas-are-addressing-dynamic-and-complex-riskhttps://www.bdo.com/insights/consulting/bdo-knows-cybersecurity-alert-august-2016https://www.bdo.com/insights/consulting/cyber-for-the-c-suite-3-tips-for-closing-the-infohttps://www.bdo.com/insights/assurance/corporate-governance/elevating-cybersecurity-to-the-boardhttp://thecaq.org/understanding-cybersecurity-and-external-audit

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NY DFS Cyber Regulation Countrys first cybersecurity

regulation went into effect March 1, 2017.

Regulators put responsibility for cybersecurity squarely on the Board.

Board must approve the companys written cybersecurity policy.

The Chief Information Security Officer must report to the Board at least annually.

Certification of compliance. Questions can be directed to

BDOs Judy Selby: [email protected]

Resources to learn more: Webinar - A New Normal: The NY FDS

Cybersecrity Regulation and the Financial Services Industry https://www.bdo.com/events/a-new-normal-the-nydfs-cybersecurity-reg-fs

D&B Article - Cyber Responsibility Officially Reaches the Board https://www.directorsandboards.com/articles/singlecyber-responsibility-officially-reaches-board

mailto:[email protected]://www.bdo.com/events/a-new-normal-the-nydfs-cybersecurity-reg-fshttps://www.directorsandboards.com/articles/singlecyber-responsibility-officially-reaches-board

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Cyber Board Certification

Certification of Compliance with New York State Department of Financial Services Cybersecurity Regulations

The Board of Directors or a Senior Officer(s) of the Covered Entity certifies: (1) The Board of Directors (or name of Senior Officer(s)) has reviewed documents, reports, certifications and opinions of such officers, employees, representatives, outside vendors and other individuals or entities as necessary; (2) To the best of the (Board of Directors) or (name of Senior Officer(s)) knowledge, the Cybersecurity Program of (name of Covered Entity as of (date of the Board Resolution or Senior Officer(s) Compliance Finding) for the year ended (year for which Board Resolution or Compliance Finding is provided) complies with Part ___.

Signed by the Chairperson of the Board of Directors or Senior Officer(s) (Name) Date: ___________________

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Diversity on Boards

In March 2017, Representative Carolyn Maloney introduced H.R. 1611, which would require the SEC to establish a Gender Diversity Advisory Group to study and make recommendations on strategies to increase gender diversity among members of boards of issuers

The bill would also amend the SEC 34 Act to require issues to make disclosures to shareholders with respect to gender diversity

In its most recent quarterly report, the Gender Diversity Index (GDI), Equilar reports that only 15.1% of board seats at the Russell 3000 companies are occupied by women At this pace, boards will reach gender parity in 2055!

Refer to: https://boardroomresources.com/insight/boardroom-update-gender-diversity-2017/

Refer to BDO June 2017 webinar that takes diversity a step further from the perspective of diversity in thought within the boardroom

https://na01.safelinks.protection.outlook.com/?url=http://CAQ.informz.net/z/cjUucD9taT02NDA4ODEzJnA9MSZ1PTEwNzg3NDQ5NjgmbGk9NDIxMzkwMDI/index.html&data=02|01|[email protected]|3b5d7885887c4ae8660908d46f84d884|6e57fc1a413e405091da7d2dc8543e3c|0|0|636256063748587572&sdata=9cL56u7Ug1BLaimw2bzFtOHCR8Xf86rDg8OZvi6pHdM%3D&reserved=0https://boardroomresources.com/insight/boardroom-update-gender-diversity-2017/

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Resources

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The BDO Center for Corporate Governance and Financial Reporting

AN INCREDIBLE RESOURCE AT YOUR FINGERTIPSThe BDO Center for Corporate Governance and Financial Reporting was born from the need to have a comprehensive, online, and easy-to-use resource for topics relevant to boards of directors and financial executives. We encourage you to visit the Center often for up-to-date information and insights you can rely on. What you will find includes:

Thought leadership, practice aids, tools, and newsletters

Technical updates and insights on emerging business issues

Three-pronged evolving curriculum consisting of upcoming webinars and archived self-study content

Opportunities to engage with BDO thought leaders

External governance community resources

For more information about BDOs Center for Corporate Governance, please go to www.bdo.com/resource-centers/governance

To begin receiving email notifications regarding BDO publications and event invitations (live and web-based), visit www.bdo.com/member/registration and create a user profile.

If you already have an account on BDOs website, visit the My Profile page to login and manage your account preferences www.bdo.com/member/my-profile.

Finally, a resource center with the continual education needs of those charged with governance and financial reporting in mind!

A dynamic and searchable on-line resource for board of directors and financial executives

http://www.bdo.com/resource-centers/governancehttp://www.bdo.com/member/registrationhttp://www.bdo.com/member/my-profile

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CAQ Audit Committee ToolsPreparing for the New Revenue Recognition Standard: Understanding the new revenue recognition standard

what is it? Evaluating the companys impact assessment how will

revenue change? Evaluating the implementation project plan how do we

need to prepare? Other implementation considerations what else do we

need to consider?

