Which intangibles should private firms report following a merger?





Accounting for M&As under U.S. Generally Accepted Accounting Principles can require a lot of red tape. Fortunately, there’s a private company reporting alternative that exempts non competes and certain customer-related intangibles from being identified and reported separately on the balance sheet after a business combination. But it doesn’t apply to public companies or other types of acquired intangibles, such as trade names or patents. Contact us for help deciding whether this alternative could simplify your post acquisition financial reporting.

Blockchain may soon drive business worldwide

“Blockchain” may sound like something that goes on a vehicle’s tires in icy weather or that perhaps is part of that vehicle’s engine. Indeed it is a type of technology that may help drive business worldwide at some point soon — but digitally, not physically. No matter what your industry, now’s a good time to start learning about blockchain.

Secure structure

Blockchain is sometimes also called “distributed ledger technology.” It was introduced in 2009 to support digital “cryptocurrencies” such as bitcoin. Entries in each digital ledger are stored in blocks, with each block containing a timestamp and providing a link to the previous block.

Typically, a blockchain is managed on a secure peer-to-peer network with protocols for validating blocks. Once data is recorded, no one can change it without altering all other blocks — which requires approval by most network participants. Blockchain proponents argue that this process essentially authenticates all information entered.

Various uses

The financial industry led the way in recognizing blockchain’s potential, foreseeing that users could execute transactions without relying on banks and other third parties. Another potential application is in the M&A sphere. Buyers and sellers could shift due diligence documentation to blockchain, so financial and legal advisors wouldn’t have to spend as much time poring over so many different and disparate records. The M&A process could thereby be completed more quickly.

There are also many industries that could employ blockchain technology to conduct quicker and more secure transactions or simply track data more efficiently.

Take manufacturers, as well as virtually any supply chain business: Blockchain could provide safeguards against errors, fraud or tampering. This functionality could bolster trust among supply chain partners. Over the long run, blockchain may even eliminate the need for third-party payment processors.

Another example: the health care industry. Blockchain could be used to better secure electronic health information, improve billing and claims processing, and enhance the integrity of the prescription drug supply chain. All of this could positively impact the health care insurance market for every employer.

Ahead of the curve

Most business owners don’t need to scramble to incorporate blockchain-related technology right this minute. But you might want to get ahead of the curve by learning more about it now and pondering some ways that blockchain could affect your company. Let us know if you need further information or other ideas on the future of business.

© 2018

2018 Q3 tax calendar: Key deadlines for businesses and other employers


Here are some of the key tax-related deadlines affecting businesses and other employers during the third quarter of 2018. Keep in mind that this list isn’t all-inclusive, so there may be additional deadlines that apply to you. Contact us to ensure you’re meeting all applicable deadlines and to learn more about the filing requirements.

July 31

• Report income tax withholding and FICA taxes for second quarter 2018 (Form 941), and pay any tax due. (See the exception below, under “August 10.”)

• File a 2017 calendar-year retirement plan report (Form 5500 or Form 5500-EZ) or request an extension.

August 10

• Report income tax withholding and FICA taxes for second quarter 2018 (Form 941), if you deposited on time and in full all of the associated taxes due.

September 17

• If a calendar-year C corporation, pay the third installment of 2018 estimated income taxes.

• If a calendar-year S corporation or partnership that filed an automatic six-month extension:

• File a 2017 income tax return (Form 1120S, Form 1065 or Form 1065-B) and pay any tax, interest and penalties due.

• Make contributions for 2017 to certain employer-sponsored retirement plans.

© 2018

How materiality is established in an audit or a review

When accountants conduct an audit or review, they can’t test every transaction. Instead, they set a “materiality” threshold. Several definitions of materiality exist. But the universal premise is that a financial misstatement is material if it could influence the decisions of financial statement users. To establish the right level of materiality, auditors rely on rules of thumb, apply professional judgment, and consider the amount and type of misstatement. Contact us for more information on what’s considered material for your business.

Marital Dissolution in Community Property States

The complexity and differences between the community property statutes of the nine mostly western states* that have adopted them have created a tax consulting and preparation quagmire that can intimidate even the most knowledgeable accountants and attorneys.  We will begin by addressing some basic Federal tax implications, and follow up in future posts with valuation issues.

Property

Definition:  “Generally, community property is property that you, your spouse (or your registered domestic partner), or both acquire during your marriage (or registered domestic partnership) while you and your spouse (or registered domestic partner) are domiciled in a community property state”.  IRS Publication 555.

Continue reading “Marital Dissolution in Community Property States”

Surviving Divorce: Eight Steps to Starting Over

No one ever expects to get to this point.  The anger, deception, frustration and fear have taken over your normally rational mind and you are not thinking clearly.  Your friends, family and work place associates are all experts at telling you what to do, yet they have not been through it themselves and only have few facts relevant to your situation.  The situation creates it’s own momentum and you are confused and unsure of what to do next.  Following are suggestions for getting on track and moving forward.

