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3 Steps to Maintain Independence When Preparing Financial Statements

Post author By FFC
Post date September 23, 2016

3 Steps to Maintain Independence When Preparing Financial Statements

Consider this scenario: A longtime tax client of yours approaches you. They are interested in starting an online gaming platform with a colleague and have already landed a significant contract. The future of this business appears bright. A local bank has agreed to extend them a $75,000 line of credit, contingent on certain ratios and providing monthly financial statements and copies of all tax filings. You client asks you if you would be interested in performing nonattest services on their behalf. They are looking for a CPA to prepare the new venture’s monthly financial statements for the bank so the bank can monitor compliance with its ratio requirements, while the client maintains the books.

The current loan covenant only calls for a complete set of financial statements, classifying the engagement as a nonattest service. You do not need to be independent to prepare your client’s financial statements, however, based on the new venture’s growth trajectory, you believe that at some point in the future, attest services will likely be needed. Because of this, you decide to take certain steps to maintain your independence in case your client’s needs change, and you are asked to provide a service that requires independence down the road. Below are three steps you take to maintain independence.

Step 1: Evaluate whether your client has the suitable skill, knowledge and/or experience to accept responsibility for the financial statement you prepare. Assuming they do;

For details regarding suitable skill, knowledge and/or experience refer to the General Requirements for Performing Nonattest Services interpretation.

Step 2: Explain to your client that they will need to assume all management responsibilities in connection with your preparation services. They will also need to oversee your services sufficiently so that they can evaluate and take responsibility for the financial statements. When a question arises, your client will need to make the final decision, although they can discuss the options with you beforehand. Additionally, they will need to review the work that you’ve done so that they can take responsibility for the financial statements.

The Management Responsibilities interpretation explains what management responsibilities are and provides examples.

Step 3: Document in writing that:

Your client has not engaged you to provide an attest service; rather they have engaged you to prepare their new venture’s financial statements using the books and records they are keeping;

Your client will assume all management responsibilities in connection with the preparation of those financial statements; and

That once your client has approved the financial statements you prepare, they will submit them to the bank.

For details regarding documentation refer to the Documentation Requirements When Providing Nonattest Services interpretation.

In Summary: While independence is not a requirement when the only services provided are financial statement preparation and tax services, it is important to anticipate if your client’s needs may change. If their needs change and you’ve structured the engagement so that independence has been maintained, then changing from a financial statement preparation engagement to a service that requires independence, will be possible. The AICPA recently published a non-attest services toolkit that we hope you will find helpful. You may also be interested in accessing the AICPA Ethics Division’s nonauthoritative Frequently Asked Questions: Nonattest Services.

Ellen Goria, CPA, CGMA, Senior Manager- Independence & Special Projects, American Institute of CPAs.

Person playing a video game image courtesy of Shutterstock

4 Key Facts about the New FASB Not-for-Profit Standard

Post author By FFC
Post date September 21, 2016

4 Key Facts about the New FASB Not-for-Profit Standard

Are you ready for significant changes to the financial statements of not-for-profit organizations?

The Financial Accounting Standards Board recently released Accounting Standards Update (ASU) 2016-14 Not-for-Profit Entities (Topic 958): Presentation of Financial Statements of Not-for-Profit Entities. ASU 2016-14 is the result of a multi-year FASB project conducted to review the financial reporting model for not-for-profits that has been in place for approximately 20 years. As a result of the review, the FASB identified several areas of the financial reporting model that needed improvements or updates to provide better information to those that rely on the financial statements issued by not-for-profits.

The full standard spans 270 pages (view it here) but it is not as daunting as it may seem. Here are four key facts about the new standard to keep in mind:

It’s an update, not an overhaul. The FASB has indicated that it does not intend ASU 2016-14 to be a complete overhaul of the current financial reporting model for not-for-profits contained in GAAP. The current financial reporting model in GAAP is fundamentally sound. The goal of ASU 2016-14 is to improve how not-for-profits communicate their financial performance and condition, while also reducing certain costs and complexities in preparing financial statements.

It will enhance reporting of expenses. All not-for-profits will now be required to disclose an analysis of expenses by both functional and natural classifications. Up until now, only certain types of not-for-profits (voluntary health and welfare entities) were required to present such an analysis. Going forward, all not-for-profits will be required to disclose this information. Additionally, not-for-profits will now disclose the methods used to allocate expenses to the functional categories.

Reduction in net asset classifications puts more focus on disaggregation and disclosure. One of the key changes will be to reduce the net asset classifications from the current three to two. Unrestricted net assets will now be labeled “net assets without donor restrictions” and temporarily and permanently restricted net assets will be combined into one class labeled “net assets with donor restrictions.” With a reduced number of net asset classes, not-for-profits will focus on disaggregating and disclosing the components of their net asset classes based on external donor restrictions and internal board designations. The FASB is retaining the requirement to disclose the nature and amounts of donor restrictions on net assets with donor restrictions. Additionally, the FASB is adding a new requirement to disclose board designations on net assets without donor restrictions; this disclosure was previously optional but will now be mandatory.