CAQ Non-GAAP Financial Measures: Continuing the Conversation The CAQ intends to use the questions in this tool in

roundtables and panels in which management, investors, investment analysts, members of the legal community, AC, internal and external auditors, regulators, and academics can come together to share perspectives on non-GAAP financial measures

http://thecaq.org/preparing-new-revenue-recognition-standard-tool-audit-committeeshttp://www.thecaq.org/non-gaap-financial-measures-continuing-conversation

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CAQ Audit Committee Tools

https://www.bdo.com/insights/assurance/corporate-governance/caq-questions-on-non-gaap-measures-a-tool-for-au

http://www.thecaq.org/docs/default-source/reports-and-publications/questions_on_non-gaap_measures_final.pdf

CAQ tool to help audit committees determine the meaningfulness of non-GAAP measures and whether:(1) management is complying

with SEC rules and related interpretations to non-GAAP measures and

(2) non-GAAP measures are aiding analysts and investors in understanding the business and its performance

https://www.bdo.com/insights/assurance/corporate-governance/caq-questions-on-non-gaap-measures-a-tool-for-auhttp://www.thecaq.org/docs/default-source/reports-and-publications/questions_on_non-gaap_measures_final.pdf

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BDO Audit Committee Alert: Emphasis and Focus on Controls and Non-GAAP

Regulators are in agreement on continued need for company vigilance around internal controls particularly: Audit areas where deficiencies have been

identified in previous PCAOB inspections Management review controls Non-GAAP measures New FASB standards on revenue

recognition, leases, financial instruments, and credit losses

Reference: BDOs practice aid available in your handouts

https://www.bdo.com/insights/assurance/corporate-governance/audit-committee-

alert-emphasis-and-focus-on-contr

https://www.bdo.com/insights/assurance/corporate-governance/audit-committee-alert-emphasis-and-focus-on-contr

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BDO Practice Aid: Audit Committee Requirements

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Questions?


TAX AUTOMATION&

ASC 740 UPDATE

June 14, 2017

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WITH YOU TODAY

Bill ConnollyTax Managing Director National Tax OfficeBDO USA, LLPBoston, [email protected](617) 239-4127

Barbara TorzewskiSenior Tax ManagerBDO USA, LLPTroy, [email protected](248) 244-6527

mailto:[email protected]:[email protected]

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AGENDA

Tax Automation Artificial Intelligence, Data Analytics & Robotics Oh My!

ASC 740 Developments

Other Considerations / Current Topics

Questions & Wrap Up

Appendix A Recent ASC Changes & Proposed Changes

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Tax AutomationArtificial Intelligence, Data Analytics & Robotics Oh My!

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What Does All This Mean?

A Definition of Data Analytics

The process of collection, identifying details, categorizing key items and creating visualizations that help users understand a set of data and its meaning. The key to data analytics is not only to understand the data but having a good understanding of the questions that need to be answered. It is also important to note that when someone is reviewing data in a manual fashion, the more data they have the more difficult it is to understand. With Data Analytics the larger the data set available, the clearer the results become and the easier it will be to draw more accurate conclusions.

Tax Specific Example

Sales & use tax bot which generates estimates of possible refund amounts to assess whether a sales and use tax reverse audit has viability.

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A Definition of Robotics

The automation of repeatable tasks performed by data and application users. Often when employees are working with data there are initial steps that they need to perform to gather consolidate, integrate with other data and finally use the information. Software Robotics is intended to remove the steps needed to process and present data by employees and give them more time to consume the data and make better use of the information.

Tax Specific Example

Bridging a trial balance via upload from source system generated report into a tax provision software tool to automatically calculate tax sensitive schedule Ms.

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A Definition of Artificial Intelligence (AI) AI and Machine Learning are important next steps in the use of Data Analytics within the business environment. Similar to standard data analytics, AI & Machine Learning collect, identify and categorize the data. However, through the use of AI, the patterns found within the datasets can now be adjusted by the code we use. Outliers can be automatically identified as issues or false positives matches. AI can also be used to identify trends that can be applied from one dataset to another and visuals (such as dashboards) can be adjusted accordingly. Data added in future imports will have the new logic and also contribute to the growing understanding of our information by the system.

Tax Specific Example Watson (owned by IBM) has teamed up with tax preparers to assist in coming up with client specific questions to find potential tax breaks based on client profiles. The tool also is meant to assist in visiting the tax preparer a more engaging and interactive experience for the client. The tool shows questions and suggestions to clients on a separate screen as the return is being prepared. The verdict is out on whether clients agree if the experience of filing their tax has improved or not!

