Executive Breakfast Briefing Accounting & Taxes in the New Year. Sensiba San Filippo LLP 1

Transcription

1 Executive Breakfast Briefing Accounting & Taxes in the New Year Sensiba San Filippo LLP 1

2 Significant Accounting Standards Updates Sensiba San Filippo LLP 2

3 Private Company Council (PCC) The PCC was established in May 2012 by the Board of Trustees of the Financial Accounting Foundation (FAF) to work with the Financial Accounting Standards Board (FASB) to determine whether and when to modify U.S. Generally Accepted Accounting Principles (GAAP) for private companies. Members of the PCC consist of preparers (private company CFOs), CPAs (auditors), and users (i.e. banks) there are 10 members Scope: does not affect public companies, Not-for-Profit entities or employee benefit plans. Private companies only. Sensiba San Filippo LLP 3

4 PCC Completed Projects 1. Goodwill (ASU ) Amortize over 10 years or less if shorter life is more appropriate Test for impairment upon triggering event One-step test with an optional qualitative assessment Effective for calendar year end 2015; early adoption allowed 2. Interest rate swaps (ASU ) Provides a practical expedient to apply a more simplified cash flow hedge accounting approach to account for interest rate swaps in a less costly and complex manner Reduces income statement volatility while still providing relevant information for lenders and investors. Effective for calendar year end 2015; early adoption allowed Sensiba San Filippo LLP 4

5 PCC Completed Projects (cont d) 3. VIE and common control leasing (ASU ) Permits an entity to elect not to apply Variable Interest Entity guidance (i.e. not to consolidate) when all of the following exist: Common control of leasing entity exists Substantially all activity is limited to leasing If company guarantees or provides collateral, then principal amount of obligation at inception does not exceed value of asset leased by the company from the lessor (assets not underwater) If elected, have to apply to all leasing arrangements that meet above conditions Expanded disclosure applies (the debt of the leasing company) Effective for calendar year end 2015 with early application allowed Sensiba San Filippo LLP 5

6 PCC Completed Projects (cont d) 4. Business Combinations: Identifiable Intangible Assets (ASU ) Allows a private company to no longer recognize the following separate from goodwill: Customer-related intangible assets unless they are capable of being sold or licensed independently from the other assets of the business, and Non-competition agreements. The decision to adopt the accounting alternative must be made upon the occurrence of the first transaction within the scope of this accounting alternative. Effective for transactions occurring in fiscal years beginning after December 15, 2015, and all periods thereafter. Sensiba San Filippo LLP 6

7 2014 Updates Galore! 18 updates issued in 2014, with the single biggest issuance since standards board was established (revenue). Some have minimal impact while others are widespread. Key updates: Effective for calendar year-end 2015: Discontinued Operations (ASU ) Development Stage Entities (ASU ) Effective for calendar year-end 2017: Going concern (ASU ) Effective for calendar year-end 2019: Revenue Recognition (ASU ) Sensiba San Filippo LLP 7

8 Discontinued Operations ASU Definition is changed as follows: Only those components of an entity that represent a strategic shift that has a major effect on an organization s operations and financial results would be eligible for discontinued operations presentation in the financial statements. Currently, a component of an entity that is a reportable segment, an operating segment, a reporting unit, a subsidiary, or an asset group is eligible for discontinued operations presentation. Removes extensive implementation guidance Requires expanded disclosures to provide information about assets, liabilities, revenues and expenses of discontinued operation. Effective for calendar year end 2015; early adoption allowed, but only if disposition was not reported in previously issued financials Sensiba San Filippo LLP 8

9 Development Stage Entities ASU Reduces data maintenance and audit costs by eliminating the accounting and disclosure differences between development stage entities and other operating entities: Eliminates the requirement for development stage entities to report inception-to-date information in the statements of income, cash flows, and shareholders equity. Eliminates the required disclosure of the development stage activities of the Company, and disclosure of additional information in the first year the Company is determined no longer development stage. Effective for calendar year end 2015; early adoption allowed for any periods where financial statements have not previously been issued Sensiba San Filippo LLP 9

10 Going Concern ASU Evaluation period: one year from the issuance date of the financial statements (compared to balance sheet date now) Substantial doubt: relevant conditions and events, considered in the aggregate, indicate that it is probable that the entity will be unable to meet its obligations as they become due Updated disclosures when going concern identified: Principal conditions or events that raise substantial doubt (before consideration of management s plans) Management s evaluation of the significance of those conditions or events in relation to the organization s ability to meet its obligations Management s plans that are intended to mitigate (or have alleviated) the conditions or events that raise substantial doubt. Effective for calendar year end 2017; early adoption allowed Sensiba San Filippo LLP 10