It requires new disclosures on liquidity. One of the chief concerns the FASB heard in its research for this project was the difficulty users have in understanding the liquidity of some not-for-profits. To address this concern, the FASB will require all not-for-profits to add disclosures regarding how they manage liquidity and information that communicates the availability of financial assets to meet cash needs for general expenditures. This new requirement may be the most challenging aspect for preparers of financial statements because it goes beyond the usual financial data included in the statements and footnotes and is focused on financial management issues.

ASU 2016-14 is effective for annual financial statements issued for fiscal years beginning after December 15, 2017, and for interim periods within fiscal years beginning after December 15, 2018. Early application is permitted. The new standard includes guidance for the year of transition when the new standard is adopted, including specific disclosures that should be made. Auditors will also want to consider the need to include an emphasis-of-matter paragraph in their auditor’s report to discuss the effects of adoption of the new standard.

Given the significant reporting and disclosure changes involved, all preparers and auditors involved with not-for-profits should start preparing for these changes now. I encourage my clients to create an implementation plan. Now is the time to learn about this new standard so you can begin the process of getting your not-for-profit ready for implementation. Some of the new disclosures, like those regarding liquidity and availability, may necessitate an education process for managers, board members, lenders and others who rely on the financial statements for decision-making. Other disclosures, such as the required disclosure of board designations on net assets, may require not-for-profits to adopt new policies and practices.

Want to learn more? The AICPA Not-for-Profit Section has a number of resources and learning opportunities, including a webcast on September 28 where participants can ask questions and get tips on creating an implementation plan.

Andrew Prather, CPA, CGMA, Shareholder – Audit & Assurance, Clark Nuber P.S. Andrew is a leader of his firm’s Not-for-Profit Services Group. He recently joined the FASB’s Not-for-Profit Advisory Committee and was a member of the AICPA’s Not-for-Profit Expert Panel.

Hands in image courtesy of Shutterstock

7 Key Communication Points for Your Clients with Extended Returns

Post author By FFC
Post date September 19, 2016

7 Key Communication Points for Your Clients with Extended Returns

As the final extension deadline of October 15 (for individual clients) approaches, it is hard to believe it is almost time to flip the calendar to another year. Although finalizing your client’s 2015 Form 1040 is the most pressing item on the agenda, it’s important to focus on year-end planning. The good news is that with the tax legislation signed last December, tax planning should be easier since many provisions were extended through 2016 (or longer) or made permanent. However, this is a presidential election year, and there is uncertainty about how a political change might impact tax reform and/or legislation.

Let’s focus on the good news (and what we can do for our clients). Here are seven topics to discuss with your clients as you wrap up their 2015 returns that will provide them the extra client service that they expect and deserve.

Year-End Planning for 2016 and Forward

Now is the perfect time to schedule a November or December appointment with your clients for any follow-up action. As you are calculating clients’ third and fourth quarter estimated tax payments, you should discuss with them the circumstances that have changed for 2016 and whether any withholding adjustments might be necessary. For example, does it make sense to make their fourth quarter state income tax payment in December? It is possible these decisions can be made with a meeting in September or October when wrapping up the 2015 return, but you’ll likely need to schedule another time to circle back with your clients to make sure the year wraps up in the way they expect.

Retirement Contributions for 2016

Remind clients to double check their contributions in their 401(k) plans while there is still time to make a payroll adjustment in order to maximize the contribution for 2016 ($18,000 or $24,000 for those age 50 and over). Also, for self-employed clients, now is a good time to discuss retirement plan options, such as a SEP IRA, Solo 401(k) or a SIMPLE IRA. Clients love it when they can save tax dollars by paying themselves!

Investment Opportunities

Consider collaborating with each of your clients’ investment advisers to plan for potential capital gains/losses and the tax ramifications. So, rather than relying on your client to relay the information correctly (to both sides), ask him or her to provide you their advisor’s contact information and grant you permission to disclose information. Or, you can schedule a meeting where all interested parties are present to discuss the different scenarios that might affect the client’s 2016 (and forward) financial situation. It is usually a win-win situation for everyone – your client’s investment advisor will likely appreciate learning more about the tax implications of investment decisions and your client should think of you as more than just a tax preparer; you’re now their year-round trusted advisers. For more tips on coordinating investing and tax planning, view this webinar that defines tax-aware investing.

Data Protection

It will be a good day when we can stop talking about identity theft and tax scams, but unfortunately, identity theft is an ever-present threat to individuals and tax practitioners. The IRS recently launched a campaign entitled Protect Your Clients; Protect Yourself aimed at increasing awareness among tax professionals. Additionally, the AICPA’s Tax Identity Theft Information and Tools page provides client letters, checklists and other resources to help practitioners dealing with this issue.

