Published on July 7, 2016
1. #cbizmhmwebinar 1 CBIZ & MHM Executive Education Series™ Second Quarter Accounting and Financial Reporting Update Mike Loritz, Mark Winiarski, Stephen Henley July 7 & July 20, 2016
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. #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. #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. #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. #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. 913.234.1226 • [email protected] MIKE LORITZ, CPA MHM Shareholder
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. 913.234.1656 • [email protected] • @KCWini MARK WINIARSKI, CPA MHM Shareholder
8. #cbizmhmwebinar 8 Presenters Steve Henley is the National Tax Practice Leader for CBIZ. Steve's responsibilities include developing and implementing strategies for the successful operation of the tax practice, including national support for the CBIZ MHM's local tax practices through the National Tax Office. 770.858.4500 • [email protected] STEPHEN HENLEY National Tax Practice Leader CBIZ
9. #cbizmhmwebinar 9 Agenda Final Accounting Standards Updates 02 01 03 04 Other Financial Reporting Updates Federal Tax Update Questions
10. #cbizmhmwebinar 10 Final Accounting Standards Updates
11. #cbizmhmwebinar 11 FASB - Overall Themes • Finalizing major projects • Revenue recognition • Financial instruments – Credit losses • Exposure documents on several smaller projects • Expect the active board to continue • Eight scheduled exposure documents • Three scheduled final standards
12. #cbizmhmwebinar 12 Revenue Recognition Timeline * First applicable reporting date for calendar year entity
13. #cbizmhmwebinar 13 Revenue (Topic 606): Identifying Performance Obligations and Licensing (ASU 2016-10) • Issues Addressed • Identifying performance obligations • Materiality • Shipping and handling • Separation • Licensing • Method of recognition • Scope • Separation
14. #cbizmhmwebinar 14 Revenue (Topic 606): Narrow-Scope Improvements and Practical Expedients (ASU 2016-12) • Issues Addressed • Collectability • Sales taxes • Noncash consideration • Transition guidance
15. #cbizmhmwebinar 15 Topic 606: Identifying Performance Obligations and Licensing 1 • Identify the contract(s) with a customer. 2 • Identify the performance obligations in the contract. 3 • Determine the transaction price. 4 • Allocate the transaction price to the performance obligations in the contract. 5 • Recognize revenue when (or as) the entity satisfied a performance obligation.
16. #cbizmhmwebinar 16 Revenue (Topic 606): Assessing Materiality • Do you have to assess all goods and services in a contract? • Exclude goods or services that are immaterial in the context of the contract 2 What is immaterial?
17. #cbizmhmwebinar 17 Revenue (Topic 606): Assessing Materiality Assume a customer walks into a store and purchases a light fixture for $150 from an entity. The following are included with the fixture: • Light fixture • Free light bulb • Instruction manual • Standard warranty • 1-800 support number 2 What goods and services in the contract?
18. #cbizmhmwebinar 18 Revenue (Topic 606): Assessing Materiality • What if? • Assume the light bulb is immaterial. • Costs $4 • Retails for $5 • The customer receives the light fixture in the store and the light bulb is out of stock and to be shipped in a month 2 How much revenue does the selling entity recognize when the customer leaves the store?
19. #cbizmhmwebinar 19 Revenue (Topic 606): Assessing Materiality • Material rights cannot be assessed as immaterial in the context of a contract • Assume as a marketing incentive, the customer also receives a card which entitles them to a free light fixture when the purchase four additional light fixtures 2
20. #cbizmhmwebinar 20 Revenue (Topic 606): Shipping and Handling • New accounting policy election • Treat shipping and handling as a fulfillment activity • Only applies to shipping that occurs after the customer obtains control of the good • Related costs are accrued if revenue is recognized before shipping costs are incurred • Shipping and handling services provided before the customer obtains control of a good are fulfillment activities. 2
21. #cbizmhmwebinar 21 Revenue (Topic 606): Distinct Goods and Services • A good or service is distinct if: • The customer can benefit from the good or service on its own • The promise is separately identifiable i.e. the promise to transfer the good or service is distinct in the context of the contract 2 Is the nature of the promise to transfer each good or service individually or to transfer a combined item?
