accounting

2019 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 2019. 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 the second quarter of 2019 (Form 941) and pay any tax due. (See the exception below, under “August 12.”)
  • File a 2018 calendar-year retirement plan report (Form 5500 or Form 5500-EZ) or request an extension.

August 12

  • Report income tax withholding and FICA taxes for the second quarter of 2019 (Form 941), if you deposited on time and in full all of the associated taxes due.

September 16

  • If a calendar-year C corporation, pay the third installment of 2019 estimated income taxes.
  • If a calendar-year S corporation or partnership that filed an automatic six-month extension:
    • File a 2018 income tax return (Form 1120S, Form 1065 or Form 1065-B) and pay any tax, interest and penalties due.
    • Make contributions for 2018 to certain employer-sponsored retirement plans.

© 2019

Lean manufacturers: Reap the benefits of lean accounting

Standard cost accounting doesn’t necessarily work for lean operations. Instead, lean accounting offers a simplified reporting alternative that generates more timely, relevant financial data. But it’s not right for every situation.

What’s lean manufacturing?

Lean manufacturers strive for continuous improvement and elimination of non-value-added activities. Rather than scheduling workflow from one functional department to another, these manufacturers organize their facilities into cross-functional work groups or cells.

Lean manufacturing is a “pull-demand” system, where customer orders jumpstart the production process. Lean companies view inventory not as an asset but as a waste of cash flow and storage space.

Why won’t traditional accounting methods work?

From a benchmarking standpoint, liquidity and profitability ratios tend to decline when traditional cost accounting methods are applied to newly improved operations. For example, to minimize inventory, companies transitioning from mass production to lean production must initially deplete in-stock inventories before producing more units. They also must write off obsolete items. As they implement lean principles, many companies learn that their inventories were overvalued due to obsolete items and inaccurate overhead allocation rates (traditionally based on direct labor hours).

During the transition phase, several costs — such as deferred compensation and overhead expense — transition from the balance sheet to the income statement. Accordingly, lean manufacturers may initially report higher costs and, therefore, reduced profits on their income statements. In addition, their balance sheets initially show lower inventory.

Alone, these financial statement trends will likely raise a red flag among investors and lenders — and possibly lead to erroneous business decisions.

How does lean accounting work?

Standard cost accounting is time consuming and transaction-driven. To estimate cost of goods sold, standard cost accounting uses complex variance accounts, such as purchase price variances, labor efficiency variances and overhead spending variances.

In contrast, lean accounting is relatively simple and flexible. Rather than lumping costs into overhead, lean accounting methods trace costs directly to the manufacturer’s cost of goods sold, typically dividing them into four value stream categories:

  1. Materials costs,
  2. Procurement costs,
  3. Conversion costs, such as factory wages and benefits, equipment depreciation and repairs, supplies, and scrap, and
  4. Occupancy costs.

These are easier to understand and evaluate than the variances used in standard cost accounting. In addition, box score reports are often used in lean accounting to supplement profit and loss statements. These reports list performance measures that traditional financial statements neglect, such as scrap rates, inventory turns, on-time delivery rates, customer satisfaction scores and sales per employee.

Should your company abandon standard cost accounting?

Most companies are required to use standard cost accounting methods for formal reporting purposes to comply with U.S. Generally Accepted Accounting Principles (GAAP). But lean manufacturers may benefit from comparing traditional and lean financial statements. Such comparisons may even highlight areas to target with future lean improvement initiatives. Contact us for more information.

© 2019

Now or later? When to report subsequent events

Financial statements present a company’s financial position as of a specific date, typically the end of the year or quarter. But sometimes events happen shortly after the end of the period that have financial implications for the prior period or for the future. Here’s a look at what’s reportable and what’s not.

Classifying subsequent events

So-called “subsequent events” happen between the date of the financial statements and the date the financial statements are available to be issued. This lag usually lasts two or three months, because it takes time to record end-of-period journal entries, make estimates, draft footnotes and, if applicable, complete external compilation, review or audit procedures. The two types of subsequent events include:

Recognized. These events provide further evidence of conditions that existed on the financial statement date. For example, a major customer might file for bankruptcy. There was probably evidence of the customer’s financial distress in the prior period, such as a decrease in revenue or a buildup of receivables. The customer’s bankruptcy filing may trigger a write-off for bad debts to be recorded on the balance sheet in the prior period.