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Introducing.our BOTs

Robot Process Automation (RPA)/Software Robotics/Automation

Uses software applications to automate manual and repetitive tasks

Removes the robot from the human

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Tax Provision Footnote Bot

3 reports are run from OneSource

Template is configured specifically for client data

Footnotes are created and updated

Final draft of statements is automatically generated

Original process to update footnotes3-5 hoursNew process takes 10 minutes

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Many resources doing the same task

Data or information produced by the task could

be shared

Timely processing of data is vital to the business

The people performing the task do not enjoy the task

The task is repeated often and is time consuming

When to Use Software Robotics

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Tax Automation Top 10 Factors to Ensure a Successful Implementation

1. Software alone is not the answer 2. Change management is crucial 3. Demo multiple packages 4. Do not start a project without enough budget 5. Dont try to implement the software yourself 6. Hire a consulting firm with appropriate experience 7. Assign an internal point person to lead the project 8. Dont spend months on the implementation 9. Ensure your department is properly trained 10. Ensure your department is properly supported

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The examples we will review are for discussion purposes only and have been intentionally simplified for the classroom setting. Specific situations need to be analyzed based on the facts and circumstances of each case. Also, please discuss with your attest firm since there are divergent views in practice with respect to many issues. BDO will not be responsible for any loss sustained by any person who relies on these materials.

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ASC 740 Developments

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ASC 740 DEVELOPMENTS

ASU 2015-17, Balance sheet classification of deferred taxes Effective date(s) and early adoption: Public business entities for annual periods beginning after December 15, 2016 Entities other than public business entities for annual period beginning after

December 15, 2017 and interim reporting periods within annual reporting period beginning after December 15, 2018.

Early adoption for all entities as of the beginning of any interim or annual reporting period.

ASU 2016-09, Improvements to Employee Share-Based Accounting Effective dates and early adoption:

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ASC 740 DEVELOPMENTS (CONTD)

Public business entities for fiscal periods beginning after December 15, 2016, including interim periods within those fiscal years

Other entities for fiscal years beginning after December 15, 2017 and interim periods within fiscal years beginning after December 15, 2018

Early adoption is permitted for: Public business entities for reporting periods for which financial statements have

not yet been issued All other entities fore reporting periods for which financial statements have not

yet been made available for issuance An entity that elects to early adopt in an interim period shall reflect any adjustments

as of the beginning of the annual period that includes that interim period

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ASU 2016-16, Intra-Entity Asset Transfers Effective date(s) and early adoption: Public business entities should apply the amendments in annual reporting periods

beginning after December 15, 2017, including interim reporting periods within those annual reporting periods.

Entities other than public business entities should apply the amendments in annual reporting periods beginning after December 15, 2018, and interim periods in annual periods beginning after December 15, 2019.

Early adoption for all entities as of the beginning of an annual reporting period for which financial statements (interim or annual) have not been issued or made available for issuance. That is, earlier adoption should be in the first interim period if an entity issues

interim financial statements.

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Disclosure framework project July 26, 2016, proposed ASU issued September 30, 2016, comment period ended January 25, 2017, Board discussed comments received March 17, 2017, Roundtable on all disclosure projects Final ASU no time frame as yet

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Case Study 1

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Other ASC 740 Topics of Current Interest

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PASS-THROUGH SUBSIDIARIES

Investments in partnerships can be accounted for under the consolidated, equity or cost method of accounting

Partnerships and other entities treated as partnerships (i.e. LLCs/S-Corps) are not taxable entities. Rather, the tax consequences of transactions within the partnership flow through to the partners

The partners then report their proportionate share of the partnerships income or loss in their individual capacities

Under ASC 740, a partners future tax consequences of recovering the financial basis of its investment in the partnership are recognized as deferred tax assets or liabilities

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PASS-THROUGH SUBSIDIARIES (CONTD)

Deferred taxes are recognized on the outside basis difference of investments in pass-through subsidiaries the difference between the financial statement carrying value and the tax basis of the investment in the partnership- Will often be equal to the net basis differences in the assets and liabilities of the

partnership- Watch for exceptions related to goodwill and/or investments in foreign

subsidiaries discussed on next two slides The exceptions to recognizing deferred taxes in ASC 740 (both taxable and deductible)

do not apply to the outside basis of the investment in pass-through subsidiaries- Consideration is necessary for recoverability should there be a deductible

temporary difference- Ordinary versus capital?

The exceptions in ASC 740-10-25-3 (general exceptions) and 740-30-25-9 (deductible outside basis difference) generally will apply to a pass-through subsidiarys investment in another entity

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Pass-through subsidiarys investment in another entity- Corporate parent with consolidated partnership where the partnership

consolidates a foreign subsidiary- A DTL for undistributed earnings for the foreign subsidiary should not be

recognized if the partnership is able to meet the indefinite reversal criterion If a pass-through has an investment in a corporate subsidiary, the outside basis

difference of the investment in the pass-through subsidiary by the ultimate corporate parent should be bifurcated into two components:- The outside basis difference related to the second tier subsidiary, and- The remaining outside basis difference

Deferred taxes generally should not be recognized for the portion of the outside basis difference that relates to the pass-through subsidiarys investment in the second tier corporate subsidiary that meets one of the exceptions to recognize deferred taxes for outside basis differences

If a pass-through has an investment in a domestic corporate subsidiary, the exception in ASC 740-30-25-7 would not be applicable as the partnership cannot recover its investment in the domestic subsidiary tax-free under the IRC