22. #cbizmhmwebinar 22 Revenue (Topic 606): Distinct Goods and Services • Factors that indicate a good or service is not distinct in the context of a contract: • The entity provides significant integration service • May include multiple phases, elements, or units • One good or service modifies or customizes another • The goods or services are highly interdependent or interrelated 2
23. #cbizmhmwebinar 23 Revenue (Topic 606): Distinct Goods and Services An entity sells a conveyor belt to a customer and contracts to install the equipment • Installation is not complex • The entity could contract with alternative vendors to install the conveyor belt 2 How many performance obligations does the entity identify?
24. #cbizmhmwebinar 24 Revenue (Topic 606): Distinct Goods and Services • What if the contract requires the customer to obtain installation services from the entity? • What if the contract calls for engineering a unique conveyor system to create an efficient manufacturing process and build the customized conveyor system? 2
25. #cbizmhmwebinar 25 Revenue (Topic 606): Licensing Intellectual Property • Functional IP • Right to use • Stand alone functionality • Examples: • Most software • Music • Drug formulas 5• Symbolic IP • Right to access • Utility is derived from past or ongoing activities • Examples • Brands • Trademark • Franchise Satisfied at a point in time Satisfied over time
26. #cbizmhmwebinar 26 Revenue (Topic 606): Licensing Intellectual Property • Functional IP • Right to use the IP as it exists at a point in time, except when: • Functionality is expected to substantially change in a way that does not result in an additional promised good or service, and • The customer is contractually or practically required to update the IP 5 Functional IP has significant stand alone value, support and maintenance are separate performance obligations.
27. #cbizmhmwebinar 27 Revenue (Topic 606): Licensing Intellectual Property • Symbolic IP • Customer’s benefit depends on continuing support or maintenance from the selling entity • Support/maintenance involves: Continuing activities that the IP derives its utility from, or Refraining from activities that would degrade the IPs utility 5
28. #cbizmhmwebinar 28 Revenue (Topic 606): Licensing Intellectual Property • Identifying a Licenses Attributes An entity sells the right to broadcast a movie once a year during Thanksgiving for each of the next five years. 5 2 How does the restriction on when the movie can air impact the number of performance obligations and when revenue should be recognized?
29. #cbizmhmwebinar 29 Revenue (Topic 606): Royalty • Sales and usage based royalties are recognized over time • When the royalty is only related to intellectual property, or • Predominantly relates to intellectual property • Otherwise sales and usage based royalties are subject to the guidance on variable consideration 3
30. #cbizmhmwebinar 30 Revenue (Topic 606): Collectability • Criteria for the existence of a contract in the scope of the 5-step method: • Approved and committed to • Identifiable rights • Identifiable payment terms • Commercial substance • Probable of collection of substantially all of the consideration that will be transferred to the customer 1 Assessment is performed at contract inception and continually updated until all of the criteria are met.
31. #cbizmhmwebinar 31 Revenue (Topic 606): Collectability • Evaluating probability of collection • Payment terms • Ability to stop the transfer of goods or services • Repossession • Revenue for contracts that do not meet the criteria may only be recognized when one of three scenarios occur Revenue is not recognized using the “cash” method. 1
32. #cbizmhmwebinar 32 Revenue Recognition for Contracts with Customers Not in Scope 1. No remaining obligations to transfer goods or services, and Substantially all of the consideration has been received and is nonrefundable, or 2. The contract has been terminated, and Consideration received is nonrefundable, or 3. Consideration has been received for the goods or services transferred and Ceased transferring goods or services, and Consideration received is nonrefundable
33. #cbizmhmwebinar 33 Revenue (Topic 606): Sales Taxes • Taxes collected on behalf of third parties are required to be presented net • Evaluate whether the entity or the customer is primarily obligated for the sales tax • Added an accounting election to exclude all government imposed taxes on specific revenue producing transactions from the transaction price • Sales taxes • Use taxes • Value added taxes • Some excise taxes 3
34. #cbizmhmwebinar 34 Revenue (Topic 606): Noncash Consideration • On May 15, an entity contracts to sell to a customer transaction advisory services in exchange for 10,000 shares of stock if the transaction is completed by November 15, or 7,500 shares of stock if the transaction is completed by December 31. The transaction is completed October 31. The shares value is: • May 15: $10 per share • October 31: $12 per share • November 15: $11 per share 3 What amount of revenue should ultimately be recognized?
