tax executives institute, inc. detroit chapter all...
TRANSCRIPT
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BDO USA, LLP, a Delaware limited liability partnership, is the U.S. member of BDO International Limited, a UK company limited by guarantee, and forms part of the international BDO network of independent member firms.
Tax Executives Institute, Inc. Detroit Chapter
All Day Seminar
June 14, 2017
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AGENDATime Topic Presenters
8:00 2017 Mid-Year A&A Update Cathy McNamara, Bill Putz, and Jason Wurz
8:50 Tax Automation and ASC 740 Update Bill Connolly and Barbara Torzewski
9:40 BREAK
10:00 Recent International Tax Developments and Tax Provision Impact Joseph Calianno and Brad Rode
10:50 M&A Trends and Topics Jerry Dentinger and Steve McCullough
11:40 LUNCH
12:50 Sub C Update and More Bob Haran and Kevin Ainsworth
1:40 Unclaimed Property and FAS 5 (ASC 450-20) Joseph Carr and Angela Gebert
2:30 BREAK
2:50 Rate Rec Items: Meals & Entertainment Expenses, DPAD Deduction, and R&D CreditsAndy Zaleski, Brendan Sullivan, and Randy Emmons
3:40 State and Local Tax Accounting Updates Andrea Collins and Paul Lukasik
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BDO USA, LLP, a Delaware limited liability partnership, is the U.S. member of BDO International Limited, a UK company limited by guarantee, and forms part of the international BDO network of independent member firms.
2017 MID-YEARA&A UPDATE
June 14, 2017
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AgendaAccounting Update FASB Accounting Standards
Updates EITF and PCC matters Revenue StandardSEC Update
SEC and Staffing Developments Rulemaking Disclosure Effectiveness SEC Hot Topics and Comment
Letter Trends Financial Choice Act 2.0 Chief Accountant Speech on
Audit Committee Effectiveness
PCAOB Update
Auditor Reporting Model Audit Quality Indicators On The Horizon
Other Governance Matters
Boards Strategy: Cybersecurity Diversity on Boards Audit Quality Reports
Resources
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Accounting
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Accounting Update Discussion Outline
FASB Accounting Standards Updates
EITF and PCC matters
Revenue (ASC 606) Update
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FASB Update
http://www.fasb.org/homehttp://www.fasb.org/home
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Final ASUS Issued Through May 2017ASU 2017- Title
01 Clarifying the Definition of a Business
02 Clarifying When a Not-for-Profit Entity That Is a General Partner or a Limited Partner Should Consolidate a For-Profit Limited Partnership or Similar Entity
03 Amendments to SEC Paragraphs Pursuant to Staff Announcements at the September 22, 2016 and November 17, 2016 EITF Meetings
04 Simplifying the Test for Goodwill Impairment
05 Clarifying the Scope of Asset Derecognition Guidance and Accounting for Partial Sales of Nonfinancial Assets
06 Employee Benefit Plan Master Trust Reporting
07 Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost
08 Premium Amortization on Purchased Callable Debt Securities
09 Scope of Modification Accounting (Stock Compensation)
10 Determining the Customer of the Operation Services
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ASU 2017-01, Clarifying Definition of a Business
Narrows the definition of a business; key concepts in revised definition include:1. A business is an integrated set of activities and assets that is capable of being
conducted and managed for the purpose of providing a return in the form of dividends, lower costs, or other economic benefits directly to investors or other owners, members, or participants
2. Two essential elementsinputs and substantive process applied to those inputs
Includes practical screen if substantially all of the fair value of the gross assets acquired is concentrated in a single identifiable asset or group of similar identifiable assets, the set is not considered a business
Industry examples provided Effective dates
Public entities annual & interim periods beginning after 12/15/17 Nonpublic entities annual periods beginning after 12/15/18; interim periods
beginning after 12/15/19
BDO Alert: https://www.bdo.com/insights/assurance/fasb/fasb-flash-report-january-2017
https://www.bdo.com/insights/assurance/fasb/fasb-flash-report-january-2017
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ASU 2017-02, Non-Profit Consolidation
Addresses an unintended outcome of ASU 2015-02* which would have required fewer for-profit LPs to be consolidated by NFP general partners
Reinstates the Subtopic 810-20 consolidation guidance for NFPs (moved to Subtopic 958-810): NFPs, as general partners still presumed to have control of a for-profit LP, regardless
ownership interest %, unless that presumption is overcome by certain rights of the limited partners
Additional guidance for when NFPs, as limited partners, should consolidate LP Effective date