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Similarly, an ultimate corporate parent company may not recognize deferred taxes on the portion of the outside basis difference for its investment in a pass-through subsidiary attributable to nondeductible goodwill- Deferred taxes are not provided for nondeductible goodwill under ASC 805-740-25-

3 and 25-4- A partner may look through its partnership interest (outside basis) to the book

and tax differences of individual assets and liabilities within the partnership (inside basis differences)

There is diversity in practice where some recognize the entire outside basis difference, including the portion of nondeductible goodwill

Either practice can be used as long as it is consistently applied- Discuss with the audit firm involved- BDOs policy is to accept either as long as the practice is consistently applied

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TAX EFFECTS OF NON-CONTROLLING INTERESTS (NCI) IN PASS-THROUGH ENTITIES

Income taxes included in consolidated income taxes and attributed to non-controlling interests on the face of the consolidated income statement will vary depending on whether the subsidiary is a partnership or C corporation

For a partnership:- Tax consequences of transactions within the partnership flow through to the

partners- Partners then report their proportionate share of the partnerships income or loss

in their individual capacities Therefore, an entity with a controlling interest in a partnership would only report

taxes on its share of the partnership in consolidated income tax expense

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BUSINESS COMBINATION ACHIEVED IN STAGES

A business combination that is achieved in stages requires the acquirer to remeasure to fair value its previously held equity investment at the acquisition date

Example would be when an entity has an investment in a partnership accounted for under the equity method and subsequently acquires the remaining partnership interests from the other partners

Equity method investment is remeasured to fair value and any resulting gain or loss is recognized in earnings and not as part of acquisition accounting

Remeasurement upon obtaining control of the investee increases or decreases the financial statement carrying value of the previously held investment without a corresponding change in the tax basis

Remeasurment would generally be a non-recognition event for income tax purposes with no change in tax basis

The effect of derecognizing any deferred taxes related to the outside basis difference of the previously held equity method investment would be recognized in earnings as part of income tax expense

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BUSINESS COMBINATION ACHIEVED IN STAGES (CONTD)

Upon gaining control of the previously held equity method investee, the acquirer will apply acquisition accounting and recognize the assets and liabilities assumed, including goodwill ; however, for tax purposes only a portion would get a step-up in basis

The acquirer recognizes and measures deferred tax assets and liabilities arising from temporary differences in the assets acquired and liabilities assumed from the equity method investee- Deferred taxes recognized on the inside basis differences of the assets and liabilities

assumed is recorded as part of acquisition accounting- Includes the inside basis difference that arises from the portion of the previously

held equity method investment that would not generally get a step-up in basis- Results in larger inside book-over-tax basis differences as a result of the previously

held equity method investment which impacts the amount of goodwill recorded in acquisition accounting

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Case Studies 2, 3, & 4

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TAX REFORM PROPOSALS

Good Bad Ugly

Rate Change 35% to 20% - 15%

Expensing Allows deductibility of both tangible and intangible asset purchases

Net operating loss carryovers

Move from current 20 year carryover to unlimited carryover period

Eliminates current 2 year carryback

Only allowed to offset 90% of taxable income in carryforward year

Interest expense Only allows deduction of interest versus interest income, excess to be carried over

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TAX REFORM PROPOSALS (CONTD)

Good Bad Ugly

Territorial tax System

100% Dividends received deduction from subsidiaries

Still would tax foreign personal holding company income (Code Sec 954(a)(1))

Mandatory repatriation

Liability payable over eight years

8.75% tax rate is proposed on previously untaxed cash and cash equivalents with a reduced 3.5% rate for all other previously untaxed foreign earnings

Border Adjustment tax (BAT)

Exclude gross income (sales, services, royalties etc.) from the tax base for exports

Deny the deduction (basis or cost of goods sold) for imports

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ASC 740 Considerations:

Rate Change Pursuant to ASC 730-10-45-15 the effect of changes in tax laws or rates shall be included in income from continuing operations for the period that includes the enactment date. Calculation complications when change is prospective versus retroactive at an interim date.

Expensing Should create additional deferred tax liabilities. Potential to create additional naked credits for entities in a valuation allowance position.

Interest expense Should create a deferred tax asset which would need to be assessed for recoverability/valuation allowance.

Net operating loss carryovers

For entities that are currently relying on carryback of net reversing deferred tax assets in support of reducing a valuation allowance, this source of income would be eliminated. Proposal could free up naked credits but realization of reversing taxable temporary differences would be limited to 90% of the amount expect to reverse in each subsequent year including the indefinite amount.

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Territorial tax system

Would not have to provide on expected remittance with the exception of withholding tax. Still would need to monitor FPHCI for inclusion. Upon sale would still need provide for outside basis difference since no longer permanent in duration (see ASC 740-30-25-5). Does not appear to be any proposal to eliminate gain on sale from taxation.

