Anderson ZurMuehlen Blog

Prepayment of Certain 2018 Expenses by Cash Basis Taxpayers May Yield Deduction Benefit in 2017 Due to Potential Tax Reform

As the Tax Cuts and Jobs Act makes its way through the House and Senate Conference Committee and put up for vote in both houses of Congress this week, cash basis taxpayers may be considering prepaying certain expenses in order to obtain relief from some of the Act’s provisions that eliminate or place limitations on tax deductions for taxable years beginning after December 31, 2017. For federal income tax purposes, cash basis taxpayers generally can take into account amounts representing allowable deductions in the taxable year in which paid. However, prepaying a 2018 liability or expense in 2017 without an obligation to do so is not a valid deduction, even for a cash basis taxpayer. Based on case law, the prepayment of the liability or expense could be challenged by the Internal Revenue Service because the payment lacks business purpose or fails to clearly reflect income. Further, if the benefit period or useful life associated with the prepaid expense exceeds 12 months, the payment is required to be capitalized and amortized. That said, to the extent that the taxpayer has an invoice in hand by year-end or the consideration to which the liability relates has been provided by year-end, and the benefit period does not exceed 12 months, cash basis taxpayers that prepay expenses in 2017 for 2018 expenses can claim a deduction in 2017.


Tax Reform

On December 15, 2017, the House-Senate Conference Committee members working on the House and Senate tax reform bills signed off on a revised bill. Issued that evening, the full language of the Tax Cuts and Jobs Act (H.R. 1) encompasses over 1,000 pages, including a 570-page joint explanatory statement describing key differences, if any, between the House and Senate tax reform bill, and a summary of the resolution of such differences in the revised bill. The revised bill will be sent to both houses of Congress during the week beginning December 18, 2017, for a vote and could set the stage for the bill to be signed by the President prior to the end of 2017.

Among the many provisions affecting individuals and businesses, this alert specifically discusses the (1) modification of deduction for taxes not paid or accrued in a trade or business; (2) repeal of certain miscellaneous itemized deductions subject to the two-percent floor; and (3) entertainment expenses.

Modification of deduction for taxes not paid or accrued in a trade or business (section 164 of the Code). Under the revised bill, individuals generally can deduct State, local, and foreign property taxes and State and local sales taxes only when paid or accrued in carrying on a trade or business, or an activity described in section 212 (relating to expenses for the production of income). Accordingly, the provision allows only those deductions for State, local, and foreign property taxes, and sales taxes, which are presently deductible in computing income on an individual’s Schedule C, Schedule E, or Schedule F on such individual’s tax return. For example, in the case of property taxes, an individual may deduct such items only if these taxes were imposed on business assets (such as residential rental property).

Under the provision, in the case of an individual, State and local income, war profits, and excess profits, taxes are not allowable as a deduction.

The provision contains an exception to the above-stated rule. Under the provision, a taxpayer may claim an itemized deduction of up to $10,000 ($5,000 for married taxpayer filing a separate return) for the aggregate of (i) State and local property taxes not paid or accrued in carrying on a trade or business, or an activity described in section 212, and (ii) State and local income, war profits, and excess profits taxes (or sales taxes in lieu of income, etc. taxes) paid or accrued in the taxable year. Foreign real property taxes may not be deducted under this exception.

The above rules apply to taxable years beginning after December 31, 2017, and beginning before January 1, 2026.

The conference agreement also provides that, in the case of an amount paid in a taxable year beginning before January 1, 2018, with respect to a State or local income tax imposed for a taxable year beginning after December 31, 2017, the payment shall be treated as paid on the last day of the taxable year for which such tax is so imposed for purposes of applying the provision limiting the dollar amount of the deduction.

Observation: An individual may not claim an itemized deduction in 2017 on a pre-payment of state or local income tax for a future taxable year in order to avoid the dollar limitation applicable for taxable years beginning after 2017. The prepayment in 2017 would have no direct link to taxable income for the 2018 tax year; therefore, a payment made to a state or local government in 2017 to apply against the taxpayer’s 2018 tax liability is merely a deposit for which no tax deduction is permitted. However, if the taxpayer has an estimated income tax payment due in April of 2018 based on 2017 taxable income, prepaying the tax in 2017 rather than 2018 would yield a proper deduction in 2017 and possibly generate the benefit of time value of money if tax rates fall in 2018.