Nonrecognized. These subsequent events reflect unforeseeable conditions that didn’t exist at the end of the accounting period. Examples might include a change in foreign exchange rates, a fire or an unexpected natural disaster that severely damages the business.

Generally, the former must be recorded in the financial statements. The latter type of subsequent event isn’t required to be recorded but may have to be disclosed in the footnotes.

Disclosing subsequent events

Nonrecognized subsequent events must be disclosed in the footnotes only if failure to disclose the details would cause the financial statements to be misleading to investors and lenders. Subsequent event disclosures should include 1) a description of the nature of the event, and 2) an estimate of the financial effect (or, if not practical, a statement that an estimate can’t be made).

In some extreme cases, the effect of a subsequent event may be so pervasive that a company’s viability is questionable. This may cause the CPA to re-evaluate the going concern assumption that underlies its financial statements.

Footnotes add value

Subsequent events may not be reflected on a company’s balance sheet or income statement. But, when in doubt, companies typically disclose subsequent events to promote transparency in financial reporting. Contact us for more information about reporting and disclosing subsequent events.

© 2019

The home office deduction: Actual expenses vs. the simplified method

If you run your business from your home or perform certain functions at home that are related to your business, you might be able to claim a home office deduction against your business income on your 2018 income tax return. There are now two methods for claiming this deduction: the actual expenses method and the simplified method.

Basics of the deduction

In general, you’ll qualify for a home office deduction if part of your home is used “regularly and exclusively” as your principal place of business.

If your home isn’t your principal place of business, you may still be able to deduct home office expenses if 1) you physically meet with patients, clients or customers on your premises, or 2) you use a storage area in your home (or a separate free-standing structure, such as a garage) exclusively and regularly for your business.

Actual expenses

Traditionally, taxpayers have deducted actual expenses when they claim a home office deduction. Deductible home office expenses may include:

  • Direct expenses, such as the cost of painting and carpeting a room used exclusively for business,
  • A proportionate share of indirect expenses, such as mortgage interest, property taxes, utilities, repairs and insurance, and
  • A depreciation allowance.

But keeping track of actual expenses can be time consuming.

The simplified method

Fortunately, there’s a simplified method that’s been available since 2013: You can deduct $5 for each square foot of home office space, up to a maximum total of $1,500.

For example, if you’ve converted a 300-square-foot bedroom to an office you use exclusively and regularly for business, you can write off $1,500 under the simplified method (300 square feet x $5). However, if your business is located in a 600-square-foot finished basement, the deduction will still be only $1,500 because of the cap on the deduction under this method.

As you can see, the cap can make the simplified method less beneficial for larger home office spaces. But even for spaces of 300 square feet or less, taxpayers may qualify for a bigger deduction using the actual expense method. So, tracking your actual expenses can be worth the extra hassle.

Flexibility in filing

When claiming the home office deduction, you’re not locked into a particular method. For instance, you might choose the actual expense method on your 2018 return, use the simplified method when you file your 2019 return next year and then switch back to the actual expense method thereafter. The choice is yours.

Unsure whether you qualify for the home office deduction? Or wondering whether you should deduct actual expenses or use the simplified method? Contact us. We can help you determine what’s right for your specific situation.

© 2019

What is and isn’t a financial statement audit?

by Tyler Mosley, CPA

Audit Partner at Atchley & Associates, LLP

 

In the public accounting world, we sometimes assume everyone knows what a financial statement audit is and what it isn’t. However, that is a misconception as the term “audit” can be used to describe a variety of compliance related activities.  For example, an income tax audit performed by the IRS is completely different than a financial statement audit performed by an independent auditor. So…what is a financial statement audit?

A financial statement audit is an examination of an organization’s financial statements by an independent auditor who must be a certified public accountant (CPA).  The examination is performed in accordance with Generally Accepted Auditing Standards (GAAS) and a reporting framework chosen by the party who authorizes the audit engagement.  In most cases, the framework chosen is Generally Accepted Accounting Standards (GAAP) as that is what most third parties who request a financial statement audit require.  However, a financial statement audit can be performed using a variety of reporting frameworks, such as but not limited to income tax basis, modified cash basis, cash basis, or statutory basis.