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Case Studies 5 & 6

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BRANCH ACCOUNTING AND DEFERRED TAXES

Issue multiple deferred differences to report for the temporary differences of a branch U.S. GAAP to U.S. Tax U.S. GAAP to Foreign Tax U.S. tax impact of Foreign deferred Deferred tax asset for foreign deferred tax liability as (potential foreign tax credit) Deferred tax liability for foreign deferred tax assets

Watch dual consolidated loss disclosures

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Case Studies 7, 8, & 9

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PUSH DOWN ACCOUNTING FALLACIES

ASU 2014-17 was issued in November of 2014 and states: An acquired entity may elect the option to apply pushdown accounting in the reporting

period in which the change-in-control event occurs Above guidance relative to acquired entity and does not eliminate the requirement that

the acquiring corporation record acquisition related adjustments whether they are pushed down to the target or kept notionally at the parent level (ASC 805-20)

Main issue seen in practice is when the acquisition related adjustments are not pushed down to target and targets deferred tax items would be at a rate different than that of the acquirer and also in a different currency ASC 830-30-45-11 States: After a business combination, the amount assigned at the acquisition date to the

assets acquired and the liabilities assumed (including goodwill or the gain recognized for a bargain purchase in accordance with Subtopic 805-30) shall be translated in conformity with the requirements of this Subtopic

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PUSH DOWN ACCOUNTING FALLACIES (CONTD)

ASU 740-10-30-5 states: Deferred taxes shall be determined separately for each tax paying component (an

individual entity on group of entities that is consolidated for tax purposes) in each tax jurisdiction

To summarize above guidance: Record acquisition related adjustments in the appropriate currency even though they are

not pushed down to the target in the acquiring corporations financial statements or books and records

Practical issue exists of identifying the location of the acquisition related adjustments e.g. intangibles - when an entity is acquired with multi location subsidiaries

Need to work with accounting and valuation in order to assure appropriate jurisdictional values are assigned

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Case Study 10

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PRESENTATION OF DEFERRED FEDERAL INCOME TAXES ASSOCIATED WITH DEFERRED STATE INCOME TAXES

ASC 740-10-55-20 states: State income taxes are deductible for U.S. federal income tax purposes and therefore , a deferred state income tax

liability or asset gives rise to a temporary difference for determining a deferred U.S. federal income tax asset or liability, respectively. The pattern of deductible or taxable amounts in future years for temporary differences related to deferred state income tax liabilities or assets should be determined by estimates of the amount of those state income taxes that are expected to become payable or recoverable for particular future years and, therefore, deductible or taxable for U.S. federal tax purposes in those particular future years.

It is not appropriate to net the federal effect of a state DTL or DTA against the state deferred tax. ASC 740 generally requires separate identification of temporary difference and related deferred taxes for each tax-paying component of an entity in each tax jurisdiction, including U.S. federal, state, local, and foreign, tax jurisdictions. ASC 740-10-45-6 states the following regarding the offsetting of DTAs and DTLs: For a particular tax-paying component of an entity and within a particular tax jurisdiction, all deferred tax liabilities

and assets, as well as any related valuation allowance, shall be offset and presented as a single noncurrent amount. However an entity shall not offset deferred tax labilities and assets attributable to different tax-paying components of the entity or to different tax jurisdictions.

In addition to improper presentation of DTAs and DTLs in the balance sheet, improperly netting the federal effect of the state deferred taxes themselves can result in, among other things, (1) an improper assessment of whether a valuation allowance is necessary in a particular jurisdiction or (2) improper disclosures related to DTAs and DTLs.

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Case Study 11

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INTRAPERIOD ALLOCATIONException to the General Rule Losses from Continuing Operations

ASC 740 requires that items outside of continuing operations (extraordinary items, discontinued operations, OCI etc.) be considered in determining the amount of income tax benefit to be allocated to continuing operations in situations where there are pretax lossesfrom continuing operations and a valuation allowance at the beginning and end of the year.

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Case Studies 12 & 13

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UNCERTAIN TAX POSITIONS INDIRECT EFFECTSTransfer Pricing

Two sides to Every Transaction Consider Competent Authority

Amount of deduction in one jurisdiction vs. amount of income in the othertax authorities have conflicting interest

May have exposure in either or both jurisdictions

Tax treaties may provide for competent authority negotiations to resolve conflicts.- Generally high success rate (but may differ by jurisdiction)

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ASC 740 analysis with competent authority Determine exposure in each jurisdiction before potential CA relief Determine whether CA relief will be requested and success probability Determine potential settlement positions, book resulting exposure/asset in

each jurisdiction

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Competent Authority Relief FY 2011 through FY2015

RELIEF 2011 2012 2013 2014 20155-year Average

(2011-2015)

Correlative Adjustment 22.84% 34.24% 65.7% 88.7% 83.3% 58.96%

Adjustment Withdrawn 55.68% 63.59% 14.1% 10.8% 15.1% 31.85%

No Relief 21.48%* 2.17% 20.2% .5% 1.6% 9.19%

Total of Correlative Adjustment received or Adjustment Withdrawn 78.52% 97.83% 79.8% 99.5% 98.4% 86.11%

* 83% of this figure is attributable to a single case on which no relief was granted.