35. #cbizmhmwebinar 35 Revenue (Topic 606): Transition •Additional practical expedient • Aggregate all modifications prior to the earliest period presented under Topic 606 for determining • Performance obligations (Step 2) • Transaction price (Step 3) • Allocation of the transaction price (Step 4)
36. #cbizmhmwebinar 36 Revenue (Topic 606): Transition • Definition of a completed contract • Contracts in which substantially all revenue was recognized under legacy GAAP (Topic 605) before initial application of Topic 606 • Do not consider accounting for contract elements that were not relevant to the legacy GAAP • Modified retrospective transition may be applied to all contracts or only those contracts that are not completed contracts
37. #cbizmhmwebinar 37 Revenue (Topic 606): Technical Corrections • Under retrospective transition an entity is not required to present the effect of the accounting change on the year of adoption • Retains the requirement to present the effect of the accounting change on prior periods • Proposal to provide practical expedient to not disclose aggregate transaction price information for variable consideration when variable consideration is: • A sales or usage based royalty for IP • Allocated to a wholly unsatisfied performance obligation or distinct good or service in a performance obligation
38. #cbizmhmwebinar 38 Rescission of Previous SEC Staff Guidance (ASU 2016-11) • Upon adoption of Topic 606 the following guidance is rescinded: • Revenue an expense recognition for freight services in process • Accounting for shipping and handling fees and costs • Accounting for consideration given by a vendor to a customer • Accounting for gas-balancing arrangements (entitlements method)
39. #cbizmhmwebinar 39 Current Expected Credit Loss (ASU 2016-13) • Changes accounting from incurred loss model to an expected loss model affecting financial assets measured at amortized cost • Trade receivables • Loans • Held-to-maturity debt securities • Loan commitments • Financial guarantees • Net investments in leases • Reinsurance Under existing US GAAP losses are generally recognized when they are probable to have occurred.
40. #cbizmhmwebinar 40 Current Expected Credit Loss (ASU 2016-13) • Expected losses over the life of the are based on factors including: • Historical information • Current information • Forecasts • Estimates of prepayments Expected losses are the current estimate of all expected credit losses – eliminating the probable threshold.
41. #cbizmhmwebinar 41 Available-for-Sale Debt Securities (ASU 2016-13) • Measurement of expected credit losses is similar to the existing impairment model, however • The concept of other-than-temporary impairment is eliminated • Expected losses cannot exceed the fair value of the debt security • Expected losses are recognized as an allowance • Allowance may be reversed into current earnings
42. #cbizmhmwebinar 42 Purchased Credit Impaired Financial Assets (ASU 2016-13) • Financial assets purchased with existing more than insignificant credit deterioration will also follow the expected credit loss model • Except the initial allowance is added to the purchase price rather than reported as a credit loss The purchased credit impaired asset is initially recorded at a gross amount with an allowance account.
43. #cbizmhmwebinar 43 Current Expected Credit Loss (ASU 2016-13) • Effective date • Public companies calendar year ended December 31, 2020, including interim periods within • All other entities calendar year ended December 31, 2021 • Early adoption permitted in calendar year ended December 31, 2019 • Modified retrospective approach (cumulative catch- up) • Prospective accounting for debt securities with prior other-than-temporary impairments
44. #cbizmhmwebinar 44 Other Financial Reporting Updates
45. #cbizmhmwebinar 45 Exposure Drafts • Statement of cash flows: Restricted Cash • Require the inclusion of restricted cash in the beginning and ending balance of cash on the cash flow statement • Disclosure of the location of restricted cash in the balance sheet • Simplifying the accounting for goodwill impairment • Eliminate Step 2 of the goodwill impairment test
46. #cbizmhmwebinar 46 Exposure Drafts • Consolidation: Indirect interests held by related parties under common control in the variable interest entity model • Modify the evaluation of whether a decision maker is the primary beneficiary by only including a proportionate share of the obligation to absorb losses or right to receive benefits for interests held by all related parties • Gains and losses from derecognition of nonfinancial assets • Defines insubstance nonfinancial assets • Establishes a full fair value method for partial sales
47. #cbizmhmwebinar 47 FEDERAL TAX UPDATE
48. #cbizmhmwebinar 48 Candidates’ Tax Plans Donald Trump Hillary Clinton Bernie Sanders Corporate Tax Top rate of 15% No change to rate structures. Provide tax credits for businesses that invest in community development and infrastructure. Provide tax credits for businesses that hire apprentices or share profits with employees. No major changes. Pass-Through Entities No business income taxed at a rate higher than 15%. No change. No provisions other than changes to individual rates.
