Jones & Roth CPAs & Business Advisors

Category: Private Companies

ASC 842: Impact of the New Lease Accounting Standard on Private Companies
The long-awaited accounting standards update (ASU) for leases is finally at our doorsteps. ASU 2016-02, and its subsequently issued amendments, enacted some significant changes in accounting for leases, with the primary goal of increasing transparency and comparability among entities and disclosing key information about leasing arrangements.

The new lease standard is codified under Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) Topic 842: Leases, and is effective for private companies with annual reporting periods beginning after December 15, 2021. Early implementation is permitted.

Overview

The new standard did not fundamentally change lease accounting for lessors. Because of that, we will focus the content of this article on changes specific to lessee accounting under the new standard.

The most significant difference between the previous lease accounting standards and the new one is the recognition of lease assets and lease liabilities on the balance sheet for leases that were classified as operating leases under the previous standards. As you probably recall, under previous standards, operating leases are “off balance sheet”. Under ASC 842, lessees are now required to record all leases with terms over 12 months on the balance sheet. These leases are now characterized as either “Finance” leases or “Operating” leases. Finance leases were referred to as Capital leases under previous GAAP, but the definition of this type of lease under the new standard is generally the same.

Lessees can make an accounting policy election not to recognize lease assets and liabilities on the balance sheet for leases with terms of 12 months or less and that do not include a purchase option that is “reasonably certain” to be exercised.

Finance vs. Operating Leases

You may be wondering, if all leases over 12 months have to be recorded on the balance sheet, why the separation between Finance and Operating leases? Well, the reason for that is that there are some differences in the accounting and reporting between Finance and Operating leases. The primary difference is related to the recognition of expense on the income statement. Expense recognized for Operating leases results in straight-line expense over the lease term, while expense recognized for finance leases is highest at the beginning of the lease and decreases over the lease term.

Lessees shall classify a lease as a Finance lease when the lease meets any of the following criteria at lease commencement:
1. The lease transfers ownership of the underlying asset by the end of the lease term
2. The lease grants the lessee an option to purchase the underlying asset that the lessee is reasonably certain to exercise
3. The lease term is for a major part of the remaining economic life of the underlying asset
4. The present value of lease payments, plus any guaranteed residual value, equals or exceeds substantially all of the fair value of the underlying asset
5. The underlying asset is of such a specialized nature that it is expected to have no alternative use to the lessor at the end of the lease term
While the new standard does not include a bright-line threshold for determining what constitutes a “major part of the remaining economic life” (under #3 above) and “substantially all of the fair value” (under #4 above) like prior lease accounting guidance, ASC 842 implementation guidance suggests 75% or more to be a reasonable basis for determining what constitutes a “major part of the remaining economic life” and 90% or more to be a reasonable basis for determining “substantially all of the fair value”.

If none of the five criteria listed above hold true, then the lease should be classified as an Operating lease.

For Finance leases, a lessee will:
- Recognize a right-of-use (ROU) asset and a lease liability, initially measured at the present value of the lease payments, in the balance sheet
- Recognize interest on the lease liability separately from amortization of the ROU asset in the income statement
- Classify repayments of the principal portion of the lease liability within financing activities and payments of interest on the lease liability and variable lease payments within operating activities in the statement of cash flows.
For Operating leases, a lessee will:
- Recognize a ROU asset and a lease liability, initially measured at the present value of the lease payments, in the balance sheet
- Recognize a single lease cost, calculated so that the cost of the lease is allocated over the lease term on a generally straight-line basis
- Classify all cash payments within operating activities in the statement of cash flows.
Disclosure and Implementation Approach

The new standard requires a significant number of additional qualitative and quantitative lease disclosures. The intent of the disclosures is to enable financial statement users to assess the amount, timing and uncertainty of cash flows arising from leases. Companies should consider these additional disclosure requirements early in their implementation process to ensure they are prepared with all the required information.