11 Revenue Recognition ASU Addresses when to recognize revenue, how to measure it, and what to disclose. Clarifies guidance to account for costs to fulfill a contract when not covered by other standards. Applies to all contracts to provide goods or services to customers, except for leases, insurance contracts, and financial instruments. Core principle: a company should recognize revenue when it transfers goods or services to a customer in the amount of consideration the company expects to receive from the customer. Sounds simple, right? To do this, there is a new five-step process Sensiba San Filippo LLP 11

12 Revenue Recognition (cont d) STEP 1: IDENTIFY THE CONTRACT WITH A CUSTOMER STEP 2: IDENTIFY THE SEPARATE PERFORMANCE OBLIGATIONS (PROMISES) IN THE CONTRACT Concept of a distinct good or service to determine if a separate performance obligation exists The promised good or service is capable of being distinct because the customer can benefit from the good or service either on its own or together with other resources that are readily available to the customer The promised good or service is distinct within the context of the contract because the good or service is not highly dependent on, or highly interrelated with, other promised goods or services in the contract Sensiba San Filippo LLP 12

13 Revenue Recognition (cont d) STEP 3: DETERMINE THE TRANSACTION PRICE STEP 4: ALLOCATE THE TRANSACTION PRICE TO THE SEPARATE PERFORMANCE OBLIGATIONS IN THE CONTRACT STEP 5: RECOGNIZE REVENUE WHEN (OR AS) THE REPORTING ORGANIZATION SATISFIES A PERFORMANCE OBLIGATION The standard was effective for calendar year 2017 for public companies and calendar year 2018 for private companies. ASU defers the effective date for one year (2018 public, 2019 private) No early application for public companies. Nonpublic companies can elect to early adopt, but not earlier than the effective date for public companies. Sensiba San Filippo LLP 13

14 2015 Updates Galore! 17 updates issued in 2015 Topics not covered here: Simplified income statement presentation for extraordinary and unusual Items (ASU ) Consolidation Analysis Limited Partnerships (ASU ) Compensation retirement benefits for DB Plans (ASU ) Internal Use Software Cloud Computing Arrangements (ASU ) Earnings per share Master Limited Partnerships (ASU ) Fair value measurement for investments in entities that calculate net asset value per share (ASU ) Business combinations SEC clarification for transfers between entities under common control (ASU ) Insurance disclosures about short-duration contracts (ASU ) Technical corrections and improvements (ASU ) Derivatives and hedging within nodal energy markets (ASU ) Sensiba San Filippo LLP 14

15 Debt Issuance Cost Presentation ASU and Part of the simplification initiative and conformity with International Financial Reporting Standards (IFRS). Simplifies presentation of debt issuance costs as a direct deduction from the carrying amount of that debt, consistent with debt discounts. Effective for calendar year end 2016; early adoption allowed for financial statements not previously issued. Due to the absence of authoritative guidance related to line-of-credit in ASU , ASU Measurement of Debt Issuance costs associated with Lines-of-Credit states SEC staff would not object to an entity deferring and presenting debt issuance costs as an asset amortized ratable over the term of the line-of-credit arrangement, regardless whether there are outstanding borrowings. Sensiba San Filippo LLP 15

16 Inventory Measurement ASU Part of the simplification initiative and to more closely align with IFRS. Measure inventory at the lower of cost and net realizable value (NRV). Reference to market had too much subjectivity and did not provide enough consistency between companies. FASB defines NRV as estimated selling price in the ordinary course of business, less reasonably predictable costs of completion, disposal and transportation. Only applies to entities using FIFO or average cost. Does not apply to inventory measured under LIFO or Retail Inventory Method. Effective for fiscal years beginning after December 15, Changes are to be applied prospectively, with early application allowed for beginning of period balances. Sensiba San Filippo LLP 16

17 Employee Benefit Plans ASU Part of the simplification initiative Part I: Fully benefit-responsive investment contracts are measured, presented and disclosed only at contract value, no longer requiring a reconciliation to fair value when different. Part II: Eliminates the requirement to disclose individual investments that represent 5% or more of net assets available for benefits and the net appreciation or depreciation for investment by general type. The net appreciation or depreciation in investments for the period will still be required to be presented in the aggregate. Also, requires that investments of employee benefit plans be grouped only by general type, eliminating the need to disaggregate the investments in multiple ways. Sensiba San Filippo LLP 17