Annual periods beginning after 12/15/16; interim periods beginning after 12/15/17 Apply concurrently with ASU 2015-02, or retrospectively to all periods impacted by
adoption of 2015-02
*Amendments to the Consolidation Analysis
BDO Alert: https://www.bdo.com/insights/assurance/fasb/fasb-flash-report-february-2017
https://www.bdo.com/insights/assurance/fasb/fasb-flash-report-february-2017
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ASU 2017-04, Simplifying Goodwill Impairment
Eliminates Step 2 from the goodwill (GW) impairment test New one step test comparing the fair value of a reporting unit (RU) with its
carrying amount Recognize impairment charge for amount by which carrying amount exceeds
RUs fair value (up to amount of GW attributed to that RU) Retains optional qualitative impairment test (Step 0) Eliminates requirement to perform Step 0 for RU with zero or negative carrying
amount, but requires additional disclosure Does not eliminate private company alternative in ASU 2014-02*
If previously elected 2014-02, can voluntarily adopt 2017-04 (no preferability assessment)
If previously elected ASU 2014-18** must demonstrate preferability to adopt 2017-04
*Accounting for Goodwill (a consensus of the Private Company Council)**Accounting for Identifiable Intangible Assets in a Business Combination (a consensus of the Private Company Council)
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ASU 2017-04, Simplifying Goodwill Impairment
(continued) Effective dates
Public entities (SEC filers) fiscal periods beginning after 12/15/19 Public entities (non-SEC filers) fiscal periods beginning after 12/15/20 Nonpublic entities annual periods beginning after 12/15/21
Early adoption permitted for interim or annual GW impairment tests performed after 1/1/17
BDO Alert: https://www.bdo.com/insights/assurance/fasb/fasb-flash-report-february-2017-(1)
https://www.bdo.com/insights/assurance/fasb/fasb-flash-report-february-2017-(1)
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ASU 2017-04, Simplifying Goodwill Impairment
(continued early adoption)
BC64: an entity should apply the same guidance to an interim impairment test as the guidance it plans to use for its annual test in the year of adoption.
Example: Company A with a calendar year-end, performs its annual goodwill impairment test on the first day of Q4. During Q2 2017, Company A disposes of a subsidiary, and this transaction is a triggering event for goodwill impairment testing. In order to early adopt ASU 2017-04 for its annual 2017 impairment testing, Company A must adopt this guidance for its interim test during Q2 2017.
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ASU 2017-04, Simplifying Goodwill Impairment
(continued early adoption)
BC66: an entity may have an indicator of impairment at the beginning of the annual period in which the amendments are adopted.
Example: if a reporting units carrying amount exceeded its fair value during the most recent impairment test before adoption (Q4 2016) but the implied fair value of goodwill exceeded its carrying amount when applying Step 2 and no impairment was recognized, the entity likely would have an indicator of impairment for that reporting unit as of the beginning of the period of adoption (Q1 2017) based on the change in how goodwill impairment is measured.
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ASU 2017-05, Nonfinancial Asset Derecognition
Clarifies scope of ASC 610-20* Defines in substance nonfinancial asset - if substantially all fair value of assets
(recognized and unrecognized) promised to a counterparty is concentrated in nonfinancial assets, a financial asset in the same arrangement would still be considered part of an in substance nonfinancial asset
Nonfinancial assets may include nonfinancial assets contained within a legal entity that is transferred to a counterparty (e.g., through transfer of ownership interest)
Derecognition of businesses not in scope of ASC 610-20 (governed by ASC 810) Clarifies treatment of distinct nonfinancial assets
Derecognize when counterparty obtains control Apply guidance in ASC 606 on allocating consideration to each distinct asset
*Other IncomeGains and Losses from the Derecognition of Nonfinancial Assets
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ASU 2017-05, Nonfinancial Asset Derecognition
(continued) Adds guidance on accounting for partial sales of nonfinancial assets
Derecognize a distinct nonfinancial asset or distinct in substance nonfinancial asset in a partial sale transaction when both:1. The entity does not have (or ceases to have) a controlling financial interest in the legal entity
that holds the asset in accordance with Topic 810, and 2. The entity transfers control of the asset in accordance with Topic 606
Effective Dates (concurrent with ASC 606) Public entities annual and interim periods beginning after 12/15/17 Nonpublic entities annual periods beginning after 12/15/18; interim
periods beginning after 12/15/19