The independent auditors’ role in the engagement is to provide an opinion on whether or not the financial statements presented are materially correct in all respects related to the reporting framework chosen.  An audit involves the independent auditors obtaining an understanding of your organization’s internal control, assessing fraud risk, substantively testing accounting records through inspection, observation, and third-party confirmation or corroborative inquiry.

Now that we have defined what a financial statement audit is, let’s discuss what it isn’t.  A financial statement audit does not serve the same purpose as a financial statement compilation or review.

A financial statement review provides a conclusion as to whether they believe any material modifications should be made to the presented financial statements based on the reporting framework that has been chosen.  In a review engagement, the CPA is required to understand the industry in which the organization operates including accounting principles that are unique to the industry.  The CPA will also ask questions about your financial activity and perform analytical procedures to identify areas in the financial statements where material misstatements are likely to arise.  The CPA does not obtain an understanding of your organization’s internal controls, assess fraud risk, or substantively test accounting records.  As such, the CPA only provides limited assurance on the financial statements.

A financial statement compilation is a service that does not have to be performed by a CPA or even an independent third party. However, if the person preparing the compilation is not independent they must disclose the fact in the compilation.  The CPA does not provide an opinion on if the financial statements presented are materially correct nor do they provide a conclusion like they would for a review.

We encourage all our clients to inform us of the purpose of the compilation, review, or audit engagement services they are requesting so we can assist in determining what level of service is appropriate for their needs.  The time required to perform the engagement increases as you move from compilation to review to an audit.

Private companies: Have you implemented the new revenue recognition standard?

Private companies that follow U.S. Generally Accepted Accounting Principles (GAAP) must comply with the landmark new revenue recognition standard in 2019. Many private company CFOs and controllers report that they still have significant work to do to meet the demands of the sweeping rules. If you haven’t started the implementation process, it’s time to get the ball rolling.

Lessons from public company peers

Affected private companies must start following Accounting Standards Update (ASU) No. 2014-09, Revenue from Contracts with Customers (Accounting Standards Codification Topic 606), the first time they issue financial statements in 2019. For private companies with a fiscal year end or issuing quarterly statements under U.S. GAAP, that could be within the next few months. Other private companies have until the end of the year or even early 2020. No matter what, it’s crunch time.

Public companies, which had to begin following the standard in 2018, reported that, even if the new accounting didn’t radically change the number they reported in the top line of their income statements, it changed the method by which they had to calculate it. They had to comb through contracts and offer paper trails to back up their estimates to auditors. Public companies largely reported that the standard was more work than they anticipated. Private companies can expect the same challenges.

An overview

The revenue recognition standard erases reams of industry-specific revenue guidance in U.S. GAAP and attempts to come up with the following five-step revenue recognition model for most businesses worldwide:

  1. Identify the contracts with a customer.
  2. Identify the performance obligations in the contract.
  3. Determine the transaction price.
  4. Allocate the transaction price to the performance obligations.
  5. Recognize revenue as the entity satisfies a performance obligation.

In many cases, the revenue a company reports under the new guidance won’t differ much from what it reported under old rules. But the timing of when a company can record revenues may be affected, particularly for long-term, multi-part arrangements. Companies also must assess:

  • The extent by which payments could vary due to such terms as bonuses, discounts, rebates and refunds,
  • The extent that collected payments from customers is “probable” and won’t result in a significant reversal in the future, and
  • The time value of money to determine the transaction price.

The result is a process that offers fewer bright-line rules and more judgment calls compared to old U.S. GAAP.

We can help

Our accounting experts can help you avoid a “fire drill” right before your implementation deadline and employ best practices learned from public companies that made the switch in 2018. Contact us for help getting your revenue reporting systems, processes and policies up to speed.