18 Employee Benefit Plans (cont d) ASU Part III: Provides a practical expedient to measure investments as of a month-end date that is closest to the plan s fiscal year-end when the fiscal period does not coincide with a month-end. Requires disclosure of significant event between measurement date and fiscal year-end. Effective for fiscal years beginning after December 15, 2015; early adoption permitted. Sensiba San Filippo LLP 18

19 Business Combinations ASU Acquirers must recognize adjustments to provisional amounts that are identified during the measurement period in the reporting period in which the adjustment amount is determined. Acquirers must also record in the same period s financial statements, the effect on the earnings of changes in depreciation, amortization or other income effects, as a result of the change to the provisional amounts, calculated as if the accounting had been completed at the acquisition date (i.e. not a a prior period adjustment). This amount must be presented separately on the face of the income statement, or disclosed in the notes. These amendments should be applied prospectively to adjustments to provisional amounts that are identified after the effective date of this update. For public entities that date is years beginning after December 15, All other entities have a one year delay. Sensiba San Filippo LLP 19

20 Deferred Income Taxes ASU Requires all deferred tax liabilities and assets to be classified as noncurrent on the balance sheet for all entities that present a classified balance sheet Effective for fiscal years beginning after December 15, 2017 Sensiba San Filippo LLP 20

21 Pending: Lease Accounting FASB re-exposed the draft standard in May FASB and IASB are currently re-deliberating the proposals. Core principle - Lease contracts give rise to assets and liabilities that should be reflected on the balance sheet. A right of use model shall be applied to all lease arrangements Effective Date: TBD based on responses Sensiba San Filippo LLP 21

22 Leases (cont d) Lessee accounting At inception (or upon adoption): Balance sheets of lessees would include both assets representing the right to use the leased asset and liabilities arising from lease contracts at the present value of the expected lease payments. Recognition of expense each period: Interest and Amortization (I&A) approach Amortize the asset on a systematic basis that reflects the pattern of consumption of the expected future economic benefits to interest and amortization Leases of assets other than property unless the lease term is an insignificant portion of the economic life of the underlying asset Sensiba San Filippo LLP 22

23 Leases (cont d) Lessee accounting (cont d) Recognition of expense each period: Straight-line approach Total lease expense would be recognized on a straight-line basis, regardless of the timing of lease payments, as one amount in the income statement Leases of property (land or a building or part of a building or both) unless the lease term is for the major part of the economic life of the underlying asset Sensiba San Filippo LLP 23

24 Leases (cont d) Impact to loan covenants: Current Ratio - although assets equal liabilities at initial recording, a portion of liabilities will be ST, but all assets will be LT Leverage Ratios - liabilities will be added without corresponding equity EBITDA - under A&I approach, a portion of expense will now be depreciation and interest expense rather than rent Sensiba San Filippo LLP 24

25 Current Projects - PCC The PCC met at the end of September and recommended the FASB consider the following topics as priority thus, we should hopefully be seeing some exposure drafts in the near future on these topics. Income Tax disclosures Other Comprehensive Income Consolidations Liabilities with Characteristics of Equity Improving Cash Flow Classification Financial Statement Presentation Sensiba San Filippo LLP 25

26 Recent Exposure Drafts Revenue from Contracts with Customers Principal vs. Agent Attempts to clarify the unit of account (the specified good or service ) at which an entity would determine whether it is a principal or an agent and clarify that an entity can be both a principal and an agent in a single contract. Comment deadline was 10/15/15 Effective date and transition guidance ASU (Goodwill), (Interest Rate Swaps), ASU (VIEs) and ASU (Business Combinations) Makes them effective immediately by removing their effective dates provides private companies with ability to forego the preferability assessment the first time they elect PCC accounting alternatives Comment deadline was 11/16/15 Sensiba San Filippo LLP 26

27 Recent Exposure Drafts Notes to Financial Statements assessing whether disclosures are material Materiality would be applied to quantitative and qualitative disclosures individually and in the aggregate in the context of the financial statements as a whole; therefore, some, all, or none of the requirements in a disclosure Section may be material. Materiality would be identified as a legal concept. Omitting a disclosure of immaterial information would not be an accounting error. Comment deadline was 12/8/15 Sensiba San Filippo LLP 27