A modified retrospective approach is required for transition to the new standard. Entities can elect to apply the transition approach to all leases in existence as of the date of the earliest period presented (and therefore, restate any comparative periods presented), or to apply it as of the beginning of the period of adoption with a cumulative-effect adjustment to the opening balance of retained earnings (and not restate comparative periods). The transition guidance also includes a variety of optional practical expedients that entities can elect into which are intended to reduce the burden of implementing the new standard.

Other Considerations

It is expected that the new standard will likely have the greatest effect on businesses with large volumes of real estate, manufacturing equipment, and vehicles. However, most companies will be impacted in some way. Leases on buildings, as well as copier and phone system leases are common-place for most entities. Therefore, each company should review and update their system of internal controls to ensure that their processes effectively identify all leases and that their accounting policies and practices appropriately report these leases under the new reporting requirements of this standard.

Finally, given the balance sheet impact of the new standard, companies should closely review and be monitoring any financial covenants and proactively work with their lenders to consider whether amendments to the covenants are appropriate and called for given the change to the financial reporting requirements.

Summary

There are many complexities in the new lease standard. This article includes a summary of the high points of the new standard from a lessee approach; however, each company has a unique set of circumstances to be considered. Reach out to your CPA with any questions you have regarding how this standard may affect your company’s financial statements.

ASU 2016-02 in it’s entirety, and the subsequently issued amending ASUs, can be accessed on the FASB ASC website.
November 3, 2022
FTE Calculation and Its Affect on PPP Forgiveness
If you have received funds under the Paycheck Protection Program (PPP), you need to know the importance of Full-Time Equivalent (FTE) employees with regard to your loan forgiveness.

The borrower’s count of FTE employees during their covered period is divided by the FTE count from the selected base period. The borrower is able to choose the base period that is most beneficial; either 02/19/19 through 06/30/19 or 01/01/20 through 02/29/20. This ratio is referred to as the FTE reduction quotient. The FTE reduction quotient is multiplied by the total PPP loan amount to arrive at your maximum forgiveness amount.

There are two eligible methods for calculating your FTEs during the covered and base period:
1. Each employee that works a 40-hour work or more a week will be counted as 1.0 FTE, whereas employees who work fewer than 40-hours are divided by 40 to calculate their FTE (i.e. 16 hours a week would be 0.4 FTE (16 divided by 40)).
2. Borrowers can utilize the simplified method and count any employees working 40 hours per week or more as 1.0 FTE and any employees working less than 40 hours as 0.5 FTE.
The PPP application provides several exceptions in regard to counting FTEs during the covered period, namely, if any employee rejects a written good-faith re-hire offer, or if an employee was fired during the covered period for cause, voluntarily resigned, or voluntarily requested a reduction of their hours. Any FTE reductions resulting from these cases do not reduce loan forgiveness.

The forgiveness application also implements an FTE Reduction Safe Harbor. This allows the covered period FTE count to be measured at 12/31/20 and compared to the base FTE count of the pay period that includes 02/15/20. If your FTEs at 12/31/20 meet or exceed your FTE count at 02/15/20 then your maximum loan forgiveness amount will not be reduced.

There is an additional “bail out” introduced in the PPP Flexibility Act (passed on 6/4/20). Loan forgiveness will not be reduced if the borrower can show documentation for one of the following:
1. The employers could not find a qualified employee to hire. This is a big “win” for employers in specialized industries like healthcare or other professional employees.
2. The employer could not restore business to a comparable level of activity because of social distancing or other Federal health guidance.
If you have questions or concerns about how this will affect you and your situation, then you should consult with your tax adviser.
June 8, 2020
Oregon Corporate Activity Tax Update
ALERT: The Oregon Department of Revenue is adjusting requirements of businesses making estimated quarterly payments of the Corporate Activity Tax.

Beginning immediately, the Oregon Department of Revenue has revised OAR 150-317-1300, dated April 27, 2020, to reflect a change in the threshold for making estimated tax payments from $5,000 of annual tax liability to $10,000 of annual tax liability for the first year of the tax. This means businesses that will owe less than $10,000 are not required to make quarterly estimated tax payments during 2020.