BDO Alert: https://www.bdo.com/insights/assurance/fasb/fasb-flash-report-march-2017-(1)
https://www.bdo.com/insights/assurance/fasb/fasb-flash-report-march-2017-(1)
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ASU 2017-06, EBP Master Trust Reporting
Employee benefit plans must present interest in a master trust and the change in interest in that master trust as single line items in the statement of net assets available for benefits and the statement of changes in net assets available for benefits
Updated disclosure requirements for interest in a master trust: Undivided (proportionate) interest - continue to disclose % Divided interest - disclose dollar amount of interest in specific investments of the
trust Disclose a master trusts other asset and liability balances and the dollar amount of
the plans interest in each of those balances Eliminates health and welfare plans investment disclosures for 401(h) account assets;
instead, the plan financials will disclose the name of the defined benefit pension plan which includes such investment disclosures
Effective for fiscal years beginning after 12/15/18
BDO Alert: https://www.bdo.com/insights/assurance/fasb/fasb-flash-report-march-2017
https://www.bdo.com/insights/assurance/fasb/fasb-flash-report-march-2017
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ASU 2017-07, Net Benefit Cost Presentation
An employer that sponsors a defined benefit plan must disaggregate components of net benefit cost Service cost
Present within same line item(s) as other employee compensation costs Generally included within income from continuing operations, but in some cases may be
eligible for capitalization
All other components of net benefit cost Present in income statement separately from service cost component and outside a subtotal of
income from operations, if one is presented E.g., interest cost, actual return on plan assets, amortization of prior service cost included in
AOCI, and gains or losses from changes in the value of the projected benefit obligation or plan assets
These costs may not be capitalized
Effective dates Public entities annual and interim periods beginning after 12/15/17 Nonpublic entities annual periods beginning after 12/15/18; interim periods
beginning after 12/15/19BDO Alert: https://www.bdo.com/insights/assurance/fasb/fasb-flash-report-march-2017-(2)
https://www.bdo.com/insights/assurance/fasb/fasb-flash-report-march-2017-(2)
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ASU 2017-08, Premium Amortization
Historically entities generally have amortized the premium on these instruments as a yield adjustment (reduction of interest income) over the securitys contractual life (i.e. to maturity), even if they are certain the issuer will exercise the option at the earliest call date.
The Standard shortens the amortization period for purchased callable debt securities held at a premium to the earliest issuer call date, rather than amortizing over the full contractual term.
Securities held at a discount continue to be amortized to maturity
Effective dates Public entities annual and interim periods beginning after 12/15/18 Nonpublic entities annual periods beginning after 12/15/19; interim
periods beginning after 12/15/20
BDO Alert: https://www.bdo.com/insights/assurance/fasb/fasb-flash-report-april-2017
https://www.bdo.com/insights/assurance/fasb/fasb-flash-report-april-2017
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ASU 2017-09, Scope of Modification Accounting
Clarifies that modification accounting applies to changes in the terms or conditions of a share-based payment award unless all of the following criteria are met:
Fair value (or calculated value or intrinsic value) is the same before and after modification Practical expedient - if the modification does not affect any valuation inputs, no
requirement to value award immediately before and after modification
Vesting conditions are the same before and after modification Classification as an equity or liability instrument is the same before and after
modification
Effective date annual and interim periods beginning after 12/15/17 (all entities)
BDO Alert: https://www.bdo.com/insights/assurance/fasb/fasb-flash-report-may-2017
https://www.bdo.com/insights/assurance/fasb/fasb-flash-report-may-2017
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ASU 2017-10, Determining the Customer of the Operation Services
Clarifies service concession arrangements guidance in Topic 853 When applying ASC 606, operating entity should consider the grantor the
customer of both construction and operation services it provides The effective date of ASU 2017-10 depend on whether an entity has already
adopted Topic 606:- If Topic 606 not adopted previously, the effective date and transition requirements
generally the same as those of Topic 606. Early adoption permitted, including within an interim period, even though the entity has not yet adopted Topic 606, but specific transition requirements apply.