As you meet with your clients during year-end planning, it’s always a good idea to remind them to:

Keep their computer secure

Avoid phishing and malware

Protect personal information

Contact you if they suspect they are a victim of tax-related identity theft

Planning for Health Insurance and Other Related Healthcare Costs

Another potential client conversation topic is healthcare. Ensure that your clients understand provisions of the Affordable Care Act that apply to them. If they need to obtain health insurance coverage, remind them about the open enrollment period from Nov. 1 to Jan. 31, 2017 for the Marketplace. Discuss their healthcare costs for the current and future year, and ensure they spend their health flexible spending arrangement money, which is “use it or lose it” (see IRS Publication 969, Health Savings Accounts and Other Tax-Favored Health Plans).

Gifting Strategy

Rather than waiting until the year is over to discuss whether a 2016 gift tax return is necessary, talk with your clients now about their gifts. Discuss what they have already given in 2016, make sure they understand the $14,000 exclusion and have taken full advantage of it, and determine whether it makes sense to make additional gifts for the remainder of 2016.

Charitable Giving

As part of your year-end planning client conversations, talk with them about charitable contributions. For example, a client may want to make a large gift to satisfy a church pledge. Certain clients may benefit from transferring an appreciated security to a charity. And, for those charitably-minded clients who earned more money this year, consider discussing the tax benefits that different levels of contributions would provide. Year-end planning is the perfect time to have these conversations and help your clients with this analysis.

Good luck with the successful completion of extension season and remember that it is worth taking that extra hour now to provide value to your clients in the upcoming year.

April Walker, CPA, Lead Technical Manager- Tax Practice and Ethics, American Institute of CPAs.

Seven courtesy of Shutterstock.

Drones on the Horizon for CPA Firms in 2017

Post author By FFC
Post date September 16, 2016

Drones on the Horizon for CPA Firms in 2017

New federal regulations mean CPA firms will have easier access to an unexpected tool for audits and inspections: flying robots.

Unmanned aircraft systems, commonly referred to as drones, have a wide range of commercial applications, including law enforcement and rescue operations. CPA firms are finding ways to use drones to audit and inspect land, agriculture and facilities as a safer and more cost effective alternative to manual inspections.

For the past several years, commercial drone use has been mostly limited to larger firms because of a burdensome and costly Federal Aviation Administration (FAA) approval process. But on August 29, a new FAA rule took effect that broadly authorizes commercial drone operations in the United States, giving CPA firms of all sizes an easier path to incorporating drones into their operations. For example, the new rule allows the commercial operation of drones under 35 pounds, whereas previous regulations mandated that commercial drone operators had to apply for a special license from the FAA.

While there are still many restrictions, such as a maximum air speed of 100 mph and a maximum altitude of 400 feet above ground level, the new rule greatly opens up the potential for drone operations and lowers the cost of entry for CPA firms looking to adapt their audit and inspection processes. Instead of the special FAA license, commercial drone operators can now use a remote pilot certificate and a TSA background check. The FAA also issued guidance on preparing operators for the certification and how they can then apply for waivers of certain provisions.

While there are many commercial applications for drones, inspections of large-scale physical assets are one of the biggest market opportunities. PwC estimates the global market for infrastructure inspection and agricultural surveys alone to exceed $77 billion. The firm has already set up a global drone headquarters in Poland with the intention of offering such services around the world. The drones will aid in a wide variety of business needs, including monitoring infrastructure for defects and assessing large geographical areas.

Due to the strict regulatory structure surrounding drone operations in the United States, CPA firms like PwC are currently testing drone applications in other countries. However, as the United States’ federal rules become more inclusive, CPA firms of all sizes can build and grow their drone operations for more effective and efficient audits and inspections.

With the rising interest in commercial drones, the level of regulation and legislation is also rising at the state level. Even with the expanded FAA rules, CPA firms should be mindful of how their state is regulating drones. So far, 32 states have enacted laws related to drones and five have adopted resolutions. Some states, such as Alaska, have adopted resolutions that support the drone industry and increase economic opportunities within the FAA framework, while other states, such as Arizona and Idaho, have added restrictions on drones and prohibited certain uses. Tennessee and Texas both passed legislation this year that specifies lawful drone uses and includes many commercial operations.

While states are often supportive of drone industry development, they are also closely monitoring the risks associated with extensive drone usage. Concerns include the use of drones over private land, how the data collected by drones will be stored and used, and if drones are violating property rights when traveling through the air. Firms can expect more state-level drone legislation in 2017.

While federal and state governments are loosening restrictions on drones, there is still a long way to go for commercial drone operators. For example, the new FAA rule states that drone operations must remain within a visual line of sight. To make drone use in inspections and audits cost-effective, however, accounting and auditing firms will need to operate beyond a visual line of sight when performing services like land audits. The FAA does allow some waivers, as long as a firm can assure the safety of the operations. Firms will have to wait to see how effective the waiver process is under the new rule.

Despite the remaining regulatory obstacles, the commercial drone industry continues to grow, and CPA firms will likely see expanded use of drones in commercial operations in 2017.