Revenue also won’t assess penalties for underestimated quarterly payments or for not making a quarterly payment, if businesses don’t have the financial ability to make the estimated payment.

If businesses know they’ll owe $10,000 or more in annual Corporate Activity Tax in 2020 and can pay, they should make estimated quarterly payments and comply with the law to the fullest extent possible.

Information and a worksheet for calculating quarterly payments can be found on the CAT page of the agency website [oregon.gov] under the Beyond the FAQ “When are estimated payments required?” The information has recently been updated to reflect the higher threshold of $10,000 or more.

The Department of Revenue will honor a business taxpayer’s good-faith efforts to comply and not assess penalties if they document their efforts to comply, including how COVID-19 has impacted their business.

If businesses have been impacted by COVID-19 and are finding it difficult to calculate or pay an estimated quarterly payment, they should keep documentation showing:
- Their inability to pay a quarterly payment because of insufficient funds due to COVID-19.
- Their inability to reasonably calculate a quarterly payment or annual tax liability due to their business being impacted by COVID-19.
- That the taxpayer is unclear at this time whether the business will owe Corporate Activity Tax in April 2020 due to COVID-19 impacts, after taking into consideration exclusions and subtractions in the law.
Businesses uncertain about their economic future due to the COVID-19 crisis, or those that have been closed during this crisis and have no ability to determine that they will owe a tax this year, won’t be penalized.

Stakeholders can direct questions or comments about the CAT to the Oregon Department of Revenue via email or by phone 503-945-8005.

Here are some helpful links:
- Registration Portal on the Oregon Revenue Online website
- Frequently Asked Questions (FAQs) about the Oregon CAT
Please make sure you are consulting with your tax advisor in regard to the Oregon Corporate Activity Tax and its relevancy to your tax situation.
April 30, 2020
Business Continuity Plans – More Necessary Than Ever
During this unprecedented time of the COVID-19 outbreak, business and nonprofit leaders have found themselves reacting quickly to news updates and finding creative ways to sustain business operations, without risking the health of their employees. Many may be asking themselves if there was any way they could have been better prepared for a situation like this.

During difficult times like these, one of the most important tools for business and nonprofits is a business continuity plan. Some of you may already have one, and may want to revisit it once the outbreak is controlled. For others, this may be a good opportunity to start brainstorming to take the first steps in the development of a business continuity plan for your company or nonprofit organization.

A business continuity plan helps businesses understand their critical business processes, and the people, technology, and other resources needed to keep those critical processes operating.

The plan can help prepare employees who are considered part of the response task force and/or those that are essential to the continuation of operations. The plan also may help you avoid blind spots as the disaster is unfolding. Business continuity plans can be utilized in business interruptions of all scales – ranging from the current global pandemic to a regional wildfire, tsunami, or flooding.

Of course, no written document can prepare a business for every possible situation, but by making updates to the plan after emergencies, leaders can learn from the past and be more prepared in the future. A business continuity plan should be a living document that is reviewed and updated at least annually.

What you can do now:

Take 15 minutes to document what is going well during this time and where the pain points are. Later, when revising or developing your business continuity plan, you will have something tangible to work from that was prepared while the situation was fresh in your mind. Below are some examples of considerations for future planning:
- Ease of employee and customer communication from off-site locations
- Critical technology (hardware and software) needed for continued operations
- Understanding your supply chain and potential risks to operations
- Liquidity management, reserves, and contingency plans for funding
Ready.gov is a national public service website from FEMA that provides great information and resources for businesses to consider for business continuity management. If you are interested in learning more on these tools and resources, please reach out to a member of the Jones & Roth team.
April 17, 2020
Will Outsourced Bookkeeping Benefit Your Business?
Successful businesses of all sizes have one thing in common: they keep good records. Owners and investors look to financials to assess a company’s health; debtors and vendors review financial statements before entering into contract; and financial reports help make strategic decisions. They are so critical to a business’s success that choosing how to fill an accountant function is one of the most important decisions a business makes.