Repeal of Certain Miscellaneous Itemized Deductions Subject to the Two-Percent Floor (Sections 62, 67, and 212 of the Code)

The conference agreement temporarily suspends all miscellaneous itemized deductions that are subject to the two-percent floor under present law. Miscellaneous itemized deductions include, for example, fees to collect interest and dividends, investment fees and expenses, tax preparation expenses, and unreimbursed business expenses incurred by an employee. Thus, under the provision, taxpayers may not claim items as itemized deductions for the taxable year beginning after December 31, 2017, and before January 1, 2026.

Observation: To the extent that the taxpayer has an invoice in hand by year-end or the consideration to which the liability has been provided by year-end, thereby establishing an obligation to pay on the taxpayer’s part, a cash basis taxpayer prepaying the expense in 2017 rather than in 2018 could reasonably claim a deduction in the earlier year, so long as the prepaid benefit period does not exceed 12 months.

Entertainment, etc. expenses (Section 274 of the Code)

Under the conference agreement, no deduction is allowed with respect to (1) an activity generally considered to be entertainment, amusement or recreation, (2) membership dues with respect to any club organized for business, pleasure, recreation or other social purposes, or (3) a facility or portion thereof used in connection with any of the above items. As a result, the provision repeals the present-law exception to the deduction disallowance for entertainment, amusement, or recreation that is directly related to (or, in certain cases, associated with) the active conduct of the taxpayer’s trade or business (and the related rule applying a 50 percent limit to such deductions).

In addition, the provision disallows a deduction for expenses associated with providing any qualified transportation fringe to employees of the taxpayer, and except as necessary for ensuring the safety of an employee, any expense incurred for providing transportation (or any payment or reimbursement) for commuting between the employee’s residence and place of employment.

Taxpayers may still generally deduct 50 percent of the food and beverage expenses associated with operating their trade or business (e.g., meals consumed by employees on work travel). For amounts incurred and paid after December 31, 2017, and until December 31, 2025, the provision expands this 50-percent limitation to expenses of the employer associated with providing food and beverages to employees through an eating facility that meets requirements for de minimis fringes and for the convenience of the employer.

The provision generally applies to amounts paid or incurred after December 31, 2017. However, for expenses of the employer associated with providing food and beverages to employees through an eating facility that meets requirements for de minimis fringes and for the convenience of the employer, amounts paid or incurred after December 31, 2025, are not deductible.

Observation: A cash basis taxpayer should take action to immediately pay any entertainment expense invoices and expense reports during 2017. If commitments exist for the 2018 year which are budgeted for (e.g., 2018 season tickets), the taxpayer is advised to request an invoice from the seller before year-end so that the amount can be prepaid in 2017.

Other Types of Expenses

There are a number of expenses that cash basis taxpayers may wish to consider prepaying in order to obtain a tax benefit in 2017. The federal tax treatment below assumes that the benefit period associated with the prepaid expense does not exceed 12 months.


The conference agreement generally suspends the deduction for moving expenses for taxable years 2018 through 2025. However, during that suspension period, the provision retains the deduction for moving expenses and the rules providing for exclusions of amounts attributable to in-kind moving and storage expenses (and reimbursements or allowances for these expenses) for members of the Armed Forces (or their spouse or dependents) on active duty that move pursuant to a military order and incident to a permanent change of station. Taxpayers outside of the Armed Forces exception may wish to prepay an invoice in 2017 for 2018 moving expenses in order to take advantage of the moving expenses deduction before suspension.