49. #cbizmhmwebinar 49 Candidates’ Tax Plans Donald Trump Hillary Clinton Bernie Sanders Payroll Taxes No provision No provision Enact a new 6.2 percent payroll tax paid by employers on the same tax base as the current Medicare hospital insurance (HI) payroll tax. Extend the Social Security payroll tax (combined employee and employer rate of 12.4 percent) to earnings over $250,000. Enact a new 0.2 percent payroll tax paid by both employees and employers on the same tax base as the current Social S it ll t
50. #cbizmhmwebinar 50 Candidates’ Tax Plans Donald Trump Hillary Clinton Bernie Sanders Individual Tax Single and earn less than $25,000, or married and jointly earn less than $50,000, no income tax. All others: four brackets – 0%, 10%, 20% and 25%. No marriage penalty Tax carried interests as ordinary income. Enact Buffet Rule 30% minimum tax on high income (>$1 million AGI) indviduals. Surcharge of 4% on AGI over $5 million. Extend the current college tuition tax credit. Sliding scale benefit of long term capital gains; must hold 6 years for full benefit. Maximum rate of 28%, plus 2.2% surtax on all income. Surtaxes on higher AGI: 9% between $200K-$500K (marginal rate: 37%); 15% between $500k - $2 million (marginal rate: 43%); 20% between $2 mllion - $10 million (marginal rate: 48%) and 24% over $10 million (marginal rate: 52%). Capital gains and qualified dividend preferred rates apply only to those in 28% bracket or below.
51. #cbizmhmwebinar 51 Candidates’ Tax Plans Donald Trump Hillary Clinton Bernie Sanders Exemptions, Deductions and Credits 10% bracket: keep all deductions. 20% bracket: keep most deductions. 25% bracket: keep fewer deductions. Charitable giving and mortgage interest deductions will remain unchanged for all taxpayers. I th P l Limit value of most deductions to 28%. Eliminate tax benefits for contributions to qualified plans once assets sufficent to fund specified annuity amount. Repeal PEP and Pease phaseouts of exemptions and itemized deductions. Alternative Minimum Tax Repeal No change Repeal
52. #cbizmhmwebinar 52 Candidates’ Tax Plans Donald Trump Hillary Clinton Bernie Sanders Estate Tax Repeal Permanently reduce the tax threshold for estates to $3.5 million ($7 million for married couples) with no adjustment for future inflation, increase the top tax rate to 45 percent, and set the lifetime gift tax exemption at $1 million. Permanently reduce the tax threshold for estates to $3.5 million ($7 million for married couples) with no adjustment for future inflation. Rates: 45% up to $10 million; 50% up to $50 million; 55% over $50 million, and 10% surtax over $500 million individuals/$1 billion Net Investment Income Tax Repeal No change Increase from 3.8% to 10%.
53. #cbizmhmwebinar 53 Candidates’ Tax Plans Donald Trump Hillary Clinton Bernie Sanders International Tax A one-time deemed repatriation of corporate cash held overseas at a 10% tax rate. End the deferral of taxes on corporate income earned abroad. Foreign tax credit will remain in place. Levy an “exit tax” on unrepatriated earnings. Tax US controlled foreign entities as US corporations. End deferral of tax on controlled foreign subsidiaries. Impose a per country limitation on the foreign tax credit.