Many business owners choose to outsource the work by hiring an external accountant, and others choose to fill the role with an employee. Neither option is inherently the right choice—a business should consider the benefits of each option before making a decision.

Benefits of Hiring an Outsourced Accountant

As a business develops and expands, its first inclination may be to fill out the accounting department with bookkeepers, payroll staff, A/P personnel, and a CFO. In reality, an external bookkeeper, accountant, or CFO can perform all of the duties needed, and they can provide other value-added services that an employee cannot.
- An outsourced accountant will be honest about inefficiencies.
  An accountant external to the organization will come in with a fresh set of eyes and suggest ways that the business can improve. They may notice that the chart of accounts could be reorganized to expedite tax return preparation, or that the fixed asset software being used is out of date. A highly-experienced external accountant will have the knowledge necessary to see these operational inefficiencies and offer suggestions to help improve business practices.
- An outsourced accountant will compare a business’s operations to others in its industry.
  When selecting an accountant, proficiency in accountancy should not be the only criterion. One should also look at industry experience. Outsourced accountants have experience in all types of industries. Accounting guidelines change, best practices shift, and technologies impact the status quo. While there are some strategies that are universal, many industries have their own standards and regulations they are expected to follow. An external accountant will be familiar with these industry-specific standards and can help a business stay compliant.
- An outsourced accountant can be the unbiased voice that a business needs.
  The separation of duties is especially important when the key employees of small- and medium-sized businesses fill more than one role. An external bookkeeper will ensure that a business’s practices are ethical and will reduce the risk of fraud, and stakeholders will have confidence that the business books are in order. Being isolated from a business will also help the accountant remain neutral when controversial decisions need to be made, staying out of company politics and presenting the facts so that the team can make better decisions.
Benefits of Hiring an Internal Accountant

Internal accountants have their benefits, as well. While employment can be more costly than outsourcing, the control a business gains with an employee may just outweigh those costs.
- Managers will have tighter control over an internal accountant.
  When working with an accountant (or a team of accountants) external to the business, one has less control over the accounting function. An external accountant’s practice will work within certain confines, and the business will not have full control over every decision the accountant makes. It can be difficult for business owners to give up the ability to communicate instantly with their accountants. While client-vendor communication tools are improving, external accountants will never be quite as available as an employee who sits in the office next door.
- An internal accountant will have skin in the game.
  Loyalty should not be overlooked. If the role is filled internally, the employee will have the time and drive to get to know the business inside and out in order to perform the job as well as possible. What an internal accountant may lack in industry expertise can be made up for in mastery of the systems.
- An internal accountant can respond quickly.
  Employees can be there for the business at the moment they are needed. If a high-value client needs information turned around quickly, an internal accountant may be able to get that information more timely. A business can dictate to its employees which tasks are a higher priority; they will be there to serve the business’s needs and no one else’s.
When deciding to work with external accountants, it is vital to make sure that they are experienced, qualified to do their jobs, and willing to customize their offerings to meet the business’s needs.
September 25, 2019
Benefits 2.0: Looking at the Future of Talent Retention
In an environment with a booming economy and record-low unemployment, talent retention is key to the ability of a thriving business to meet customer demand. The stakes are high when top talent leaves an organization in today’s job market. Talent is always challenging to find, but with fewer people looking for work than ever in recent history, some talent may be next to impossible to replace. This article covers some basics on retaining top talent.

The Basics

Employers will struggle to attract and retain top talent if they are unable to offer the competitive benefits that have become prerequisites to attracting employees in the current job market. An organization should be looking at ways to get these programs in place sooner than later if it is truly hoping to increase its retention of top talent.

However, benefits such as paid time off, holidays, health insurance, and 401(k) plans (or other retirement plan options) are no longer enough to make an employer stand out. Today’s top talented individuals have come to expect these programs and are looking for additional employee offerings from their potential employers.