The conference agreement suspends the deduction for interest on home equity indebtedness. Thus, for taxable years beginning after December 31, 2017, a taxpayer may not claim a deduction for interest on home equity indebtedness. The suspension ends for taxable years beginning after December 31, 2025. In this regard, cash basis taxpayers should consider prepaying “points” charged in 2017 in order to take advantage of the home equity indebtedness deduction before the suspension period. Although a taxpayer must capitalize interest that is properly allocable to a period that extends beyond the close of the taxable year and amortize it over the period to which it applies, section 461(g)(2) provides an exception for points paid in respect of any indebtedness incurred in connection with the purchase or improvement of, and secured by, the taxpayer’s principal residence to the extent that such payment of points is an established business practice in the area in which such indebtedness is incurred and the amount of such payment does not exceed the amount generally charged in such area. Points paid in refinancings may not meet the exception.


Accelerating a deduction from 2018 to 2017 can provide time value of money benefits to the extent that the tax rates drop in 2018. Generally speaking, prepaid rent can be deducted by a cash basis taxpayer in the year of payment so long as the lease agreement calls for rent to be prepaid prior to the beginning of the month to which the rent payment relates. Cash basis taxpayers must also be aware that the prepaid benefit period cannot exceed 12 months. Thus, for example, if the lease agreement requires January 2018 rent to be paid by the end of December, the lessee can claim an accelerated deduction by prepaying for the next month. On the contrary, if the lease agreement calls for January 2018 rent to be due on the first day of that month, prepaying in 2017 would not result in an earlier deduction.

© 2017

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Cutting Costs When You’ve Gone Over Budget

Year end can’t get here soon enough for some business owners — especially those whose companies have exceeded their annual budgets. If you find yourself in this unenviable position, you can still cut costs to either improve this year’s financial picture or put yourself in a better position for next year.

Tackle staffing issues

It’s easy to put off tough staffing decisions, but those issues may represent an unnecessary drain on your finances. If you have employees who don’t have enough work to keep busy, think about restructuring jobs so everyone’s productive. You might let go of extra staff, or, alternatively, offer mostly idle workers unpaid time off during slow periods.

You also need to face the hard facts about underperforming workers. Few business owners enjoy firing anyone, but it makes little sense to continue to pay poor performers.

Take control of purchasing

Are you getting the most out of your company’s combined purchasing power? You may have different departments independently buying the same supplies or services (for example, paper, computers, photocopying). By consolidating such purchases, you might be able to negotiate reduced prices.

To strengthen your bargaining power with suppliers when seeking discounts, pay your bills promptly. Even if it doesn’t help you land reduced prices, you’ll avoid late payment fees and credit card interest charges.

But don’t just continue to pay bills mindlessly. Review all of your service invoices — especially those that are automatically deducted from your bank accounts or charged to credit cards — to confirm you’re actually using the services. Consider canceling any services you haven’t used in 90 days.

Redirect your marketing efforts

Advertising costs can take a significant bite out of your budget, and the priciest efforts often have the lowest returns on investment. Cut programs and initiatives that haven’t clearly paid off, and move your marketing to social media and other more cost-efficient avenues — at least temporarily. A single, positively received tweet may reach exponentially more people than a costly directory listing, print ad or trade show booth.

A caveat

Resist the urge to solve your budget shortfalls with one dramatic cut — the risks are simply too high. The better approach is to execute a combination of incremental actions that will add up to savings. Contact us for a full assessment of your company’s budget.

© 2017

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Are You a US Shareholder Who Owns 10% or More of a Foreign Corporation? If So, This Bill’s Aimed at You…

You may or may not be following the US tax reform legislation that has dramatically worked its way through the House and the Senate.  A primary reason for the tax reform is to make the US a more tax-friendly environment for corporations.  Many provisions are geared toward this end, and much has been touted about changing corporate taxation.  The provision we are talking about here changes the US taxation of earnings in foreign subsidiaries.  Currently, US shareholders invested in foreign operating corporations are taxed on dividends their foreign corporations pay them (even though their foreign subsidiaries are probably already paying tax in the foreign country of incorporation).  The new provisions would reduce or eliminate the US tax on dividends those foreign subsidiaries pay their US shareholder(s).

As usual, the means to accomplish this end are complicated.  In order to transition between the two systems, the proposed legislation triggers tax on foreign earnings that have not been previously taxed by the US.  The tax on these foreign earnings would be at a special reduced rate (as yet to be determined, but probably somewhere between 7% and 15%).  The deadline to pay the tax is also to be determined, but it’s likely there will be an election available to spread the payments out over several years (the current draft is proposing 8 years).