- If Topic 606 previously adopted, effective dates of ASU 2017-10:1. Public business entities - fiscal years and interim periods beginning after
12/15/172. All others - fiscal years beginning after 12/15/18, and interim periods within
fiscal years beginning after 12/15/19
BDO Alert: https://www.bdo.com/insights/assurance/fasb/fasb-flash-report-may-2017-(1)
https://www.bdo.com/insights/assurance/fasb/fasb-flash-report-may-2017-(1)
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EITF and PCC Update
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EITF Update
EITF meeting March 2017 Finalized Issue 16-C, Determining the Customer of the Operation
Services in a Service Concession Arrangement see ASU 2017-10 No current issues on EITF agenda for possible meetings in May or June
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PCC Update
April 4, 2017 meeting: Disclosure framework Accounting for financial instruments, hedging Consolidations Liabilities and equity: down rounds Cloud computing Invitation to comment on Agenda Consultation
Meeting recap: http://www.fasb.org/cs/ContentServer?c=Document_C&pagename=FASB%2FDocument_C%2FDocumentPage&cid=1176168947553
Next meeting July 11, 2017
http://www.fasb.org/cs/ContentServer?c=Document_C&pagename=FASB/Document_C/DocumentPage&cid=1176168947553
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ASC 606, Revenue from Contracts with Customers
ASU 2014-09, Revenue from Contracts with Customers (Topic 606), as amended, becomes effective on January 1, 2019 for calendar-year nonpublic entities, but early adoption is permitted as of January 1, 2017
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ASC 606, Revenue from Contracts with Customers
Impact will vary by industry. No more industry-specific rules. Key concepts:
Transfer of control Identification of performance obligations in a contract Allocating the transaction price to performance obligations based on relative
standalone selling prices Measurement of revenue point in time or over time
Disclosures Other technical aspects
Contract costs Warranties Licenses Principal vs. agent
Internal controls
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ASC 606, Revenue from Contracts with Customers
Things To Consider What steps has the company taken to familiarize itself with the new standard? Has the company determined which method of adoption it will use (full
retrospective or modified retrospective)? Has the company trained relevant personnel, including accounting, finance,
legal, sales, contract management, human resources, and others? Has the company documented its preliminary assessment about the impact of
adoption, including the impact on accounting for income taxes?* *Standard setters and regulators have emphasized the importance of beginning
implementation ASAP Has the company updated its SAB 74 disclosures to reflect the above
assessment?
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ASC 606, Revenue from Contracts with Customers
Things To Consider For key financial systems used to process customer orders and/or record
transactions, has consideration been given to any needed changes**?
**System implementations and upgrades can often take 12+ months to complete
Has the company communicated with any existing or potential third party processing agents and other service providers about changes needed for transaction processing?
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ASC 606, Revenue from Contracts with Customers
BDO Resources BDO Revenue Recognition Resource Center and Corporate Governance Center
BDO Knows: FASBTopic 606, Revenue from Contracts with Customers BDO Practice Aid: ASC Topic 606 BDO industry publications and flash reports
Audit tools Revenue Audit Workbook Industry guidance
Accounting advisory services BDO Revenue Recognition Advisory Team
External Resources FASB Transition Resource Group for Revenue Recognition AICPA Industry Task Forces / Revenue Recognition Guide FASB technical inquiry process SEC pre-clearance process
https://www.bdo.com/services/assurance/revenue-recognition/overviewhttps://www.bdo.com/services/assurance/revenue-recognition/overview
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Revenue BDO Resources
Updated Newsletterhttps://www.bdo.com/insights/assurance/fasb/fasb-newsletter-march-2017
Upcoming/Recent WebinarsASC 606, Revenue from Contracts with Customers (self-study available) https://www.bdo.com/events/bdo-knowledge-asc-606,-revenue-from-contracts-witApplying the New Revenue Standard, Part 1 (6/8/17, followed be self-study)https://www.bdo.com/events/bdo-knowledge-applying-the-new-revenue-standard-1Applying the New Revenue Standard, Part 2 (6/15/17, followed by self-study)https://www.bdo.com/events/bdo-knowledge-applying-the-new-revenue-standar-2
BDO Revenue Resource Centerhttps://www.bdo.com/services/assurance/revenue-recognition/overview
https://www.bdo.com/insights/assurance/fasb/fasb-newsletter-march-2017https://www.bdo.com/events/bdo-knowledge-asc-606,-revenue-from-contracts-withttps://www.bdo.com/events/bdo-knowledge-applying-the-new-revenue-standard-1https://www.bdo.com/events/bdo-knowledge-applying-the-new-revenue-standar-2https://www.bdo.com/services/assurance/revenue-recognition/overview
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SEC Update
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SEC & Staff Developments
Commission Changes- Jay Clayton named new Chairman- 2 Commissioner seats remain open
Staff Changes- William Hinman named Director of the Division of Corporation
Finance- Sagar Teotia named Deputy Chief Accountant, OCA- Other changes in senior staff positions
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SEC Developments
Statements by Commissioner Piwowar* - Pay Ratio Rule- Conflict Minerals Rule
Portions of Conflict Minerals rule not enforced following U.S. District Court Ruling- Staff guidance - Commissioner Piwowar statement
Resource Extraction Issuers rule nullified
*Acting Chairman from late January early May
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SEC Rulemaking
Final rule and technical amendments related to the JOBS Act- Conforms rules and forms to securities law amendments in JOBS Act- Inflation-adjusted EGC revenue threshold - $1,070,000,000
Proposal to require Inline XBRL - Would require issuers to embed XBRL data within the financial statements
instead of an exhibit- Follows the voluntary program from June 2016
Release regarding availability of IFRS Taxonomy
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Disclosure Effectiveness
What is it?