Benefits 2.0

Research by the SHRM Foundation shows that people remain at jobs because of their connections at an organization. Connections consist of not only people, but also the culture, or fit, and what employees perceive they would have to give up if they were to leave. Organizations hoping to retain and attract talent should be looking for ways to foster its employee connections; if an organization is looking to justify programs, thinking about the initiatives in terms of how they will foster these invaluable connections may be helpful.

People

An organization’s initiatives should be aimed at creating connections with people, both at work and outside of it. Ideally, the program will enable employees to strengthen relationships at the workplace and lead to a more enjoyable work day. Some ideas include:
- Weekly or monthly business-sponsored social hour
- A dedicated number of hours for participation in community organizations or causes
- A mentorship program that allows senior employees to take junior or newer employees out of the office for one on one coaching
- Expanded family leave
Culture/Attitude

A good rule of thumb: top talent who do not like where they live and the culture of where they work will not stay for long. A culture-focused initiative is probably the harder area to identify, as the goal is to fulfill employees’ interests, which can vary widely. A majority of these efforts must be made up front during the recruiting process. Cultural initiatives can include:
- Employing a local guide to tour recruits around the surrounding area and asking them pointed questions with the intent of determining if the community is a good fit
- Hiring locally if possible—local recruits tend to have built-in connections
- Sponsoring and celebrating community events that promote the organization’s values and work in the community
- Hosting company functions at unique-to-the-area locales
What’s on the line

It is vital that organizations understand that financial incentives are a major part of why talent choose their next employment opportunity. Base salary is a first step, but there are many other ways to put incentives on the table that are too good for a potential hire to pass up. By looking at the competition within the hiring space, an organization can identify what is not being offered and attempt to fill that gap. Here are some ideas of additional offerings:
- Tuition assistance or, even better, student loan repayment
- Home buying assistance; getting employees into a home they love helps them to establish roots in the community
- Opportunity to grow within the organization
- Company trips
- Flex time or remote work stations
- Benefits that are scaled to tenure (PTO often follows this model)
The recruiting field is nuanced—no two employees are alike. When looking at adding incentives to employees’ compensation package, the selection of what to offer and what not to offer should be based on some actual data. One of the best places to gain this data is from current and exiting employees. Asking an employee who is voluntarily leaving (not being terminated) why they are leaving can be invaluable information in drafting future employee incentive initiatives. Asking current employees can be helpful as well. However, it is important to be cautious in the process and not over-commit to future plans or possibilities, as this may cause discontent if the initiatives are never put in place.
July 2, 2019
Financial Reporting and the 4 Levels of Service
When asking a Certified Public Accountant (CPA) for a report and financial statements, it is important to know what type is needed and what will be delivered for each type.

In the world of CPA services applied to financial statements, there are four primary levels of service: preparation, compilation, review, and audit.

The results from each level come with varying degrees of “assurance” or reliability to their users. This assurance ranges in scale from none to reasonable assurance and markedly varies in both the accounting effort and the amount of fees an organization may be charged to receive those financial statements.

The level of service an organization requires ultimately depends on its needs, the needs of the financial statement users and the perceived risk to that user. Higher risk usually requires a higher level of service. For example, an organization may require financial statements for the purpose of:
1. Grant funding
2. Regulatory compliance
3. Surety bonding
4. Bank loan covenants
5. Capital raises or financing
6. Out of area owners
The best way to discern the level of financial statement services required is to consult with the financial statement users to determine what is necessary. The following is a breakdown of the primary levels of service by the amount of work involved by the CPA.

PREPARATION

With a basic financial statement preparation engagement, the CPA is merely assisting management or the business owner in preparing financial statements for internal company use, in a similar manner to what an in-house controller or chief financial officer might prepare for the company. The financial statements can be prepared in any frequency that is most useful for the company (e.g. monthly, quarterly or annually), and can be prepared with or without disclosures. The financial statements may fulfill some lenders’ documentation requirements for small loans and basic reporting on the company’s activity during the reporting period, which can be useful in making organizational decisions. The CPA does not include any formal report with these financial statements and independence is not required.