Continue reading “Surviving Divorce: Eight Steps to Starting Over”

Audit Committee Standards

While there are many requirements and expectations of an issuer’s audit committee, the 1934 Exchange Act under rule 10A(3) mandates five specific standards in order for a company to be listed.

1.  Independence – each member of the audit committee must be a member of the Board of Directors of the listed issuer, and must otherwise be independent:

–  there can be no consulting, advisory or compensatory relationship, outside of that as a member

–  members of the AC can not be affiliated persons as defined of the issuer or any subsidiary.

2.  Responsibility – the audit committee, as a sub-committee of the Board of Directors must be directly responsible for the appointment, consultation with, and retention of the registered independent accounting firm, while including oversight including problem resolution between management and the auditor.

3.  Complaint Resolution – the AC must establish procedures for addressing complaints received by the issuer including anonymous submission by employees.

4.  Advisers – the AC must have the authority to engage advisers, including accountants, auditors, attorneys and consultants they feel are reasonable and necessary to carry out the duties of the committee.

5.  Funding –  the issuer must provide appropriate funding to allow the AC to carry out their duties as a committee of the Board of Directors.

Our experience has been that if there is a failure in meeting the requirements for an audit committee established by the ’34 Act it typically is for one of two reasons:  first, and most common there is often confusion as to who the auditor should be responsible to – the AC or management.  All too frequently, the unofficial role that management can play in the selection of the auditor becomes significant.  Second, is the ‘step-child’ status many audit committees relegate complaint resolution too.  this absolutely can not be the case if the issuer is going to minimize exposure, considering our litigious society.

 

MD & A Are You Blowing an Opportunity?

As a service to our public company clients we routinely perform an extensive review of the other information included in their annual report.  While  completing a large number of such reviews recently for our clients with December 31 year-ends we became aware of opportunities that are regularly over-looked by issuers.  In preparing Management’s Discussion and Analysis there are some critical elements that will make them more effective.

Attitude – your MD & A is an opportunity to tell the story of the company in a positive way.    As is your web page, your SEC filings are the ‘face’ of the company to potential shareholders, investors and others considering doing business with you.  Do not minimize this opportunity by viewing it primarily as an obligation.  We all have a tendency to spend less time on things we view as ‘necessary evils’ as opposed to ‘opportunities’.

Approach – the primary purpose of the MD & A is to allow the reader to “look at the company through the eyes of management by providing both a short and long-term analysis of the business of the company” (SEC Financial Reporting Policies sec. 501).    The MD & A is intended to be entirely prospective, not historical.  Too frequently we see comments like “As of 12/31/x1 revenues declined $xxx,xxx which was a reduction of x% over revenues of $xxx,xxx as of 12/31/x0”.  That’s historical, not prospective, and anyone could calculate it from the financials.  It provides no additional information of any value to the reader.

 Executive Level Overview – Sec. 501.12 is a gift from the SEC that most issuers don’t open.  This is a chance to tell your story.  Because many companies have become larger, global and more complex, and the disclosure rules correspondingly so,  MD & A has  become lengthy and complex and correspondingly, boring and so not read as thoroughly as it should be.   In an effort to improve clarity and understandability many company’s are incorporating an Executive Level Overview (ELO) as an introductory section  summarizing the most significant areas of the MD & A that management wants to emphasize.  Typically this includes:  economic or industry wide factors; how the company earns revenues and generates cash; lines of business, locations, principle products, services; and provide insight into material opportunities, challenges and risks which management is most focused on.

It is a ‘highlight’ of those things that are important to the company, reported elsewhere as well (e.g. Risk Factors, or Business Description).

Liquidity, Capital Resources, Results of Operations – You must address each of these areas specifically.   When drafting these comments keep in mind that you should address three questions for the reader: (1) What happened? (2) Why did it happen? and most importantly (3) Is it expected to continue?  That last one is the crux of the MD & A.  Remember – the reader is entitled to assume that “past performance is indicative of future performance” unless you tell him different.

Other Tips – (1) If you’ve previously discussed it in your Form 10k you don’t need to keep beating it to death unless it applies to new information in the current interim filing .  Most companies over disclose information that they’ve previously discussed numerous times.  The unwelcome result is that the points you want to make get buried in the irrelevant.  (2)  Discussion for interim reports should be limited to material changes occurring subsequent to the last annual report.  Over disclosure, again,  can result in burying relevant information in the minutiae.  (3) The SEC requires that it be “presented in clear and understandable language”.  That means you need to lose the ‘legalese’.   (4)   In the words of an internationally recognized securities attorney with whom we’ve worked – “Disclosure is too important to leave up to only the attorneys”.  While their focus is compliance, as it should be, this is more than a compliance document.  It is  the public face of your company.  Remember it is an opportunity to ‘sell’ to investors, financiers and those people you want to do business with.  (5)  Finally, sentence structure,  grammar and spelling are critical.  If your MD & A is sloppy, those reading it will assume the company is run the same way.

You have a great company with a great business plan and outlook for the future.  Tell the world in your MD & A.

 

A Road-map for IRS Audits . . . Schedule UTP has Arrived!