This is all pretty wonky…so what does it mean?

Let’s talk in examples.  Say, for example, that you are a US citizen who has been living in Canada since you were 18 months old.  You grew up in Canada, got married in Canada, and your home is in Canada.  You own a plumbing business, which you have incorporated in Canada.  The customers you serve are only in Canada, the income your business generates is Canadian only, and your corporation pays Canadian income tax.

You and your Canadian spouse each own 50% of the company.  You are a US citizen so you have been diligently filing your US returns and reporting your foreign assets as is required.  Your US returns include extensive information about your corporation, but you don’t have to pay US tax on any of the corporation’s earnings unless the corporation pays you dividends.  The corporation doesn’t pay out all of its earnings as dividends each year because it’s growing and reinvesting in itself.  All is hunky dory.


Along comes this new provision that says that the US wants to reduce the tax you pay on the dividends that your corporation pays you.  Great right?  However, to get you to that point, the US needs a clean slate on the undistributed earnings that have accumulated in your corporation.  To do that, the US is going to tax those earnings that haven’t already been paid out in dividends.  It doesn’t matter if those earnings haven’t been paid to you….. the US is going to tax them.  Period.


Well, the US wants to pull cash back into its borders.  It’s trying to trigger growth and jobs and other things that require cash funding.  So, the theory is if US shareholders are going to be taxed on the earnings anyway….. hopefully they’ll pull dividends out of their foreign companies and bring that cash back to the US.  Makes sense when you’re thinking about Apple or Google or another big multinational company headquartered in the US.  Doesn’t make as much sense when you’re thinking about a US citizen living and working abroad with minimal ties to the US.

Unfortunately, the details are still to be determined and we won’t know what they are until the House and Senate reconcile the two bills that have passed.  They’ve announced that they will start the reconciliation process on Wednesday the 13.  President Trump wants a bill on his desk by Christmas, so they are pushing hard to do that.  Will they?  It’s hard to say –but it’s likely a final bill will be ready for House and Senate vote soon.

So, what can you do?

Well…. unfortunately, probably not much.  In the proposed legislation, the testing date for undistributed earnings is as of a date earlier in 2017.  So you may already caught in the web.  The critical factor will be calculating your company’s Earnings & Profits, which is a US tax concept and it is what the tax will be based upon.

We are here to help you with this calculation and with the filings in general.  As we learn more about it, we’ll share that information with you.

They say in the long run it will reduce US taxation of foreign company earnings from operations, so there is that silver lining.

Contributed by Dana Cade, senior manager and Erin Stockwell, shareholder

© 2017

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7 Last-Minute Tax-Saving Tips

The year is quickly drawing to a close, but there’s still time to take steps to reduce your 2017 tax liability — you just must act by December 31:

  1. Pay your 2017 property tax bill that’s due in early 2018.
  2. Make your January 1 mortgage payment.
  3. Incur deductible medical expenses (if your deductible medical expenses for the year already exceed the 10% of adjusted gross income floor).
  4. Pay tuition for academic periods that will begin in January, February or March of 2018 (if it will make you eligible for a tax credit on your 2017 return).
  5. Donate to your favorite charities.
  6. Sell investments at a loss to offset capital gains you’ve recognized this year.
  7. Ask your employer if your bonus can be deferred until January.

Many of these strategies could be particularly beneficial if tax reform is signed into law this year that reduces tax rates and limits or eliminates certain deductions (such as property tax, mortgage interest and medical expense deductions) beginning in 2018.

Keep in mind, however, that in certain situations these strategies might not make sense. For example, if you’ll be subject to the alternative minimum tax this year or be in a higher tax bracket next year, taking some of these steps could have undesirable results. (Even with tax reform legislation, some taxpayers might find themselves in higher brackets next year.)

If you’re unsure whether these steps are right for you, consult us before taking action.


© 2017

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Demystifying the Audit Process


Independent auditors provide many benefits to business owners and management: They can help uncover errors in your financials, identify material weaknesses in your internal controls, and increase the level of confidence lenders and other stakeholders have in your financial reporting.