28 Questions Sensiba San Filippo LLP 28

29 Significant Tax Updates Sensiba San Filippo LLP 29

30 Business Tax Extenders On December 18, 2015 the Protecting Americans from the Tax Hikes of 2015 ( the 2015 PATH Act ) was signed into law Some provisions now made permanent Others extended either 2 or 5 years Significant modifications to several provisions Sensiba San Filippo LLP 30

31 Business Tax Extenders Section 179 Higher limits on IRC 179, the immediate expensing of certain depreciable assets, have been restored and are now permanent $500,000 expense limitation and $2M beginning of phase-out To be indexed for inflation beginning after 2015 Sensiba San Filippo LLP 31

32 Business Tax Extenders Section 179 (cont d) Makes permanent the eligibility for expensing of most computer software Makes permanent the eligibility for expensing of qualified real property (certain leasehold building improvements, retail building improvements and restaurant property) Removes the $250,000 cap on qualified real property expensing Heating and air conditioning units are now eligible property Sensiba San Filippo LLP 32

33 Business Tax Extenders Bonus Depreciation The PATH Act retroactively extends 50% bonus depreciation for 2 years After 2017, bonus depreciation is phased down to: 40% in % in 2019 Fiscal year-end taxpayers may want to consider amending to take bonus depreciation on assets placed in service in calendar year 2015 on their 2014 tax return Sensiba San Filippo LLP 33

34 Business Tax Extenders Bonus Depreciation (cont d) Definition of Qualifying Property has been expanded New law continues to follow prior rules: 1. Property must be tangible depreciable property with a recovery period of 20 years or less 2. Water utility property 3. Computer software 4. Qualified leasehold improvement property 5. Original use must commence with the taxpayer; used machinery doesn t qualify Sensiba San Filippo LLP 34

35 Business Tax Extenders Bonus Depreciation (cont d) New law now includes as a qualifying category of property qualified improvement property instead of qualified leasehold improvement property, with a broader definition: Improvement to an interior portion of a building that is nonresidential real property Does not include: The enlargement of the building Any elevator or escalator The internal structural framework of the building Must be placed in service after the date the building was first placed in service (placed in service by other taxpayers is OK) Sensiba San Filippo LLP 35

36 Business Tax Extenders Bonus Depreciation (cont d) In a win for agricultural interests, the new law also permits certain trees and vines to be eligible for bonus depreciation when planted or grafted, rather than when placed in service Sensiba San Filippo LLP 36

37 Business Tax Extenders Research & Development Credit R&D Credit is now permanent Eligible small businesses ($50M or less in gross receipts) can use the credit to offset both regular tax and AMT liabilities Qualified small businesses ($5M or less in gross receipts) can elect to apply a portion of the credit against their employer FICA tax liability Credit used in this manner limited to $250,000 per year Credit is allowed for the 1 st calendar quarter which begins after the date on which the return is filed Sensiba San Filippo LLP 37

38 Business Tax Extenders Work Opportunity Tax Credit The Work Opportunity Credit (WOTC) was restored and extended for 5 years by the PATH Act Effective for individuals who begin work after December 31, 2014 and before January 1, 2020 Used for qualified first- and second-year wages of targeted group employees Target group has been expanded to include long-term unemployment recipients (defined as 27 consecutive weeks and includes a period in which the individual was receiving unemployment compensation) Sensiba San Filippo LLP 38

39 Business Tax Extenders Small Business Stock The PATH Act makes permanent the exclusion of 100% of the gain on qualified small business stock (QSBS) Applies to transactions after September 27, 2010 and is retroactive to stock sold after December 31, 2014 Per-taxpayer limit is the great of 10x taxpayer s basis in QSBS or $10M The qualifying gain is also exempt from AMT Sensiba San Filippo LLP 39

40 Business Tax Extenders Small Business Stock (cont d) Same overall qualifications apply: Acquired by taxpayer at original issue after August 10, 1993 Minimum 5-year holding period Issuer must meet gross asset limit and other restrictions Sensiba San Filippo LLP 40

41 Business Tax Extenders Built-in Gains The PATH Act makes permanent the 5-year holding period for purposes of computing built-in gain on the conversion of a corporation from a C corporation to an S Corporation If sold before holding period lapses, maximum tax rate of 35% applied to the built-in gain Applies to S corporation beginning in 2011 and later Sensiba San Filippo LLP 41