© 2019

6 last-minute tax moves for your business

Tax planning is a year-round activity, but there are still some year-end strategies you can use to lower your 2018 tax bill. Here are six last-minute tax moves business owners should consider:

  1. Postpone invoices. If your business uses the cash method of accounting, and it would benefit from deferring income to next year, wait until early 2019 to send invoices. Accrual-basis businesses can defer recognition of certain advance payments for products to be delivered or services to be provided next year.
  2. Prepay expenses. A cash-basis business may be able to reduce its 2018 taxes by prepaying certain expenses — such as lease payments, insurance premiums, utility bills, office supplies and taxes — before the end of the year. Many expenses can be deducted up to 12 months in advance.
  3. Buy equipment. Take advantage of 100% bonus depreciation and Section 179 expensing to deduct the full cost of qualifying equipment or other fixed assets. Under the Tax Cuts and Jobs Act, bonus depreciation, like Sec. 179 expensing, is now available for both new and used assets. Keep in mind that, to deduct the expense on your 2018 return, the assets must be placed in service — not just purchased — by the end of the year.
  4. Use credit cards. What if you’d like to prepay expenses or buy equipment before the end of the year, but you don’t have the cash? Consider using your business credit card. Generally, expenses paid by credit card are deductible when charged, even if you don’t pay the credit card bill until next year.
  5. Contribute to retirement plans. If you’re self-employed or own a pass-through business — such as a partnership, limited liability company or S corporation — one of the best ways to reduce your 2018 tax bill is to increase deductible contributions to retirement plans. Usually, these contributions must be made by year-end. But certain plans — such as SEP IRAs — allow your business to make 2018 contributions up until its tax return due date (including extensions).
  6. Qualify for the pass-through deduction. If your business is a sole proprietorship or pass-through entity, you may qualify for the new pass-through deduction of up to 20% of qualified business income. But if your taxable income exceeds $157,500 ($315,000 for joint filers), certain limitations kick in that can reduce or even eliminate the deduction. One way to avoid these limitations is to reduce your income below the threshold — for example, by having your business increase its retirement plan contributions.

Most of these strategies are subject to various limitations and restrictions beyond what we’ve covered here, so please consult us before you implement them. We can also offer more ideas for reducing your taxes this year and next.

© 2018

4 steps to auditing AP

At most companies, the accounts payable (AP) department handles an enormous volume of transactions. So, the AP ledger may be prone to errors or used to bury fraudulent journal entries. How do auditors get a handle on AP? They use four key procedures to evaluate whether this account is free from“material misstatement” and compliant with U.S. Generally Accepted Accounting Principles (GAAP).

1. Examination of SOPs

Standard operating procedures (SOPs) are critical to a properly functioning AP department. However, some companies haven’t written formal SOPs— and others don’t always follow the SOPs they’ve created.

If SOPs exist, the audit team reviews them in detail. They also test a sample of transactions to determine whether payables personnel follow them.

If the AP department hasn’t created SOPs — or if existing SOPs don’t reflect what’s happening in the department — the audit team will temporarily stop fieldwork. Auditors will resume testing once the AP department has issued formal SOPs or updated them as needed.

2. Analysis of paper trails

Auditors use the term “vouching” to refer to the process of tracking a transaction from inception to completion. Analyzing this paper trail requires auditors to review original source documents, such as:

  • Purchase orders,
  • Vendor invoices,
  • Journal entries for AP and inventory, and
  • Bank records.

The audit team may select transactions randomly, as well as based on a transaction’s magnitude or frequency. They’ll also ascertain whether the company has complied with invoice terms and received the appropriate discounts.

3. Confirmations

Auditors may send forms to the company’s vendors asking them to “confirm” the balance owed. Confirmations can either:

  • Include the amount due based on the company’s accounting records, or
  • Leave the balance blank and ask the vendor to complete it.

If the amount confirmed by the vendor doesn’t match the amount recorded in the AP ledger, the audit team will note the exception and inquire about the reason. Unresolved discrepancies may require additional testing procedures and could even be cause for a qualified or adverse audit opinion,depending on the size and nature of the discrepancy.

4. Verification of financial statements

Auditors compare the amounts recorded in the company financial statements to the records maintained by the AP department. This includes reviewing the month-end close process to ensure that items are posted in the correct accounting period (the period in which expenses are incurred).

Auditors also review the process for identifying and recording related-party transactions. And they search for vendor invoices paid with cash and unrecorded liabilities involving goods or services received but yet not processed for payment.

Get it right

These four procedures may be conducted as part of a routine financial statement audit — or you may decide to hire an auditor to specifically target the AP department. Either way, your payables personnel can help streamline fieldwork by having the formal SOPs in place and source documents ready when the audit team arrives. Contact us for more information about what to expect during the coming audit season.

