1. 1. #cbizmhmwebinar 1 CBIZ & MHM Executive Education Series First Quarter Accounting and Financial Reporting Update Mike Loritz, Mark Winiarski, Bill Smith April 13 & April 20, 2016
2. 2. #cbizmhmwebinar 2 About Us Together, CBIZ & MHM are a Top Ten accounting provider Offices in most major markets Tax, audit and attest* and advisory services Over 2,900 professionals nationwide A member of Kreston International A global network of independent accounting firms *MHM is an independent CPA firm providing audit, review and attest services, and works closely with CBIZ, a business consulting, tax and financial services provider.
3. 3. #cbizmhmwebinar 3 Before We Get Started To view this webinar in full screen mode, click on view options in the upper right hand corner. Click the Support tab for technical assistance. If you have a question during the presentation, please use the Q&A feature at the bottom of your screen.
4. 4. #cbizmhmwebinar 4 CPE Credit This webinar is eligible for CPE credit. To receive credit, you will need to answer periodic participation markers throughout the webinar. External participants will receive their CPE certificate via email immediately following the webinar.
5. 5. #cbizmhmwebinar 5 Disclaimer 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.
6. 6. #cbizmhmwebinar 6 Presenters 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 the Director of the Audit Resource Group and a member of MHM's Professional Standards Group, providing accounting knowledge leadership in the areas of derivative financial instruments, complex financial instruments, share-based compensation, fair value, debt/equity and others. 816.945.5611 mloritz@cbiz.com MIKE LORITZ, CPA MHM Shareholder
7. 7. #cbizmhmwebinar 7 Presenters Mark is a member of our Professional Standards Group (PSG). Mark's role includes instructing in the national training programs, serving as a subject matter expert at webinars and conferences, and preparing MHM publications on accounting and auditing issues. As a PSG member , Mark consults with clients and engagement teams across the country in many areas of accounting and auditing. Mark has served clients as an auditor, consultant and advisor in numerous industries including manufacturing, distribution, mining, retail sales, services and software. 816.945.5614 mwiniarski@cbiz.com @KCWini MARK WINIARSKI, CPA MHM Shareholder
8. 8. #cbizmhmwebinar 8 Presenters 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. 301.951.3636 billsmith@cbiz.com WILLIAM M. SMITH, Esq. Managing Director, CBIZ National Tax Office
9. 9. #cbizmhmwebinar 9 Agenda Final Accounting Standards Updates 02 01 03 04 Other Financial Reporting Updates Federal Tax Update Questions
10. 10. #cbizmhmwebinar 10 Final Accounting Standards Updates
11. 11. #cbizmhmwebinar 11 FASB - Overall Themes Financial Accounting Standards Board Back into the storm Nine accounting standards issued in Q1
12. 12. #cbizmhmwebinar 12 Leases (ASU 2016-02) Lease obligations and lease assets are recorded on the balance sheet for finance (formerly capital) and operating leases Scope Includes: contracts that convey the right to control the use of an identified asset (property, plant or equipment) for a period of time in exchange for consideration Excludes: Intangible assets, Exploration for or use of natural resources, biological assets, inventory, assets under construction Short-term leases: 12 months or less Contracts with a substantive right to substitute another asset
13. 13. #cbizmhmwebinar 13 Leases (ASU 2016-02) Key Concepts Lease term: Noncancellable period plus reasonably certain renewals Lease payments: Fixed payments, less incentives paid Variable lease payments dependent upon an index or rate Plus payments that are reasonably certain to occur Exercise price of an option to purchase the underlying asset Payments for penalties to terminate the lease Certain structuring fees, and For the lessee residual value guarantees probable of being paid Lease payments excludes non-qualifying variable lease payments, guarantees of lessor debt, and nonlease components.