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Case Study 14

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VALUATION ALLOWANCESIn Business Combinations

Established at time of business combination

Evaluate evidence- Combined companys past and expected future results of operations as of the

acquisition date- Consider tax law provisions that restrict future use of temporary differences (Code

Section 382 limitations)

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VALUATION ALLOWANCESIn Business Combinations

Two deferred tax assets and valuation allowances need to be considered in these transactions

Acquired company:- Adjustments to target companys valuation allowance established for DTAs at the

date of acquisition are reflected as adjustments to goodwill.

Acquiring Company:- Adjustments to the acquirers valuation allowance is recorded as a component of

income tax expense (P&L) and not included as part of acquisition accounting (Goodwill).

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Case Study 15

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Circular 230 and General Disclaimer: These materials do not constitute tax or legal advice, and cannot be relied upon for purposes of avoiding penalties under the Internal Revenue Code. These materials may omit discussion of exceptions, qualification, definitions, effective dates, jurisdictional differences, and other relevant authorities and considerations. In no event should a reader rely on these materials in planning a specific transaction or litigation. Non-lawyers should not attempt to provide legal services or legal advice in circumstances where that would violate laws against the unauthorized practice of law. BDO will not be responsible for any error, omission, or inaccuracy in these materials.

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Questions?

Thank You!

120

APPENDIX A SLIDES REGARDING RECENT

ASC 740 CHANGES

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BALANCE SHEET CLASSIFICATION OF DEFERRED TAXES ASU 2015-17ASU 2015-17 issued in November by the Board which requires deferred taxes to be shown as long term in a classified statement of financial position

Transition method The Board decided that entities should have a choice of applying the amendments

either prospectively or retrospectively to all periods presented. Transition Disclosures If an entity applies the amendments prospectively, the entity should disclose in the

first interim and annual period of change (1) the nature of and reason for the change in accounting principle and (2) a statement that prior periods were not adjusted. If an entity applies the amendments retrospectively, the entity should disclose in the first interim and annual period of change (1) the nature of and reason for the change in accounting principle and (2) quantitative information about the effects of the accounting change to prior periods.

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BALANCE SHEET CLASSIFICATION OF DEFERRED TAXES ASU 2015-17 (CONTD)

Effective Date and Early Adoption The Board affirmed the proposal that public business entities would be required to

apply the amendments in annual reporting periods beginning after December 15, 2016, including interim reporting periods within those annual reporting periods.

The Board affirmed the proposal that entities other than public business entities would be required to apply the amendments in annual reporting periods beginning after December 15, 2017, and interim reporting periods within annual reporting periods beginning after December 15, 2018.

The Board decided to allow earlier adoption for all entities as of the beginning of any interim or annual reporting period.

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ASU 2016-09 IMPROVEMENTS TO EMPLOYEE SHARE-BASED ACCOUNTING ASU 2016-09 issued on March 30, 2016 The changes as they relate to income taxes are as follows:

Classify cash paid when directly withholding shares to meet statutory withholding requirements as a financing activity in the statement of cash flow. Transition - Retrospective transition method (application of a different accounting

principal to one or more previously issued financial statements). Removal of requirement to present excess tax benefits as a cash inflow from financing

activities and a cash outflow from operating activities. Transition - Either prospective or retrospective application of this provision is permitted.

Board decided that all excess tax benefits and deficiencies be recognized within the income statement. Removes the requirement to recognize excess tax benefit until reduction of cash taxes. Transition - modified retrospective method, with a cumulative- effect adjustment

recognized in equity and prospective transition method for future excess benefits and deficiencies. All existing windfall benefits not recognized due to net operating losses are recognized.

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ASU 2016-09 IMPROVEMENTS TO EMPLOYEE SHARE-BASED ACCOUNTING (CONTD)

Other Issues

The ASU eliminates the requirement to defer recognition of an excess tax benefit until the benefit is realized through a reduction of taxes payable

Excess tax benefits and deficiencies are considered discrete items in the reporting period and are not included in the estimated effective tax rate

Excess tax benefits and deficiencies are excluded from the assumed proceeds available to repurchase shares in the computation of diluted earnings per share when an entity applies the treasury stock method

The tax impact of dividends on share-based payments will now be accounted for as income tax expense or benefit in the income statement rather than as an increase to APIC

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Effective date(s) Public business entities for fiscal periods beginning after December 15, 2016, including

interim periods within those fiscal years Other entities for fiscal years beginning after December 15, 2017 and interim periods

within fiscal years beginning after December 15, 2018 Early adoption is permitted for:

Public business entities for reporting periods for which financial statements have not yet been issued

All other entities for reporting periods for which financial statements have not yet been made available for issuance

An entity that elects to early adopt in an interim period shall reflect any adjustments as of the beginning of the annual period that includes that interim period

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If early adopted all amendments must be adopted at the same time

Disclosures In the period of adoption, entities are required to disclose:

The nature and reason for the change in accounting principle The cumulative effects of the changes on retained earnings or other components of

equity as of the date of adoption Cash flows related to excess tax benefits disclose either:

That prior periods have not been adjusted OR The effect of the change on prior periods retrospectively adjusted if the change is

applied retrospectively

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For changes in the statement of cash flows related to statutory tax withholding requirements, entities are required to disclose the effect of the change on prior periods retrospectively adjusted