42 Business Tax Extenders Energy-related tax breaks Generally, energy-related tax breaks are extended for 2 years Examples: Qualified alternative fuel vehicle refueling property ($1,000 per year, per location, up to $30,000) Energy efficient commercial building (increased tax deduction for qualified upgrades) Sensiba San Filippo LLP 42

43 Business Tax Extenders Other items Enhanced deduction for donation of food inventory is made permanent Qualified transportation fringe benefit exclusion for transit passes and vanpools is made permanent; maximum amount for 2015 is $255 Sensiba San Filippo LLP 43

44 Repair Regulation Updates Effective for tax years beginning on or after January 1, 2016, the de minimis safe harbor threshold increased from $500 to $2,500 per invoice or per item without Applicable Financial Statements (AFS)* The IRS will provide audit protection to eligible businesses by not challenging the use of the $2,500 threshold for tax years ending before January 1, 2016 Annual election to be made with the tax return Capitalization policy not required without AFS but recommended; if AFS applies, the policy must be written *Applicable financial statements defined as Reviewed or Audited financial statements Sensiba San Filippo LLP 44

45 Due dates for Business Returns Changing On July 31, 2015 the Surface Transportation Act was signed into law: the Act makes the following return due date changes for taxable years beginning after December 31, 2015 Partnership Returns (Form 1065): moved back one month from April 15 to March 15 (2 ½ months after the end of the taxable year). Partnerships will be allowed a 6-month extension. Sensiba San Filippo LLP 45

46 Due dates for Business Returns Changing (cont d) C corporation returns (Form 1120): moved forward one month from March 15 to April 15 (3 ½ months after the end of the taxable year) Note that the due date for C corporations with a June 30 th fiscal year end will not be changing until after December 31, 2025; the due date will continue to be September 15 S corporations (Form 1120S) will not change - the due date will continue to be March 15 (2 ½ months after the end of the taxable year) Sensiba San Filippo LLP 46

47 Due dates for Business Returns Changing (cont d) Foreign Bank Account Report (FBAR) / FinCen Form 114: changed from June 30 to April 15, and taxpayers will now be allowed a 6- month extension California non-conformity: CA does not conform to these new due date changes. Legislation will be required to conform. Sensiba San Filippo LLP 47

48 State Activity California: not much conformity to the federal extenders CA s 179 remains at $25,000 with a $200,000 phase-out threshold CA does not allow bonus depreciation CA has its own R&D credit CA does not have a WOTC credit CA no longer has a small business stock exclusion Sensiba San Filippo LLP 48

49 State Activity (cont d) CA s holding period for built-in gain recognition remains 10 years CA does not have energy credits CA does not recognize modification of the charitable deduction for food inventory CA has a more expansive transportation benefit exclusion Sensiba San Filippo LLP 49

50 State Activity (cont d) Nevada Commerce Tax Imposed on every business whose Nevada gross revenue exceeds $4M Applies to all business entities engaged in business activities within NV: including partnerships, C corporations, S corporations, LLCs and sole proprietorships Tax rate varies by business category and ranges from 0.051% to 0.331% Sensiba San Filippo LLP 50

51 State Activity (cont d) Tax year for the commerce tax is July 1 June 30, regardless of the business entity s tax year Initial tax reports are due on the 45 th day following the end of the tax year (August 15, 2016) Sensiba San Filippo LLP 51

52 Affordable Care Act Updates Cadillac Tax delayed The Cadillac Tax applies to health plans that cost more than $10,200 for self-only coverage, or $27,500 for family coverage 40% excise tax imposed on the excess of costs over the limit Excise tax payments are now a deductible business expense Implementation, originally scheduled for 2018, has been postponed for 2 years Sensiba San Filippo LLP 52

53 Affordable Care Act Updates (cont d) Due dates for Forms 1094 & 1095 has been extended Due date for furnishing Form 1095-B/C forms to employees is extended from January 31 to March 31, 2016 Due date for furnishing Form 1094-B/B and Form 1095-B/C to the IRS are: Extended from February 29 to May 31, 2016 for paper-filed forms Extended from March 31 to June 30, 2016 for electronically-filed forms Sensiba San Filippo LLP 53

54 Questions Sensiba San Filippo LLP 54

55 Contact Information Karen Burns Assurance Partner Linda Cook Senior Tax Manager Sensiba San Filippo LLP 55