14. 14. #cbizmhmwebinar 14 Leases (ASU 2016-02) Key Concepts Discount rate Implicit rate, unless not readily determinable Incremental borrowing rate Practical expedient for nonpublic entities to elect risk-free discount rate Related party leasing Evaluate based on the legally enforceable terms and conditions
15. 15. #cbizmhmwebinar 15 Leases (ASU 2016-02) Lessee Classification 1. The lease transfers ownership of the underlying asset to the lessee by the end of the lease term 2. The lease grants the lessee an option to purchase the underlying asset that the lessee is reasonably certain to exercise 3. The lease term is for the major part of the remaining economic life of the underlying asset 4. The present value of the sum of the lease payments and any residual value guaranteed by the lessee that is not already reflected in the lease payments equals or exceeds substantially all of the fair value of the underlying asset 5. The underlying asset is of such a specialized nature that it is expected to have no alternative use to the lessor at the end of the lease term
16. 16. #cbizmhmwebinar 16 Leases (ASU 2016-02) Other Changes Simplified sale-leaseback rules Initial direct costs Subleases Reassessment and modification Lessor accounting Distinction between direct financing and sales type lease will rest on third-party involvement Selling profit on a sales-type lease is upfront Eliminates leveraged lease model
17. 17. #cbizmhmwebinar 17 Leases (ASU 2016-02) Presentation and Disclosure Presentation and disclosure between finance and operating leases is segregated Prohibition from presenting finance and operating lease right-of-use assets in the same line item Increased disclosures, including: Options, covenants and similar contractual terms Significant terms and judgments Additional information for analysis Weighted average lease term Weighted average discount rate
18. 18. #cbizmhmwebinar 18 Leases (ASU 2016-02) Transition Modified retrospective transition Recognize and measure existing or new leases as of the beginning of the earliest comparative period Practical expedients Reassessment exclusion Do not reassess whether any contracts contain leases Do not reassess lease classification Do not reassess initial direct costs Exclude short-term leases Use hindsight for lease term and impairment of the right-of-use-assets
19. 19. #cbizmhmwebinar 19 Leases (ASU 2016-02) Effective Date Calendar-year entities: Public business entities, certain not-for-profit entities and employee benefit plans: December 31, 2019 including interim periods All others: December 31, 2020 Early adoption is permitted.
20. 20. #cbizmhmwebinar 20 Financial Instruments: Recognition & Measurement (ASU 2016-01) Equity investments measured at fair value with changes in fair value recognized in net income Except investments consolidated or accounted for under the equity method Examples of equity investments: Stock, partnership interests, membership units Warrants Forward purchase or sale agreements for equity Eliminates the available-for-sale and cost method classifications for equity investments, but does not impact debt securities or securities measured under the fair value option.
21. 21. #cbizmhmwebinar 21 Financial Instruments: Recognition & Measurement (ASU 2016-01) Practicability Exception: elect to record equity investments without readily determinable fair values at: Cost Plus or minus subsequent adjustments for observable price changes for an identical or similar investment of the same issuer Less impairment Qualitative assessment each reporting period Measured at fair value with immediate recognition of gain or loss Qualification for the exception is assessed each reporting period.
22. 22. #cbizmhmwebinar 22 Financial Instruments: Recognition & Measurement (ASU 2016-01) Presentation and Disclosure Present or disclose financial assets and financial liabilities by measurement category and form of financial asset Eliminates the requirement for non-public entities to disclose fair value of financial instruments measured at amortized cost (early adoption permitted) Financial instruments measured at amortized cost (public entities) Eliminates disclosures about method(s) and significant assumptions used to estimate the fair value
23. 23. #cbizmhmwebinar 23 Financial Instruments: Recognition & Measurement (ASU 2016-01) Other changes Requires separate presentation in other comprehensive income for effect of changes in credit risk own credit on liabilities measured under the fair value option (early adoption permitted) Requiring public business entities to use the exit price notion when measuring the fair value of financial instruments for disclosure purposes Clarifies assessments of income tax valuation allowances for available-for-sale securities Effectively eliminates the ability to consider ability and intent to hold the debt securities to maturity as a tax planning strategy
24. 24. #cbizmhmwebinar 24 Financial Instruments: Recognition & Measurement (ASU 2016-01) Transition and Effective Date Calendar-year entities: Public-business entities: December 31, 2018 including interim periods Private companies, not-for-profit organizations and employee benefit plans: December 31, 2019 Prospective application for the measurement election for equity securities without readily determinable fair value Cumulative catch-up at the beginning of the period of adoption for all other provisions
25. 25. #cbizmhmwebinar 25 Simplifying the Transition to the Equity Method of Accounting (ASU 2016-07) Eliminates the retrospective application of the equity method when an investment in the equity of another entity transitions from being accounted for as a trading, available-for-sale or cost method investment to the equity method of accounting Amounts previously recognized in accumulated other comprehensive income are recognized into net income upon transition to the equity method of accounting
26. 26. #cbizmhmwebinar 26 Simplifying the Transition to the Equity Method of Accounting (ASU 2016-07) Original exposure draft called for the elimination of the allocation and tracking of the basis difference for equity method investments Based on feedback this proposal was removed from the final standard A new project was created to consider other ways to simplify the equity method of accounting
27. 27. #cbizmhmwebinar 27 Simplifying the Transition to the Equity Method of Accounting (ASU 2016-07) Prospective transition Effective for all entities for fiscal years beginning after December 15, 2016 Calendar year December 31, 2017 Early adoption is permitted.