54. #cbizmhmwebinar 54 Candidates’ Tax Plans Donald Trump Hillary Clinton Bernie Sanders Affordable Care Act Repeal and replace Strengthen Repeal most provisions, including employer and employee penalties; Cadillac tax; and excise tax on health insurers.
55. #cbizmhmwebinar 55 Candidates’ Tax Plans
56. #cbizmhmwebinar 56 Candidates’ Tax Plans
57. #cbizmhmwebinar 57 Democratic Party Platform DRAFT – July 1: Tax Provisions • Claw back tax breaks for companies that ship jobs overseas • Eliminate tax breaks for big oil and gas companies • Crack down on inversions and other methods companies use to dodge their tax responsibilities • Make sure tax code rewards businesses that make investments and provide good-paying jobs here in the United States, not businesses that walk out on America • End deferrals so that American corporations pay U.S. taxes immediately on foreign profits and can no longer escape paying their fair share of United States taxes by stashing profits abroad • Use the revenue raised from fixing the corporate tax code to reinvest in rebuilding America and ensuring economic growth that will lead to millions of good-paying jobs
58. #cbizmhmwebinar 58 Democratic Party Platform DRAFT – July 1: Tax Provisions • Ask those at the top to contribute to our country’s future by establishing a multimillionaire surtax to ensure millionaires and billionaires pay their fair share • Shut down the “private tax system” for those at the top, immediately close egregious loopholes like those enjoyed by hedge fund managers • Restore fair taxation on multimillion dollar estates • Ensure millionaires can no longer pay a lower rate than their secretaries • Offer tax relief to middle-class families—not those at the top
59. #cbizmhmwebinar 59 Transitional Relief For Certifying Targeted Group Members For Work Opportunity Tax Credit • Employers claiming the work opportunity tax credit (WOTC) for targeted workers have been granted an extension of time –to no later than September 28, 2016– to submit Form 8850, Pre- Screening Notice and Certification Request for the Work Opportunity Credit, to its Designated Local Agency (DLA). • Workers, hired January 1, 2015, through May 31, 2016, who are members of groups targeted by the WOTC provisions as listed under Code Sec. 51(c) prior to the PATH Act; • Workers, hired on or after January 1, 2016, and on or before May 31, 2016, who are qualified long-term unemployment recipients. Long-term unemployment recipients only became members targeted by the WOTC under the PATH Act for hires after 2015.
60. #cbizmhmwebinar 60 H. W. Johnson, Inc. v. Comm’r, TC Memo 2016-95 • Two brothers owned a construction company C corporation • Company paid year-end bonuses of over $8 million over two years to the brothers • IRS attacked the bonuses as being unreasonable compensation and denied the deductions, relying on the “independent investor” test that the IRS successfully used to challenge law firm bonuses in the Brinks Gilson & Lione v Comm’r case discussed in the last update. • Independent Investor Test: whether a hypothetical independent investor would receive an adequate return on equity after accounting for the brothers’ compensation. • Ninth Circuit has five-part test: • (1) the employee's role in the company; (2) a comparison of compensation paid by similar companies for similar services; (3) the character and condition of the company; (4) potential conflicts of interest; and (5) the internal consistency of compensation arrangements • Court held that factors favored the company
61. #cbizmhmwebinar 61 ? QUESTIONS
62. #cbizmhmwebinar 62 If You Enjoyed This Webinar… Upcoming Courses: • 7/20 & 7/27: Tax Considerations for Your Tax-Exempt Organization • 7/26 & 8/2: Eye on Washington: Quarterly Business Tax Update • 8/2: Conducting Effective Internal Investigations • 8/4: Important Considerations in Retirement Plan Design and Administration Recent Publications: • Second Quarter Developments from the Emerging Issues Task Force • Exposure Draft Would Amend Consolidation Guidance for interest Held in Common Control • Recognition of Credit Losses Updated • Understanding the Leasing Standard: Part 2 – Lessee Accounting
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64. #cbizmhmwebinar 64 THANK YOU CBIZ & Mayer Hoffman McCann P.C. [email protected]