Julia Morriss, Project Administrator, State Regulatory and Legislative Affairs. Julia Morriss monitors trends in state legislation and regulation impacting the CPA profession. She holds a Bachelor’s Degree from American University’s School of Public Affairs, with a minor in Accounting.

Drone courtesy of Shutterstock.

A Passion for Education Proves Perfect Formula for Ross Riskin, CPA/PFS

Post author By FFC
Post date September 14, 2016

A Passion for Education Proves Perfect Formula for Ross Riskin, CPA/PFS

Meet Ross Riskin, CPA/PFS, CCPS, vice president of Riskin & Riskin, PC in Orange, Conn. Ross is definitely not your typical CPA; he has a unique passion for helping college students and their families, a direct hand in CPA education and a thoughtful take on incorporating the AICPA’s Essentials of Financial Planning curriculum into the classroom.

AICPA: You’re founder and managing member of Riskin Advisory, LLC, described on your website as “a college financial planning practice.” How are you helping students and their parents plan for college expenses?

Ross Riskin: I work with families and recent graduates to help them develop plans to save and pay for higher education expenses in the most financially efficient manner. I approach the college and education planning process from tax, financial aid, and cash flow planning perspectives. Whether a family is trying to navigate the complex financial aid process, a grandparent is trying to develop a funding plan for their grandchild, or a recent graduate is trying to come up with a game plan to tackle their student loan debt, I am happy to advise them about the best course of action.

AICPA: How does being a CPA and a PFS support your expertise in education planning?

RR: Being a practicing CPA has provided me with the educational and professional experience required to enhance my knowledge of tax planning. Obtaining the PFS credential has helped me approach college and education planning from the perspective of an accountant and an adviser in order to develop comprehensive solutions for clients to help them see the big “financial” picture. Education planning is an area that hasn’t really been a focal point of planning to the same degree that tax planning and investment planning have been, and I am dedicated to working each day as a CPA/PFS to shift that focus and help families plan and take action in a holistic way.

AICPA: You’re an assistant professor of Accounting and Finance and the director of Finance Programs at Albertus Magnus College in New Haven, Conn. What inspired you to become a college professor?

RR: My passion for learning and the positive experiences I had with my own professors in my undergraduate and graduate studies inspired me to get involved in academia. Teaching others is truly one of the most fulfilling experiences I have had in my life and career, and I believe that preparing to teach others is the greatest learning experiences of all. I highly recommend other CPAs and advisers get involved in academia; it is rewarding on personal and professional levels.

AICPA: One of the AICPA’s initiatives is to encourage college students in accounting to consider a career in financial planning. How are you planning to incorporate the AICPA’s Essentials of Financial Planning into your lesson plans, and how do you think it will help your students?

RR: Albertus Magnus College is the first college in the country to incorporate the AICPA’s Essentials in Financial Planning course into its Master of Science in Accounting curriculum. I also helped create the Personal Financial Planning concentration within our master’s program to further encourage students to learn about financial planning, and to hit the ground running once they earn their graduate degree and pass the CPA and Personal Financial Specialist (PFS) exams.

AICPA: What is your career advice to college accounting students?

RR: First, don’t just think outside the box; be prepared to move outside the box. Many college accounting students are pressured into believing their careers need to begin at one of the Big 4 accounting firms, or that they have to stay in audit or tax. I am a Big 4 veteran myself, but my desire to run my own firm, teach and get involved in financial planning guided me in another direction on my own path to success.

Second, always stay straight on your journey, but don’t believe for a second that it is going to stay straight for you. Everyone’s career is like a mountain range with a series of peaks and valleys that requires persistence and integrity to move ahead when things are going well and more so when things are not. If you can go above and beyond what is expected of you at all times without sacrificing your integrity, success will surely follow.

Sarah Bradley, CPA, Senior Technical Manager, Personal Financial Planning-American Institute of CPAs.

The Secret to Quality Audits and Fine Wines? Quality Control

Post author By FFC
Post date September 13, 2016

The Secret to Quality Audits and Fine Wines? Quality Control

“Quality means doing it right when no one is looking.”

Henry Ford

Browsing the internet and looking at websites of CPA firms I notice they pretty much all talk about being quality firms. We all believe we have quality, but just what is quality?

As I sit with my evening glass, I realize what draws us to a fine wine is the diligent process to produce the beverage we enjoy. The process for producing a fine wine is not unlike the accounting and auditing world. Indulge me as I demonstrate the similarities.

Winemakers must identify critical points in the process where problems can arise in order to eliminate or minimize precursors for taints and faults, and then rectify any problems that still do occur.

All facets of the winemaking process must be carefully controlled to create a quality wine, just as we must control all facets of the accounting and audit process to produce a quality audit. As you can see below, there is a strong correlation between our profession’s elements of quality control and those required to produce fine wines.