28. 28. #cbizmhmwebinar 28 Effect of Derivative Contract Novations (ASU 2016-05) When hedge accounting is applied, a contract novation does not on its own trigger dedesignation of the hedging relationship Contract novation is not a termination of the existing derivative contract Contract novation is not a change in a critical term Contract novation occurs when the counterparty to a contract changes as a result of a merger, acquisition, intercompany transaction or similar transaction by the counterparty.
29. 29. #cbizmhmwebinar 29 Effect of Derivative Contract Novations (ASU 2016-05) Prospective or modified retrospective transition Under the modified retrospective transition reassessment and measurement of hedge effectiveness for formerly dedesignated hedging relationships is required for each period not previously performed Calendar year entities: Public business entities: December 31, 2017 including interim periods All others: December 31, 2018 Early adoption is permitted.
30. 30. #cbizmhmwebinar 30 Derivatives: Contingent Put and Call Options in Debt Instruments (ASU 2016-06) Clarifies that the four-step decision sequence from the Derivatives Implementation Group (DIG) is the only required analysis for whether a call or put option that can accelerate repayment of debt is clearly and closely related to the host instrument Payoff is adjusted based on changes in an index Payoff is indexed to an underlying other than interest rate or credit risk Debt involves a substantial premium or discount Call (put) option is contingently exercisable
31. 31. #cbizmhmwebinar 31 Derivatives: Contingent Put and Call Options in Debt Instruments (ASU 2016-06) Modified retrospective transition One-time only option to elect to measure a debt instrument at fair value if it ceases to have a bifurcated embedded derivative upon adoption Calendar year entities: Public business entities: December 31, 2017 including interim periods All others: December 31, 2018 Early adoption is permitted.
32. 32. #cbizmhmwebinar 32 Private Company Council Effective Dates (ASU 2016-03) Unconditional one-time election to adopt an existing PCC accounting alternative Allows an entity to forgo the initial preferability assessment Goodwill amortization Retains prospective transition guidance in the period of adoption Clarifies that amortization of existing goodwill begins at the beginning of the fiscal year of adoption Effective upon issuance
33. 33. #cbizmhmwebinar 33 Private Company Council Effective Dates (ASU 2016-03) Identifying and recognizing intangible assets under the acquisition method Retains prospective transition guidance Retains the requirement to adopt goodwill amortization accounting alternative Common controlled leasing arrangements (Variable Interest Entity scope exception) Retains retrospective transition guidance
34. 34. #cbizmhmwebinar 34 Private Company Council Effective Dates (ASU 2016-03) Simplified hedge accounting for certain receive- variable pay-fixed interest rate swaps Retains modified retrospective or retrospective transition options Allows election on a swap-by-swap basis for existing swaps, one time only, upon the first adoption of the accounting alternative
35. 35. #cbizmhmwebinar 35 Revenue Recognition Timeline * First applicable reporting date for calendar year entity
36. 36. #cbizmhmwebinar 36 Revenue (Topic 606): Principal versus Agent Considerations (ASU 2016-08) Major changes Clarifies evaluation applies to each performance obligation Clarifies an entity is a principal when they obtain control of a good or service prior to transfer to the customer
37. 37. #cbizmhmwebinar 37 Revenue (Topic 606): Principal versus Agent Considerations (ASU 2016-08) Major changes Flips the considerations from an agent perspective to a principal perspective, indicators include: Responsibility for fulfillment Inventory risk Discretion to establish prices Eliminates indicators that an entity is an agent: Consideration in the form of a commission Credit risk
38. 38. #cbizmhmwebinar 38 Improvements to Employee Share-Based Payment Accounting (ASU 2016-09) Simplification of seven aspects of Topic 718 1. Eliminates APIC treatment for excess tax benefits 2. Eliminates separation of cash flows related to excess tax benefits 3. Permits an entity wide election to account for forfeitures when they occur 4. Increases the threshold for requiring liability treatment for withholding shares for employee income taxes from more than the minimum income tax rate to the maximum 5. Clarifies that withholdings for employee income taxes related to stock compensation are classified as a financing activity
39. 39. #cbizmhmwebinar 39 Improvements to Employee Share-Based Payment Accounting (ASU 2016-09) Simplification of seven aspects of Topic 718 6. Practical expedient for nonpublic entities to use a midpoint in estimating the expected term under certain conditions Only permissible for entities that are not a public entity as defined for Topic 718 7. Permits a nonpublic entity to make a one-time election upon adoption to switch existing liability classified awards to the intrinsic value method
40. 40. #cbizmhmwebinar 40 Improvements to Employee Share-Based Payment Accounting (ASU 2016-09) Transition methods applied are the retrospective, modified retrospective or prospective method depending on which change is being implemented. Timing of recognition of excess tax benefits, forfeitures, and intrinsic value are applied under the modified retrospective approach Calendar year entities: Public business entities: December 31, 2017 including interim periods All others: December 31, 2018 Early adoption is permitted.