But many companies are unclear about what to expect during a financial statement audit. Here’s an overview of the five-step process.

1. Accepting the engagement

Once your company has selected an audit firm, you must sign an engagement letter. Then your auditor will assemble your audit team, develop a timeline, and explain the scope of the audit inquiries and onsite “fieldwork.”

2. Assessing risk

The primary goal of an audit is to determine whether a company’s financial statements are free from “material misstatement.” Management, along with third-party stakeholders that rely on your financial statements, count on them to be accurate and conform to U.S. Generally Accepted Accounting Principles (GAAP) or another accepted standard.

Auditing rules require auditors to assess general business risks, as well as industry- and company-specific risks. The assessment helps auditors 1) determine the accounts to focus audit procedures on, and 2) develop audit procedures to minimize potential risks.

3. Planning

Based on the risk assessment, the audit firm develops a detailed audit plan to test the internal control environment and investigate the accuracy of specific line items within the financial statements. The audit partner then assigns audit team members to work on each element of the plan.

4. Gathering evidence

During fieldwork, auditors test and analyze internal controls. For example, they may trace individual transactions to original source documents, such as sales contracts, bank statements or purchase orders. Or they may test a random sample of items reported on the financial statements, such as the prices or number of units listed for a randomly selected sample of inventory items. Auditors also may contact third parties — such as your company’s suppliers or customers — to confirm specific transactions or account balances.

5. Communicating the findings

At the end of the audit process, your auditor develops an “opinion” regarding the accuracy and integrity of your company’s financial statements. In order to do so, they rely on quantitative data such as the results of their testing, as well as qualitative data, including statements provided by the company’s employees and executives. The audit firm then issues a report on whether the financial statements 1) present a fair and accurate representation of the company’s financial performance, and 2) comply with applicable financial reporting standards.

Reasonable expectations

Understanding the audit process can help you facilitate it. If your company doesn’t issue audited financials, this understanding can be used to evaluate whether your current level of assurance is adequate — or whether it’s time to upgrade. Contact us for additional information.

© 2017

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Valuing and Reporting Gifts in Kind and Donated Services


Not-for-profit organizations don’t receive only cash donations. Your support also likely comes in the form of gifts in kind and donated services. But even when such gifts are welcome, it can be challenging to determine how to recognize and assign value to them for financial reporting purposes.

Recording gifts in kind

Gifts in kind generally are pieces of tangible property or property rights. They may take many forms, including:

• Free or discounted use of facilities,
• Free advertising,
• Collections, such as artwork to display, and
• Property, such as office furniture or supplies.

To record gifts in kind, determine whether the item can be used to carry out your mission or sold to fund operations. In other words, does it have a value to your nonprofit? If so, it should be recorded as a donation and a related receivable once it’s unconditionally pledged to your organization.

To value the gift, assess its fair value — or what your organization would pay to buy it from an unrelated third party. In many cases it’s easy to assign a fair value to property, but when the gift is a collection or something that doesn’t otherwise have a readily determinable market value, its fair value is more difficult to assign. For smaller gifts, you may need to rely on a good faith estimate from the donor. But if the value is more than $5,000, the donor must obtain an independent appraisal for tax purposes, which will give you documentation for your records.

Recognizing donated services

The fair value of a donated service should be recognized if it meets one of two criteria:

1. The service creates or enhances a nonfinancial asset. Such services are capitalized at fair value on the date of the donation. These types of services either create a nonfinancial asset (in other words, a tangible asset) or add value to an asset that already exists.

2. The service requires specialized skills, is provided by persons with those skills and would have been purchased if it hadn’t been donated. These services are accounted for by recording contribution income for the fair value of the service provided. You also must record it as a related expense, in the same amount, for the professional service provided.

Beyond the basics

These are only basic guidelines to recognizing and valuing gifts in kind and donated services. For more comprehensive information about handling these gifts, contact us.

© 2017

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Critical Connection: How Costs Impact Pricing

As we head toward year end, your company may be reviewing its business strategy for 2017 or devising plans for 2018. As you do so, be sure to give some attention to the prices you’re asking for your existing products and services, as well as those you plan to launch in the near future.