Wine Making Quality Control Elements

Comparable A&A Quality Control Elements

Facility assessments: cellar assessments

Acceptance and continuance

Management assessments

Tone at the top

Personnel assessments

Human Resources

Varietal and regional benchmarking; regulatory compliance

Relevant ethical requirements

Analysis and results interpretations

Engagement performance

Corrections and troubleshooting

Engagement performance/monitoring

Independent evaluations

Monitoring

Such variables as the speed with which harvested grapes are crushed, temperature and timing during fermentation and aging, the percent of sugar and acid in the harvested grapes, and the amount of sulfur dioxide added during fermentation all have a tremendous impact on the quality of the finished wine.

Similarly, professional judgment must be employed in the performance of our accounting and auditing engagements to produce quality reports that comply with professional standards.

To bring this a little closer to home and our profession, let’s consider how we often advise or evaluate our clients. We expect clients and prospective clients to have strong leadership and foster an environment of solid internal controls (Tone at the Top). Our professional standards require that we evaluate the skills, knowledge and experience of our clients (human resources and relevant ethical requirements). We expect to see documented internal controls, documented policies and procedures, and appropriate documentation to support transactions (engagement performance). We also expect our clients to perform ongoing evaluations, separate evaluations or a combination thereof to ensure their controls are functioning appropriately (monitoring). Imagine our perception and evaluation if these elements are not continuously evaluated throughout the year, every year.

In our firms, we need to have good governance and a documented system of quality control, just like we advise others. We expect this of our clients; we should expect it of ourselves.

Soon our year-end audits and busy season will be upon us. Now is a great time to review your Quality Control document. If you do not have one, then create it; after all, it is required by our professional standards.

The AICPA has a newly revised and updated free practice aid available to assist you in this important endeavor. It has been designed with two versions – one for small and medium-sized firms and one for the sole practitioner. There are illustrative policies and procedures which are more easily customizable for practitioners, and the practice aid includes tips, warnings, and notes to help practitioners better implement the policies and procedures. Take the time to read them – they provide insightful and practical advice.

The Peer Review Board has also been making changes to drive improvements in audit quality. Be sure to review those changes as you revise your Quality Control document and prepare for your next peer review.

Whether your passion is wine, food or some other product or activity, it is the underlying system of quality control that draws you back to it again and again. Just like we recognize quality in what we purchase, our clients will recognize our quality work.

“People forget how fast you did a job – but they remember how well you did it.”

Howard Newton, American advertising executive, and author.

Rick Reeder, CPA, CGMA, is the Owner of Reeder & Associates, PA in Tampa, FL. Rick is a member of the AICPA Quality Control Standards Task Force, Past Peer Review Board Chair and former member of the Government Audit Quality Center Executive Committee. His firm specializes primarily in audits of not-for-profit organizations and performs audits of ERISA and CIRA engagements.

Vineyard courtesy of Shutterstock.

Helping Clients Plan Ahead for College Expenses

Post author By FFC
Post date September 9, 2016

Helping Clients Plan Ahead for College Expenses

As the cost of undergraduate, graduate and professional education continues to soar, having enough money set aside to pay for college is no longer a “nice-to-have” component of financial planning. It is essential to devise a thoughtful, cohesive plan to keep clients on course toward achieving their financial goals, within the larger context of their financial situation, investment horizon, risk tolerance, and resources.

Helping clients understand how much to save based on their education goals prepares them for the cost of college.

Six Considerations

In trying to approximate future college costs and the amount clients will need to save to pay the college costs of the future, you’ll need to help them make several assumptions and determinations:

Type of educational institution. A great disparity exists between costs associated with a four-year private and a four-year public college, with the former costing significantly more.

Which costs to fund? Typical college costs include tuition, as well as non-tuition items such as fees, room and board, books, meals, and living expenses. Help your clients figure out whether they want to save enough to pay for everything, or just fund some of these expenses.

Estimate the annual cost. Once your clients decide which type of educational institution and related expenses to save for, the next step is to estimate the total annual cost in today’s dollars. A great resource to assist with this calculation is the College Board.

Establish time horizon. Next, determine the number of years until education costs will begin, and for how many years you’ll be paying college expenses. To forecast these costs, consider the inflation rate applicable to education expenses over the family’s time horizon. Historically, college expenses have run about two times the general inflation rate.

Figure the future funding requirement. Identify any current savings earmarked for education expenses, followed by calculating the future value of the current savings over the time horizon until the education costs occur. The net of these two figures will represent the education funding requirement in future dollars.

Determine lump sum and periodic funding amounts. Next, discount the funding requirement to its present value to determine the lump sum and periodic payments needed to fund the total cost today. Determine the intervals most appropriate to fund your client’s education objective by assessing cash flow, the need for an emergency fund and the family’s desire to save for competing goals.

Funding Options

Once you help your client figure out how much they need to save over a determined period of time, you can help them save in the most advantageous way, using tax-efficient savings vehicles.