41. 41. #cbizmhmwebinar 41 Other Financial Reporting Updates
42. 42. #cbizmhmwebinar 42 PROPOSAL: Cash Flow Statement Proposed clarifications for seven types of transactions where diversity of practice exists, including: Debt prepayment, extinguishment costs, and repayment of zero-coupon bonds Settlement of insurance claims, including life insurance Distributions received from equity method investees Clarification to the predominance principle Comment period ended March 29, 2016.
43. 43. #cbizmhmwebinar 43 PROPOSAL: Defined Benefit Plan Disclosures Thirteen proposed improvements to disclosure requirements, including: Eliminating disclosures, such as: Pension accumulated benefit obligations Amount of net periodic benefit cost in AOCI expected to be recognized in the next year For nonpublic entities reconciliations of Level 3 plan assets Adds disclosures, such as: Nature of benefits provided, employees covered, benefit plan formula For nonpublic entities effect of a one-percentage point change in health care cost trend rates
44. 44. #cbizmhmwebinar 44 PROPOSAL: Net Periodic Pension Cost Improvements to presentation including: Present service cost in the same line item as compensation cost in the income statement Present other components of net benefit costs separately from service cost Presented outside of a subtotal of income from operations Permits capitalization of service cost into inventory or a self-constructed asset Comment period for these two proposals ends April 25, 2016.
45. 45. #cbizmhmwebinar 45 FEDERAL TAX UPDATE
46. 46. #cbizmhmwebinar 46 Obamas 2017 Budget Revenue Raisers Long term capital gain rate increased from 20% to 24.2% (with 3.8% NIIT, would be 28%) Estate and gift rates and exemptions returned to 2009: 45% top rate; $3.5 million exemption for estates and $1 million for gifts Buffett rule: High-income taxpayers subject to 30% minimum rate Cap charitable deduction benefit at 28% Tax carried interests as ordinary income Limit 1031 deferral to $1 million
47. 47. #cbizmhmwebinar 47 Obamas 2017 Budget Business Provisions Repeal LIFO accounting Enhanced and simplified research incentives beyond changes made by the PATH Act Addition of tax incentives for designated Promise Zones Additional tax credits for investments in qualified property used in a qualifying advanced energy manufacturing project
48. 48. #cbizmhmwebinar 48 Obamas 2017 Budget Net Investment Income Tax definition expanded Gross income and gain from any trades or businesses of an individual that is not otherwise subject to employment taxes Soften Cadillac Tax Increase the excise tax threshold to the greater of the current law threshold or a "gold plan average premium." Credit for hiring community college grads One-time credit of $5,000 for each qualified employee hired full-time and certified as having earned a degree from an eligible post-secondary institution.
49. 49. #cbizmhmwebinar 49 House of Representatives on Tax Reform House Republicans held a task force meeting March 1 to help create consensus around tax proposals that may indicate where the panel's tax writers will focus their efforts to overhaul the code. The task force met again on March 23 and the Ways and Means Tax Policy Subcommittee, which Rep. Charles Boustany Jr. (R-La.) chairs, will hold a hearing April 13 on proposals to alter income-based taxation. International tax changes are being crafted by Boustany and a broader overhaul of the Code is expected from Rep. James B. Renacci (R-Ohio), also a House Ways and Means Committee member.
50. 50. #cbizmhmwebinar 50 IRS Audit Rates Individuals Businesses IRS Commissioner Koskinen said he anticipates the new rules will increase the number of partnerships examined. The IRS has shed nearly 4,000 enforcement personnel in the past decade tied to hiring freezes and budget cuts. FY 2015 FY 2014 Change Overall 0.84 0.86 (0.02) > $1 million 9.55 7.50 2.05 > $200K 2.61 2.71 (0.10) FY 2015 FY 2014 Change Partnerships 0.51 0.43 0.08 S Corps 0.40 0.36 0.04
51. 51. #cbizmhmwebinar 51 Brinks Gilson & Lione v Commr, T.C. Memo. 2016-20 Law Firm established as corporation. Cash method of accounting. The law firm had 65 shareholder attorneys, who were entitled to dividends as and when declared by the board. For at least 10 years before and including the years in issue, however, petitioner had not paid a dividend. The board intended the sum of the shareholder attorneys' yearend bonuses (bonus pool) to exhaust book income. Law firm had invested capital, measured by the book value of its shareholders' equity, of about $8 million at the end of 2007 and about $9.3 million at the end of 2008. Law firm conceded portion should be non-deductible dividends, and court held corporation liable for penalties.