The cost of production is a logical starting point. After all, if your prices don’t exceed costs over the long run, your business will fail. This critical connection demands regular re-evaluation.

Reconsider everything

One simple way to assess costs is to apply a desired “markup” percentage to your expected costs. For example, if it costs $1 to produce a widget and you want to achieve a 10% return, your selling price should be $1.10.

Of course, you’ve got to factor more than just direct materials and labor into the equation. You should consider all of the costs of producing, marketing and distributing your products, including overhead expenses. Some indirect costs, such as sales commissions and shipping, vary based on the number of units you sell. But most are fixed in the current accounting period, including rent, research and development, depreciation, insurance, and selling and administrative salaries.

“Product costing” refers to the process of spreading these variable and fixed costs over the units you expect to sell. The trick to getting this allocation right is to accurately predict demand.

Deliberate over demand

Changing demand is an important factor to consider. Incurring higher costs in the short term may be worth it if you reasonably believe that rising customer demand will eventually enable you to cover expenses and turn a profit. In other words, rising demand can reduce per-unit costs and increase margin.

Determining the number of units people will buy is generally easier when you’re:

• Re-evaluating the prices of existing products that have a predictable sales history, or
• Setting the price for a new product that’s similar to your existing products.

Forecasting demand for a new product that’s a lot different from your current product line can be extremely challenging — especially if there’s nothing like it in the marketplace. But if you don’t factor customer and market considerations into your pricing decisions, you could be missing out on money-making opportunities.

Check your wiring

Like an electrical outlet and plug, the connection between costs and pricing can grow loose over time and sometimes short out completely. Don’t risk operating in the dark. Our firm can help you make pricing decisions that balance ambitiousness and reason.

© 2017

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4 Questions to Guide Your Prospective Financial Statements


CPAs don’t just offer assurance services on historical financial results. They can also prepare prospective financial statements that predict how the company will perform in the future. This list of questions can help you make more meaningful assumptions for your forecasts and projections.

1. How far into the future do you want to plan?

Forecasting is generally more accurate in the short term. The longer the time period, the more likely it is that customer demand or market trends will change.

While quantitative methods, which rely on historical data, are typically the most accurate forecasting methods, they don’t work well for long-term predictions. If you’re planning to forecast over several years, try qualitative forecasting methods, which rely on expert opinions instead of company-specific data.

2. How steady is your demand?

Sales can fluctuate for a variety of reasons, including sales promotions and weather. For example, if you sell ice cream, chances are good your sales dip in the winter.

If demand for your products varies, consider forecasting with a quantitative method, such as time-series decomposition, which examines historical data and allows you to adjust for market trends, seasonal trends and business cycles. You also may want to use forecasting software, which allows you to plug other variables into the equation, such as individual customers’ short-term buying plans.

3. How much data do you have?

Quantitative forecasting techniques require varying amounts of historical information. For instance, you’ll need about three years of data to use exponential smoothing, a simple yet fairly accurate method that compares historical averages with current demand.

Want to forecast for something you don’t have data for, such as a new product? In that case, use qualitative forecasting or base your forecast on historical data for a similar product in your arsenal.

4. How do you fill your orders?

Unless you fill custom orders on demand, your forecast will need to establish optimal inventory levels of finished goods. Many companies use multiple forecasting methods to estimate peak inventory levels. It’s also important to consider inventory needs at the individual product level and local warehouse level, which will help you ensure speedy delivery.

If you’re forecasting demand for a wide variety of products, consider a relatively simple technique, such as exponential smoothing. If you offer only one or two key products, it’s probably worth your time and effort to perform a more complex, time-consuming forecast for each one, such as a statistical regression.

Plan to succeed

You may not have a crystal ball, but using the right forecasting techniques will help you gaze into your company’s future with greater accuracy. We can help you establish the forecasting practices that make sense for your business.

© 2017

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Fortifying Your Business with Enterprise Risk Management

Hundreds of years ago, prosperous towns managed the various risks of foreign invaders, thieves and wild animals by fortifying their entire communities with walls and towers. Today’s business owners can take a similar approach with enterprise risk management (ERM).