If your client has little time until they need to start paying college tuition, and they or another family member, such as a grandparent, aren’t equipped to pay the entire college expense, there are certain ways to finance a shortfall. Primarily, the student can apply for governmental or private grants and scholarships. Further, financial aid forms should be filed to allow the school to calculate the amount of eligible aid the student may receive, based on the family’s overall financial picture. The student’s financial aid package may include loans from the Federal government, state government, the college or a commercial lender.

Given today’s low-interest rate environment, some clients may consider using a home equity line of credit. The loan options may differ significantly, depending on the product, so be sure to help your client carefully examine the interest rates and terms of each loan before proceeding.

If a client has retained you, and you have a clear and thorough understanding of their financial and personal goals, you can prudently research, analyze and present other possibilities. Specifically, retirement savings may be available to pay for college expenses in the form of withdrawals and/or loans. Clients may withdraw dollars from their IRAs before reaching age 59 ½, without penalty, to pay for qualified higher education expenses. Borrowing funds from an IRA is prohibited; however, you may be able to borrow from most workplace retirement plans, including 401(k)s, 403(b)s and 457 plans.

The CPA’s Role

One important caveat to keep in mind when using retirement assets to fund an education: there are always education loan options available, but there are no such loan programs existing for retirement. You, as the adviser, must carefully guide your client through this and other options and make sure the risk and consequences of a shortfall in retirement are fully understood. Short of putting all of their money on red 24 in Vegas, they will have to come up with their own money to pay for college expenses or pursue one of the savings plans described above. For more information on education planning, the AICPA personal financial planning division, in partnership with expert Bob Keebler, CPA/PFS, has created this podcast series.

Robert A. Westley, CPA/PFS, Northern Trust. Robert is a CPA financial planner with Northern Trust in New York City. He specializes in developing, implementing, and monitoring holistic financial plans and wealth management solutions for high net worth families. Robert serves on the AICPA Personal Financial Specialist Credential Committee. Contact him at raw8@ntrs.com.

College savings courtesy of Shutterstock.

7 Key Facts on the FASB’s Revenue Recognition Standard

Post author By FFC
Post date September 8, 2016

7 Key Facts on the FASB’s Revenue Recognition Standard

Transitioning to significantly new accounting guidance is always a critical process, and that’s particularly true with the Financial Accounting Standards Board’s Accounting Standards Update 2014-09, Revenue from Contracts with Customers (Topic 606). Since the effective date for this important guidance has been postponed, CPAs and their clients can now make the most of the added time they need to begin understanding and preparing to apply the standard. Here are seven facts that CPAs should know about this key standard.

Fact #1: Its reach is broad.

Any entity—whether it’s public, private or not-for-profit—that enters into contracts involving goods or services or nonfinancial assets is affected. There are exceptions for contracts that are within the scope of other standards, such as leases and insurance contracts, and for financial instruments, certain guarantees and specific nonmonetary exchanges, but the standard still applies to a wide range of organizations and transactions. Entities should assess the possible impact of the guidance on their financial statements, information systems, processes and controls.

Fact #2: You’ll need a shift in thinking.

Organizations in the United States are used to transaction- and industry-specific revenue recognition guidance under current GAAP, but the new standard, which converges with International Financial Reporting Standards, uses a principle-based approach for recognizing revenue, which is less rules-based and calls for greater judgment in implementation.

Fact #3: Organizations will likely be making more disclosures.

There are required disclosures on numerous details of contracts with customers, including disaggregation of revenue, contract balances and performance obligations, as well as on significant judgments and on assets recognized in costs to get or fulfill a customer contract.

Fact #4: There have been updates and modifications to the standard since it was first issued.

In the last year, the FASB has issued updates related to principal versus agent considerations (reporting revenue gross versus net); identifying performance obligations and licensing; and narrow-scope improvements and practical expedients, as well as an update to address the rescission of certain Securities and Exchange Commission rules. As you plan the best way for your firm and your clients to implement the standard, be aware of the possibility that further information may have been issued since the standard’s original publication date.

Fact #5: Be prepared to follow the five steps.

The process set forth in the standard calls for these five steps. Many clients may need to be alerted to the changes in approach involved and the best ways to address them.

Identify the contract with a customer.

Identify the separate performance obligations in the contract.

Determine the transaction price.

Allocate the transaction price to the separate performance obligations in the contract.

Recognize revenue when or as the entity satisfies a performance obligation.

Fact #6: It would be a mistake to postpone tackling this one.

After the FASB issued a deferral of the original effective date for this standard, public entities and certain not-for-profits and employee benefit plans now will apply the guidance to annual reporting periods beginning after December 15, 2017, including interim reporting periods within that reporting period. For all other entities, the guidance will be effective for annual reporting periods beginning after December 15, 2018, and interim reporting periods within annual reporting periods beginning after December 15, 2019. However, given the breadth of the standard’s reach, all organizations, and smaller, private entities in particular, are advised to begin informing themselves about the standard and planning to implement it well in advance.

Fact #7: CPAs have access to a wealth of implementation resources.