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Other issues to consider

Valuation allowance Consider valuation allowance upon adoption Release after adoption

Determination of the discrete item related to excess tax benefits Direct effect Full ASC 740 with and without Incremental effect

Existing APIC Pools No reclassification to retained earnings upon adoption

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Early adoption other than first-quarter Must treat as if adopted at the beginning of the year Previously issued financials need to be recast in future filings (e.g. Form 10-Q,

Form 10-K)

Accounting policy change for forfeitures will create additional deferred tax considerations

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EXAMPLE OF SHARE-BASED PAYMENTS

Assume Fulham Co. grants a nonqualified stock option (NQSO) 40% rate Fair value at date of grant is $20 in 20x1 Strike price equals market at date of grant - $30 At date of exercise the fair value of the grant is $60

Fulham would recognize the following:

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EXAMPLE OF SHARE-BASED PAYMENTS

Assume the same facts as the previous example except the excess tax benefit recognized becomes part of an NOL carryover and Fulham will not record a valuation allowance with respect to its deferred tax assets.

Fulham would recognize the following:

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INTRA-ENTITY ASSET TRANSFERS ASU 2016-16

ASU 2016-16 was issued on October 24, 2016 Requires that an entity recognize the income tax consequences of an intra-entity asset

transfer, other than an intra-entity asset transfer of inventory, when the transfer occurs. For intra-entity asset transfers of inventory, the board decided to retain current GAAP, which requires an entity to recognize the income tax consequences when the inventory has been sold to an outside party.

The Board decided that entities should apply the amendments on a modified retrospective basis, with a cumulative-effect adjustment directly to retained earnings as of the beginning of the period of adoption.

The Board affirmed the proposal that entities should disclose in the first annual period after adoption, and the interim periods within the first annual period, the nature of and reason for the change in accounting principle and certain quantitative information about the change in accounting principle.

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INTRA-ENTITY ASSET TRANSFERS (CONTD)

The Board decided that public business entities should apply the amendments in annual reporting periods beginning after December 15, 2017, including interim reporting periods within those annual reporting periods.

The board decided that entities other than public business entities should apply the amendments in annual reporting periods beginning after December 15, 2018, and interim periods in annual periods beginning after December 15, 2019.

The Board decided to permit early adoption for all entities as of the beginning of an annual reporting period for which financial statements (interim or annual) have not been issued or made available for issuance. That is, earlier adoption should be in the first interim period if an entity issues

interim financial statements.

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INTRA-ENTITY TRANSACTION EXAMPLE - INVENTORY

Assumptions: Widget Company, a U.S. Corporation, owns 100% of Guiness Co., an Irish entity. Widget

and Guiness are included in a consolidated financial statement but file separate tax returns.

Widget sells inventory to Guiness with a book and tax value of $50 for $100 which has not been sold by Guiness at the reporting date.

Widgets tax rate is 40% and Guiness tax rate is 12.5%.

Question: What entries should be recorded in the consolidated financial statements of the

Widget/Guiness Group.

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INTRA-ENTITY TRANSACTION EXAMPLE-CURRENT & PROSPECTIVE ACCOUNTING-INVENTORY

WidgetDr A/R 100

Cr. Sale 100Dr Cogs 50

Cr. Inventory 50Dr Current tax Expense 20

Cr Current tax Payable 20Guiness

Dr Inventory 100Cr A/P 100

ConsolidationDr A/P 100Dr Sales 100

Cr Inventory 50Cr. Cogs 50Cr. A/R 100

Dr Prepaid tax 20Cr Current tax Expense 20

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INTRA-ENTITY TRANSACTION EXAMPLE-EXPOSURE DRAFT ACCOUNTING (REJECTED)-INVENTORYFacts are the same as the previous example.Journal entries are as follows:

WidgetDr A/R 100

Cr Sale 100Dr Cogs 50Cr. Inventory 50

Dr Current tax Expense 20Cr Current Tax Payable 20

GuinessDr Inventory 100Cr A/P 100

ConsolidationDr A/R 100Dr Sales 100

Cr Inventory 50Cr Cogs 50Cr A/R 100

Dr Deferred tax asset 6.251.

Cr Deferred Tax benefit 6.25

1. (50x12.5%)

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INTRA-ENTITY TRANSFER FINAL - NON-INVENTORY TRANSFER

Assumptions: Widget Company, a U.S. Corporation, owns 100% of Guiness Co., an Irish entity. Widget

and Guiness are included in a consolidated financial statement but file separate tax returns.

Widget sells intellectual property (IP) to Guiness for $100 which has a zero basis. Guiness is able to amortize the IP for tax purposes over a ten year period which approximates the estimated book life.

Widgets tax rate is 40% and Guinesss tax rate is 12.5%

Question: What entries should be recorded in the consolidated financial statements of the

Widget/Guiness Group with respect to the IP sale?