Assessing threats

In short, ERM is an integrated, companywide system of identifying and planning for risk. Many larger companies have entire departments devoted to it. If your business is ready to implement an ERM program, be prepared for a lengthy building process.

This isn’t an undertaking most business owners will be able to complete themselves. You’ll need to sell your managers and employees on ERM from the top down. After you’ve gained commitment from key players, spend time assessing the risks your business may face. Typical examples include:

• Financial perils,
• Information technology attacks or crashes,
• Weather-related disasters,
• Regulatory compliance debacles, and
• Supplier/customer relationship mishaps.

Because every business is different, you’ll likely need to add other risks distinctive to your company and industry.

Developing the program

Recognizing risks is only the first phase. To truly address threats under your ERM program, you’ll need to clarify what your company’s appetite and capacity for each risk is, and develop a cohesive philosophy and plan for how they should be handled. Say you’re about to release a new product. The program would need to address risks such as:

• Potential liability,
• Protecting intellectual property,
• Shortage of raw materials,
• Lack of manufacturing capacity, and
• Safety regulation compliance.

Again, the key to success in the planning stage is conducting a detailed risk analysis of your business. Gather as much information as possible from each department and employee.

Depending on your company’s size, engage workers in brainstorming sessions and workshops to help you analyze how specific events could alter your company’s landscape. You may also want to designate an “ERM champion” in each department who will develop and administer the program.

Ambitious undertaking

Yes, just as medieval soldiers looked out from their battlements across field and forest to spot incoming dangers, you and your employees must maintain a constant gaze for developing risks. An ERM program, while an ambitious undertaking, can provide the structure for doing so. We can assist you in managing risks to your business in a financially sound manner.

© 2017

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Ready for the New Not-For-Profit Accounting Standard?

A new accounting standard goes into effect starting in 2018 for churches, charities and other not-for-profit entities. Here’s a summary of the major changes.

Net asset classifications

The existing rules require nonprofit organizations to classify their net assets as either unrestricted, temporarily restricted or permanently restricted. But under Accounting Standards Update (ASU) No. 2016-14, Not-for Profit Entities (Topic 958): Presentation of Financial Statements of Not-for-Profit Entities, there will be only two classes: net assets with donor restrictions and net assets without donor restrictions.

The simplified approach recognizes changes in the law that now allow organizations to spend from a permanently restricted endowment even if its fair value has fallen below the original endowed gift amount. Such “underwater” endowments will now be classified as net assets with donor restrictions, along with being subject to expanded disclosure requirements. In addition, the new standard eliminates the current “over-time” method for handling the expiration of restrictions on gifts used to purchase or build long-lived assets (such as buildings).

Other major changes

The new standard includes specific requirements to help financial statement users better assess a nonprofit’s operations. Specifically, organizations must provide information about:

Liquidity and availability of resources. This includes qualitative and quantitative information about how they expect to meet cash needs for general expenses within one year of the balance sheet date.

Expenses. The new standard requires entities to report expenses by both function (which is already required) and nature in one location. In addition, it calls for enhanced disclosures regarding specific methods used to allocate costs among program and support functions.

Investment returns. Organizations will be required to net all external and direct internal investment expenses against the investment return presented on the statement of activities. This will facilitate comparisons among different nonprofits, regardless of whether investments are managed externally (for example, by an outside investment manager who charges management fees) or internally (by staff).

Additionally, the new standard allows nonprofits to use either the direct or indirect method to present net cash from operations on the statement of cash flows. The two methods produce the same results, but the direct method tends to be more understandable to financial statement users. To encourage not-for-profits to use the direct method, entities that opt for the direct method will no longer need to reconcile their presentation with the indirect method.

To be continued

ASU 2016-14 is the first major change to the accounting rules for not-for-profits since 1993. However, it’s only phase 1 of a larger project to enhance financial reporting transparency for donors, grantors, creditors and other users of nonprofits’ financial statements. Contact us for help preparing or evaluating an organization’s financial statements under the new standard.

© 2017

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