52. 52. #cbizmhmwebinar 52 Polowniak v Commr, T.C. Memo. 2016-31 Taxpayer sole shareholder of S Corporation (SCo) Taxpayer set up what his attorney called a Roth IRAs and privately owned Roth IRA corporations (PIRAC) transaction New Roth IRA would purchase the stock of a new corporation (Newco) treated as C Corporation Newco engages in transactions with pre-existing wholly owned S Corporation Taxpayer was Newcos sole employee, and entered into consulting agreement with SCo for 75% of revenue from one client Court held substance, not form, controlled. Held that taxpayer had excess contributions to Roth IRA, subject to excise tax and penalties.
53. 53. #cbizmhmwebinar 53 Stuller v. U.S. (7th Cir.) H and W owned several Steak n Shake franchises Bred horses Lived in Illinois but bought property in Tennessee for their horses From 1994 to 2009, it lost money every year except 1997, when its annual profit was $1,500. From 1999 to 2005, its annual losses ranged between around $130,000 to around $170,000 per year. During this time, LSA was only able to continue operating because it received around $1.5 million in interest-free loans from the taxpayers, which were not repaid.
54. 54. #cbizmhmwebinar 54 Stuller v. U.S. (7th Cir.) Section 183 permits tax deductions for losses from S corp activities engaged in for profit (i.e., business losses). Treasury Regulation 1.1832(b) provides a non-exclusive list of relevant factors for determining whether an activity is engaged in for profit, including: 1. the manner in which the taxpayer carries on the activity; 2. the expertise of the taxpayer or his advisors; 3. the time and effort expended by the taxpayer; 4. the expectation that assets may appreciate in value; 5. the taxpayer's success in other similar or dissimilar activities; 6. the taxpayer's history of income or losses; 7. the amount of occasional profits, if any; 8. the financial status of the taxpayer; 9. elements of personal pleasure or recreation.
55. 55. #cbizmhmwebinar 55 Stuller v. U.S. (7th Cir.) No one factor is determinative; instead, all relevant facts and circumstances are to be taken into account. In considering whether an operation was a business activity engaged in for profit, more weight is given to objective facts than a taxpayer's statement of intent. District court applied all of the factors and found that there was no intent to make a profit. Court of appeals affirmed: kept minimal records for tax purposes despite consistent and significant annual losses, taxpayer did not change its operating methods or adopt any new techniques that would significantly turn around its finances no evidence that taxpayers consulted with any experts regarding methods for running a profitable horse-breeding enterprise substantial income from sources losses from the activity generate substantial tax benefits personal or recreational elements involved
56. 56. #cbizmhmwebinar 56 ? QUESTIONS
57. 57. #cbizmhmwebinar 57 If You Enjoyed This Webinar Upcoming Courses: 4/19: Leasing Unleashed - A Deep Dive into the New Standard 4/28 & 5/17: Top Lessons Learned from the First Year of the Uniform Grant Guidance Implementation 4/28 & 5/3: Eye on Washington: Quarterly Business Tax Update 5/11 & 6/1: Unclaimed, Unidentified but Undeniable - A Primer on Managing your Abandoned Property Recent Publications: First Quarter Developments from the Emerging Issues Task Force Guidance Streamlines Equity Method Accounting Principal Versus Agent Consideration Finalized for Revenue Recognition Standard Private Companies Can Now Bypass Preferability Assessment for Qualifying Adoptions of Accounting Alternatives
58. 58. #cbizmhmwebinar 58 Connect with Us linkedin.com/company/ mayer-hoffman-mccann-p.c. @mhm_pc youtube.com/ mayerhoffmanmccann slideshare.net/mhmpc linkedin.com/company/ cbiz-mhm-llc @cbizmhm youtube.com/ BizTipsVideos slideshare.net/CBIZInc MHM CBIZ
59. 59. #cbizmhmwebinar 59 THANK YOU CBIZ & Mayer Hoffman McCann P.C. cbizmhmwebinars@cbiz.com