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INTRA-ENTITY TRANSACTION EXAMPLE NON INVENTORYPrior Accounting

WidgetDr A/R 100

Cr Income 100Dr Current tax

expense 40Cr Current tax

payable 40

GuinessDr I.P 100

Cr A/P 100

ConsolidationDr prepaid tax 40Cr Current Tax

expense 40Dr Income 100

Cr I.P. 100

ASU 2016-16

WidgetDr A/R 100

Cr Income 100Dr Current tax

expense 40Cr Current Tax

payable 40

GuinessDr I.P 100

Cr A/P 100

ConsolidationDr Deferred tax

asset 12.5Cr Deferred Tax

benefit 12.5Dr Income 100

Cr I.P. 100

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DISCLOSURE FRAMEWORK PROJECT

On July 26, 2016 the Board proposed an Accounting Standards Update, with a comment period of 60 days or ending on September 30, 2016, whichever is longer.

The Board decided to require prospective transition for all income tax disclosures. Currently, some disclosure requirements in Topic 740, Income Taxes, are required of

public entities and some are required of nonpublic entities. The Board decided to replace the term public entity with the term public business entity as defined in the Master Glossary of the Codification. The result is that some disclosures will be required of public business entities while other disclosures will be required of entitles other than public business entities.

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DISCLOSURE FRAMEWORK PROJECT FOREIGN DISCLOSURES & UNDISTRIBUTED EARNINGS TENTATIVE DECISION

Disclose

Income (loss) before income tax expense (benefit) disaggregated between domestic and foreign

Income tax expense (or benefit) from continuing operations disaggregated between domestic and foreign shall be disclosed

An explanation of circumstances that caused a change in assertion about the indefinite reinvestment of undistributed foreign earnings and the corresponding amount of these earnings

The aggregate of cash, cash equivalents and marketable securities held by foreign subsidiaries

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DISCLOSURE FRAMEWORK PROJECT-UNCERTAIN TAX POSITION DISCLOSURE TENTATIVE DECISION

Disclose

Settlements between cash and noncash items UTPs by balance sheet line item

Removes

The disclosure of tax positions that could reasonably change within the next twelve months pursuant to ASC 740-10-50-15d

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DISCLOSURE FRAMEWORK PROJECT- OTHER ASC 740 ISSUES

Disclose If a change in tax law has been enacted and it is probable that the change will affect

the reporting entity in a future period Income taxes paid between domestic taxes paid and foreign taxes paid Foreign income taxes paid to any country that are significant relative to total income

taxes paid The change in the valuation allowance and explaining the nature and amounts recorded

or released during the reporting period (for public business entities only)

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DISCLOSURE FRAMEWORK PROJECT- OTHER ASC 740 ISSUES (CONTD)Rate Reconciliation Public Business Entity

Reconciliation between total income tax expense/(benefit) from continuing operations and PBT times the applicable statutory federal income tax rate showing the estimated reporting currency amount of each reconciling difference

Should the public business entity be a foreign entity, the income tax rate in that entitys country of domicile shall normally be used as the starting point of the reconciliation (emphasis added) Different rates shall not be used for subsidiaries or other segments of the public

business entity If the rate used is other than the U.S. federal tax rate, the rate used and the basis

for using that rate shall be disclosed If no individual reconciling item amounts to more than 5% of the computed amount and

the total difference to be reconciled is < 5%, no reconciliation need be provided

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DISCLOSURE FRAMEWORK PROJECT- OTHER ASC 740 ISSUES (CONTD)

Rate Reconciliation Public Business Entity (contd) Reconciling items that are individually less than 5% of the computed amount may be

aggregated in the reconciliation The reconciliation may be presented in percentages or in the reporting currency The statutory tax rates shall be the regular tax rates if there are alternative tax

systems Explanations of year-to-year changes in the reconciling items shall also be

disclosed

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DISCLOSURE FRAMEWORK PROJECT OTHER ASC 740 ISSUES (CONTD)

The amounts of federal, state, and foreign carryforwards (not tax effected) by time period of expiration for each of the first five years after the reporting date and a total of the amounts for the remaining years. (public business entities)

The deferred tax asset for carryforwards (tax effected) before valuation allowance disaggregated by federal, state, and foreign. Those amounts should be further disaggregated by time period of expiration for each of the first five years after the reporting date and a total of the amounts for the remaining years. (public business entities)

The total amount of unrecognized tax benefits that offset the deferred tax asset attributable to carryforwards

For entities other than public business entities the amounts of federal, state, and foreign carryforwards (not tax effected) should be disclosed

The terms of any rights or privileges granted by a governmental entity directly to the reporting entity that have reduced, or may reduce, the entity's income tax burden. Does not apply to circumstances in which the entity meets the eligibility requirements that are broadly available to taxpayers without specific agreement between the entity and the government

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DISCLOSURE FRAMEWORK PROJECT OTHER ASC 740 ISSUES (CONTD)Potential Sample of Carryforward Disclosure

Year of Expiration

FederalCarryforward

State Carryforward

Foreign Carryforward

Federal DTA

StateDTA

ForeignDTA

Less UTP

Net DTA Before VA

2017

2018

2019

2020

2021

Thereafter