© 2018

Beware of unexpected tax liabilities under new accounting and tax rules!

The Tax Cuts and Jobs Act (TCJA) contains a provision that ties revenue recognition for book purposes to income reporting for tax purposes, for tax years starting in 2018. This narrow section of the law could have a major impact on certain industries, especially as companies implement the updated revenue recognition standard under U.S. Generally Accepted Accounting Principles (GAAP).

Recognizing revenue under GAAP

Accounting Standards Update (ASU) No. 2014-09, Revenue from Contracts with Customers, went into effect for public companies this year; it will go into effect for private companies next year. The updated standard requires businesses to all use a single model for calculating the top line in their income statements under GAAP, as opposed to following various industry-specific models.

The standard doesn’t change the underlying economics of a business’s revenue streams. But it may change the timing of when companies record revenue in their financial statements. The standard introduces the concept of “performance obligations” in contracts with customers and allows revenue to be recorded only when these obligations are satisfied. It could mean revenue is recorded right away or in increments over time, depending on the transaction.

The changes will be most apparent for complex, long-term contracts. For example, most software companies expect to record revenues in their financial statements earlier under ASU 2014-09 than under the old accounting rules.

Matching book and tax records

Starting in 2018, the TCJA modifies Section 451 of the Internal Revenue Code so that a business recognizes revenue for tax purposes no later than when it’s recognized for financial reporting purposes. Under Sec. 451(b), taxpayers that use the accrual method of accounting will meet the “all events test” no later than the taxable year in which the item is taken into account as revenue in a taxpayer’s “applicable financial statement.”

The TCJA also added Sec. 451(c), referred to as the “rule for advance payments.” At a high level, the rule can require businesses to recognize taxable income even earlier than when it’s recognized for book purposes if the company receives a so-called “advance payment.”

Some companies delivering complex products, such as an aerospace parts supplier making a custom component, can receive payments from customers years before they build and deliver the product. Under ASU 2014-09, a business can’t recognize revenue until it’s completed its performance obligations in the contract, even if an amount has been paid in advance. However, under Sec. 451(c), companies may be taxed before they recognize revenue on their financial statements from contracts that call for advance payments.

Will the changes affect your business?

Changes in the TCJA, combined with the new revenue recognition rules under GAAP, will cause some companies to recognize taxable income sooner than in the past. In some industries, this could mean significantly accelerated tax bills. However, others won’t experience any noticeable differences. We can help you evaluate how the accounting rule and tax law changes will affect your company, based on its unique circumstances.

© 2018

ASU 2016-14: Information about Liquidity

by Colleen Trombetta

Audit Senior at Atchley & Associates, LLP

 

Do you ever find yourself reading a set of financials statements and asking, “So how are we doing cash-wise?” or “Do we have enough cash to pay all our expenses this month… how about the next six months?” It’s clear that the readers of financial statements are concerned with cash. The FASB Accounting Standards Update (ASU) 2016-14, Not-for-Profit Entities (Topic 958): Presentation of Financial Statements of Not-for-Profit Entities, is going to address this concern of cash and take it one step further by addressing liquidity, which is more complex than just cash-on-hand.

The financial assets that an organization has available to cover operating expenses consist not only of cash, but also of assets that will turn into cash within the coming year, such as accounts receivable, contributions and grants receivable and short-term investments. On the balance sheet, these assets are presented as “Current Assets.” If there are no donor restrictions or board designations, the current assets would be disclosed in the financial statements notes as assets available to cover operating expenses within one year of the balance sheet date.

ASU 2016-14 will require disclosure of the organization’s policies for managing liquidity. The policies should cover areas such as cash reserves, available lines of credit, and investment of cash in excess of current operating needs.

ASU 2016-14 will also require nonprofits to present, on the face of the financial position, the amount for each of two classes of net assets— net assets with donor restrictions and net assets without donor restrictions— as opposed to three.

ASU 2016-14 is effective for fiscal years beginning after December 15, 2017, with early application permitted.

 

 

References.

https://www.aicpa.org/interestareas/centerforplainenglishaccounting/resources/2016/asu-2016-14.html

https://www.nonprofitaccountingacademy.com/asu-2016-14-nonprofit-liquidity/