CPA prepared financial statements can be shared outside of the company, as long as they include a notice that “no assurance is provided”. The CPA is not required to verify the accuracy or completeness of the information as the financial statements are prepared directly from the information provided by the company.

COMPILATION

In a compilation engagement, the CPA’s objective is to apply accounting and financial reporting expertise by assisting management in the presentation of their financial statements in accordance with General Accepted Accounting Principles (GAAP). These can be prepared with or without disclosures. The primary requirement of the CPA is to read the financial statements and propose adjustments to them if anything comes to his or her attention that is not materially correct or may impact how the user may view the magnitude of those inconsistencies. Depending on the significance of the inconsistencies, the financial statements may need to be adjusted to be in compliance with GAAP.

With a compilation, there are some key aspects that make this level of service different from a preparation, review or audit:
1. The CPA is not required to perform inquiries, analytic, substantive or other procedures on the information provided by management.
2. The CPA is not required to obtain an understanding of the entity’s internal controls or assess fraud risks; however, if fraud comes to the CPA’s attention it should be reported to management.
3. The CPA is not required to be independent. If the CPA is not independent, the lack of independence must be disclosed in the accountant’s compilation report.
REVIEW

The next level of service is a review engagement. This type goes more in-depth than a compilation and gives the user a limited level of assurance that there are no material modifications that should be made to the financial statements. This limited assurance is obtained primarily through inquiry and analytic procedures which are not required in a preparation or compilation.

For a review, the CPA is required to:
1. Have an understanding of the industry in which the client operates.
2. Obtain knowledge about the business and the accounting principles and practices that the client uses.
3. Perform inquiry, analytic, substantive or other procedures on any information provided by management that can be analyzed in relation to peer, industry and historical data.
4. Be independent in order to perform the engagement.
Similar to a compilation, a review does not require the CPA to obtain an understanding of the entity’s internal controls or assess fraud risks; however, if fraud comes to the CPA’s attention it should be reported to management.

AUDIT

A financial statement audit is the highest level of service a CPA can provide. The CPA’s objective is to obtain reasonable (defined as high, but not absolute) assurance about whether the financial statements as a whole are free of material misstatement. The CPA then expresses an opinion on whether the financial statements are presented fairly, in all material respects, in accordance with GAAP.

Some important characteristics of the financial statement audit include:
1. The CPA is required to obtain an understanding of the entity’s internal controls and assess fraud risks.
2. Professional standards require the CPA to perform risk assessment procedures on significant areas that could have an impact on the financials if they were not deemed materially correct.
3. The CPA is required to perform inquiry and analytic procedures.
4. Information from management is confirmed or corroborated with third party information.
5. The CPA is required to be independent in order to perform an audit engagement.
During the course of completion, an auditor spends much of the time attempting to gain an understanding of the appropriateness of the assertions or claims made by management. Professional standards require the auditor to look at the organization through the lens of management’s assertions in six key areas.

Existence or Occurrence – Amounts or transactions recognized in the financial statements pertain to valid transactions that actually occurred and/or items that both exist and relate to the entity.

Completeness – All transactions that were supposed to be recorded have been recognized in the financial statements.

Rights and Obligations – The entity has the right to ownership or to use the recognized assets, and the liabilities in the financial statements represent the obligations of the entity.

Accuracy or Classification – Transactions in the financial statements are recorded accurately at their appropriate amounts and are classified and presented fairly.

Valuation or Allocation – Transactions in the financial statements are properly valued. Estimates are reasonably calculated and applied.

Cutoff – Transactions have been recognized in the correct accounting periods.

When evaluating an organization’s financial statement needs, it is important to consider the purpose and desired information of the end user. If a financial statement audit is required, the work a CPA puts into those engagements may yield recommendations for improved internal controls and streamlined processes. However, some organizations may decide not to pursue an audit when simply a compilation or review from a well-known CPA firm will do.

It is important to consider organizational needs and consult options with a trusted CPA to determine which approach combines the right marriage of effort, cost, and assurance requirements.
July 2, 2019