The AICPA revenue recognition site features news and practical guidance, including information for specific industries, a roadmap to understanding the standard, a learning and implementation plan and a perspective on the standard’s tax effects. The AICPA’s Financial Reporting Executive Committee has released working drafts of revenue recognition implementation issues for the telecommunications industry. Comments are due on October 1, 2016.

Ensure a Smooth Transition

The revenue recognition guidance is a game-changing standard. The good news is that the delayed effective date offers companies the chance to plan for a reasonable and well-planned transition. The AICPA’s PCPS Center for Plain English Accounting (CPEA) has developed valuable implementation resources for its members including the following:

The CPEA Revenue Recognition Series ─ Fortune Favors the Prepared

Part I: Key concepts, including the minimum requirements to recognize revenue, long-term contracts, variable consideration, and other topics.

Part II: Key concepts, including application of the terms “Distinct” and “Separately Identifiable,” methods for measuring progress on contracts, and significant financing component.

Part III: Contract costs, warranties, and bill and hold arrangements.

Part IV: Accounting for licenses.

Part V: Principal versus agent considerations

ASU 2016-10: Identifying performance obligations, and licensing implementation guidance.

NFP Entities – Part I: General implementation issues in the not-for-profit sector.

NFP Entities – Part II: Higher education sector implementation issues.

Real Estate Industry: General implementation issues in the real estate sector.

For a limited time, Part I of the CPEA Revenue Recognition Series is accessible to all free of charge.

Now is the time to work with clients or employers to ensure smooth implementation of the new requirements. The AICPA puts valuable tools at your fingertips to help you apply the standard.

Bob Durak, CPA, CGMA, Director- Center for Plain English Accounting, American Institute of CPAs.

Revenue Recognition image courtesy of Shutterstock

Seizing Opportunity Like a Rapping Founding Father

Post author By FFC
Post date September 7, 2016

Seizing Opportunity Like a Rapping Founding Father

When hip hop music first became popular, very few people would have thought that the music could be a great way to tell the story of America’s founding fathers. Yet, the wildly popular Broadway musical “Hamilton,” which won 11 Tony Awards, merges the historical narrative of a former president with hip hop music and lyrics, and proves that it’s possible to successfully create something fresh by offering a new take on a familiar subject.

Alexander Hamilton, the man whose life inspired the musical, started his career as an accounting clerk in the West Indies, then went to colonial America, where he would eventually lay the groundwork for the United States financial system. The musical came to life because Lin-Manuel Miranda, its creator and the man who originated the role of Hamilton, saw an opportunity and seized it by utilizing his musical talents to tell a 240-year-old story and delight unsuspecting audiences.

What does that have to do with CPAs? A lot, actually. Every day, CPAs use their knowledge and talents to meet a wide spectrum of client needs, often in ways that weren’t initially envisioned 50 or 20 or even five years ago. If you’d like to set the stage for new options in your career or practice, here are several opportunities that mesh well with CPAs’ core competencies and experience.

Cybersecurity services. Forty percent of information security professionals expect a major security breach this year, according to a Black Hat survey. As cybersecurity concerns and incidents rise, CPAs can provide assurance and advisory services that can help clients or employers address associated risks and reassure their stakeholders about their efforts.

Crowdfunding consulting. In light of new Securities and Exchange Commission rules on crowdfunding, CPAs can provide clients and employers with a valuable perspective on what this financing choice can mean to them and help them evaluate capitalization options. The AICPA’s Crowdfunding and Regulation A+ webpage offers members valuable background on the rules.

Private company reporting needs. The AICPA Financial Reporting Framework for Small- and Medium-Sized Entities (FRF for SMEs™)accounting framework allows practitioners to offer small business clients the customized information for their financial statement users in a format that is simplified, consistent and cost effective. When GAAP financial statements are not required, CPAs can differentiate themselves by providing the information that will fit small business clients’ unique needs.

New options for valuation skills. In response to regulatory concerns and market interest in fair value measurements for U.S. public company financial reporting, the AICPA recently introduced the Fair Value Measurement interest area to address the need for greater quality, consistency and transparency in this area. To reinforce and demonstrate CPAs’ knowledge, in the fall the Institute will roll out the Certified in Entity and Intangible Valuations™ (CEIV™) credential. The CEIV credential will be available to AICPA and CIMA members and finance professionals who demonstrate competence in fair value measurements, related audit considerations, financial reporting standards and AICPA professional standards.

SOC reports. When clients provide outsourced services, CPAs offer valuable information that users can use to assess and address any risks associated with those services using Service Organization Control Reports^®. In SOC engagements, CPAs examine and report on controls at a service organization that might affect user entities’ financial reporting or controls related to the service organization’s systems’ security, availability and processing integrity or the confidentiality and privacy of information processed for user entities’ customers.

Personal financial planning services. There’s never been a greater demand for personal financial planning services: tax, retirement, estate, charitable and life-transition planning, among others. The U.S. Bureau of Labor Statistics projects a 27% growth in the need for personal financial planning advisers over the next six years and 30% over the next 10. “Personal financial planning” is the term consumers use to identify services they seek – services many CPAs already provide. It’s time to call yourself a CPA financial planner. The AICPA offers a wealth of valuable tools and resources for CPA financial planners, which are designed to help you build deeper, longer-lasting relationships with clients through all life-stages.