The following is part I of a two part blog post, which will describe the specific reporting requirements of Schedule UTP and discuss the IRS’ objectives and rational for its new reporting requirements. Part 2 will apply the  requirements of Schedule UTP to specific factual situations and reconcile the resulting reporting requirements to those requirements under FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes, an interpretation of FASB Statement No. 109 (“FIN 48”).

The much anticipated IRS audit road-map, Schedule UTP, is now reality for certain large corporate taxpayers.   Corporations that file Form 1120, U.S. Corporation Income Tax Return, Form 1120-F, U.S. Income Tax Return of a Foreign Corporation and certain insurance companies with assets of more than $100 million must file a Schedule UTP starting in 2010. To view Schedule UTP, click here. To view the IRS instructions to Schedule UTP, click here. Schedule UTP must be attached to a calendar year 2010 tax return or to a fiscal year-end return that begins in 2010 and ends in 2011

The initial reporting threshold of $100 million of total assets will be reduced to $50 million starting in 2012 and to $10 million for the 2014 tax year.  Only a corporate taxpayer or related party that has issued audited financial statements covering all or a portion of the corporation’s tax year is required to file a Schedule UTP.  Compiled or reviewed financial statements are not audited financial statements.

Note that a corporation without audited financial statements is still required to file Schedule UTP if it meets the related party definition.   A “related party” is any entity that has a relationship described in IRC Section 267(b), Section 318(a), or that is included in the consolidated audited financial statements in which a corporation with audited financial statements is also included.

A corporation must report tax positions taken on a U.S. federal income tax return if:

  • The corporation has taken a position on its federal income tax return for the current year or for a prior year, and
  • The corporation or a related party has either
    • Recorded a reserve with respect to that tax position in audited financial statements, or
    • Not recorded a reserve for a tax position because the corporation expects to litigate the position.

A tax position taken on a return is defined as one that would result in an adjustment  to a line item on a return or that would be included in a Section 481(a) adjustment (i.e. a change in a method of accounting) if the position were not sustained on upon an IRS audit. If multiple positions affect a single line on the tax return, each tax position is treated as a separate tax position. A tax position is based on a unit of account used to prepare the audited financial statements in which the reserve has been recorded. The unit of account must be the same unit of account used by the taxpayer in its financial statements for purposes of FIN 48.  If no FIN 48 reserve was required, the tax position need not be reported on Schedule UTP.

The initial FIN 48 reserve for financial statement purposes will trigger the reporting requirement on Schedule UTP. Interestingly, subsequent increases or decreases in the FIN 48 reserve will not require additional Schedule UTP reporting. Additionally, no Schedule UTP disclosure is required with respect to tax positions taken on a return before January 1, 2010, even if a corporation records a reserve for financial statements issued in 2010 or later.

A corporation must report on Schedule UTP a tax position for which it did not record a reserve based on its expectation to litigate the position if: (i) the probability of settling with the IRS is less than 50% and (ii) no reserve was recorded in the financial statements because the corporation intends to litigate the tax position and has determined that it is more likely than not to prevail on the merits in litigation.

Schedule UTP is divided into three parts. In part I, the corporate taxpayer reports tax positions taken in the current year that meet the definition of a UTP disclosure position. Part II is used to report tax positions taken by a corporation in a prior year that has not been reported on Schedule UTP.  Part III is used to provide a concise description of each uncertain tax position reported in parts I and II.

For each UTP, the corporate taxpayer must provide the following information:

  • Identify the Internal Revenue Code section related to each UTP (up to three code sections).
  • Indicate whether the UTP is temporary and/or permanent book-tax difference.
  • If the UTP relates to a pass-through entity (e.g. partnership, S corporation, etc.) the EIN of the pass-through must be reported.
  • Disclosure with respect to those UTPs whose relative size (by amount of dollar reserve) is greater than or equal to 10% of all UTPs listed on parts I and II of Schedule UTP for that tax year.
  • All UTPs on parts I and II must be ranked based on size with the number “1” assigned to the largest, “2” to the next largest, and so on. The letter T must be provided for all transfer pricing related issues and the letter G for all other UTPs.

IRS Commission Doug Shulman announced the following goals of Schedule UTP

  • Create certainty regarding a taxpayer’s obligation sooner rather than later.
  • Cut down on the time it takes that IRS to find issues and complete an audit.
  • Provide consistent treatment across taxpayers.
  • Make efficient use of government resources by focusing on issues the pose the greatest risk of noncompliance.
  • Ensure that both the IRS and taxpayer spend more time discussing the law as it applies to the facts and less time looking for information.
  • Help the IRS prioritize taxpayers for examination
  • Help the IRS identify issues where there is uncertainty and where further guidance is necessary.
  • Help the IRS prioritize selection of issues during an audit.
  • Obtain key information regarding uncertain tax positions without getting into the heads of the taxpayer or their advisors as it relates to quantifying risk.

The practical impact of Schedule UTP is that the affected corporate taxpayer must now carefully consider its FIN 48 analysis and disclosure in conjunction the preparation of Schedule UTP and its defense of its tax position.  In part 2, we will apply the new disclosure requirements to specific factual situations.