What’s Next for Your Firm?

CPA firms today have to be able to determine what trends and developments can be expected to affect them and how to address them. That sounds like a big job, but the PCPS Firm inMotion e-Toolkit can help streamline the process. Leveraging key insights from the Horizons 2025, the e-toolkit helps members jumpstart their planning in firm structure and strategy; staff development and culture; clients and relationship building; and use of technology.

Where can your education and experience take you? Be sure to check out these AICPA resources that can help you explore new ways to enhance your career success and seize opportunities like a rapping founding father.

Mark Koziel, CPA, CGMA, Vice President, Firm Services & Global Alliances-American Institute of CPAs.

Alexander Hamilton courtesy of Shutterstock.

2704 Regs May Eliminate Discount: Practitioners Must Plan Now

Post author By FFC
Post date September 6, 2016

2704 Regs May Eliminate Discount: Practitioners Must Plan Now

Most practitioners are aware by now that the Treasury has proposed regulations under Code Section 2704 that would generally eliminate valuation discounts on transfers of interest in family entities. This means that practitioners should advise all wealthy clients to review planning options before year-end when these new rules might become effective.

The AICPA will examine the regulations and offer comments at the Dec. 1 IRS hearing; however, to be safe, advisers should proceed with the assumption they will take effect as is. Outlined below are four practical planning steps practitioners should address with their clients before year-end.

Step 1: Identify Clients Affected

Clients who own large real estate or valuable family businesses that can currently be discounted for transfer tax valuation purposes, but which may not be able to be discounted after the effective date of the regulations, should focus on planning for the new regulations. In 2012, when the estate tax exemption was modified from $5 million to $1 million, many clients rushed to modify their plans in advance of this change. We will likely experience similar activity this year, as clients strive to complete planning to address the discount rush before year-end.

Step 2: Identify and Address Legal Impediments to Planning

Although a client might benefit significantly from consummating transfers (by gift or sale) to family members or trusts for family or other heirs before year-end, practitioners should discuss with their clients whether those transfers can actually be made. If the client owns interests in real estate LLCs, it might be critical to secure a discount to make planning successful. However, the threshold issue might be whether the approval of a lender, anchor tenant or co-owner is required before those transfers can be made.

Since this might take time, practitioners should advise potentially affected clients to have their attorneys review all governing legal documents and obtain any approvals necessary to transfer. This is much more restrictive and time sensitive than 2012 planning, when any asset or even cash borrowed on an asset could have been given to accomplish planning objectives. In 2016, if the actual equity interests cannot be transferred, gifts or sales to lock in discounts may not be feasible. If a modification to a shareholder’s agreement or other type of approval needs to be obtained to permit gifts or sales of equity interests, that process should be undertaken now. The time delays and possible costs of obtaining third-party approvals could be significant.

Step 3: Determine Interests to be Transferred and Receptacles to Receive those Interests

Practitioners need to determine which business entity interests are advisable to transfer, and to whom they should be transferred (e.g., a child or a particular type of trust). This step is an interrelated step. In most cases, transfers should be made to trusts and not directly to heirs in order to ensure control of the family business interests and protect those interests from possible divorce or other legal actions against the recipient. If equity interests are sold, it may be a good planning opportunity to designate a grantor trust as recipient, if the value exceeds the client’s remaining gift tax exemption. This will avoid current capital gains on the sale of the discounted equity interests. Thus, for larger transfers, a grantor trust might be the default approach.

Determine whether those trusts should be formed in trust-friendly jurisdictions (e.g., Alaska, Nevada, South Dakota or Delaware). The manner in which the receptacle trust and the mechanism of consummating the transfer to that trust (or trusts) will depend on a number of factors: client age and health, client need for cash flow or access to funds transferred, tax status of the entity (e.g., S corporation or not), etc. For example, if the client will need cash flow from the entity in retirement, selling rather than gifting interest might be advisable so that note payments can provide cash flow.

Step 4: Value the Interests to be Transferred

Undertake the value of the underlying assets and non-controlling interests in the business to be transferred. The fact that after the regulations become effective, discounts might be eliminated does not mean that the IRS will not challenge discounts on transactions consummated before the effective date. Appraisal reports should be prepared meeting all requirements necessary to be respected by the IRS.

For more information on this topic, the AICPA’s Personal Financial Planning Division has created a resource page containing multiple podcasts and articles on how advisers can plan for the proposed regulations.

Martin Shenkman, CPA, MBA, PFS, AEP, JD, Shenkman Law. Martin focuses on estate and tax planning. He is the author of more than 42 books and 1,000 articles, and is a quoted expert on tax matters. Martin is also known for his active charitable work, which has been profiled in Forbes.

Family business image courtesy of Shutterstock

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