- Providing better information to investors more understandable, more useful and eliminating excessive disclosure
- Disclosure effectiveness less disclosure
What has the SEC staff done lately?
- Request for commentReg S-X (other entity financial statements)comment period closed November 30, 2015
- S-K concept releasecomment period closed July 21, 2016
- Subpart 400 of Reg S-K comment period closed October 31, 2016
- Disclosure Update and Simplification closed Nov 2, 2016
Report on Modernization and Simplification of Reg S-K released on November 23, 2016
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Disclosure Effectiveness
Disclosure Effectiveness Initiative Final rule requiring the use of hyperlinks to exhibits
- Effective for filings submitted on or after September 1, 2017 (or September 1, 2018 for certain filers)
Request for comment on Industry Guide 3 (Statistical Disclosure by Bank Holding Companies)
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SEC Hot Topics
ICFR New Accounting Standards & SEC Reporting Implications Non-GAAP Financial Measures Income Taxes Segments Goodwill Impairment Other Comment Areas
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SEC Hot Topics
NEW ACCOUNTING STANDARDS SAB Topic 11M (SAB 74) Disclosures
- Expect comment letters on deficient disclosure in 2017 ICFR Considerations SEC Reporting Implications in Year of Adoption
- Selected financial data- S-3 considerations
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SEC Hot TopicsNON-GAAP FINANCIAL MEASURES Non-GAAP measures should supplement, not supplant GAAP
presentation Reminder on Non-GAAP C&DIs issued in May 2016
- Provide:- Guidance on adjustments and measures that may be misleading- Examples of placing undue prominence on non-GAAP measures- Guidance on computing income taxes in non-GAAP measures
- Communicate that: - Presenting non-GAAP that tailors GAAP (e.g., revenue) is generally not permitted- Presenting non-GAAP liquidity measures on a per share basis is prohibited
KEY OPERATING METRICS Recent topic in staff speeches Similar concerns as non-GAAP companies should focus on disclosure
controls and procedures over metrics
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SEC Hot Topics
INCOME TAXES Realizability of Deferred Tax Assets Effective Tax Rate Separate disclosure for U.S. operations versus foreign
jurisdictions- Pre-tax earnings - Income tax provision or benefit
Assertions related to indefinite reinvestment of foreign earnings
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SEC Hot Topics
SEGMENTS Identification of operating segments
- Factors used, including basis of organization- Clearly defining who is the CODM
Aggregation of operating segments Changes in business and organizational structure Disclosures
- Revenues by product category- Geographic information
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SEC Hot Topics
GOODWILL IMPAIRMENT Impairment analysis disclosures in MD&A
- Reporting units at risk of failing Step 1 of the goodwill impairment test (see FRM Topic 9510)
- Material uncertainties associated with methods and assumptions Interim impairment test
- Events occurring since impairment test that may be impairment indicators
- Sustained decline in market capitalization- Why an impairment charge/test was not necessary prior to Q4
Reporting units- Aggregation of components- Changes
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SEC Hot Topics
OTHER FREQUENT COMMENT AREAS MD&A Loss Contingencies Revenue Recognition (ASC 605 & SAB 74 Disclosures) Business Combinations & Related Issues
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Financial Choice Act 2.0Background
Main provisions would eliminate or modify - many banking provisions of Dodd-Frank Act- several Dodd-Frank Acts disclosure and corporate
governance requirements- SEC enforcement and rulemaking authority- securities laws governing capital raising and ongoing
reporting requirements
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Financial Choice Act 2.0Impact on Reporting Requirements
Executive Compensation- Requires say-on-pay vote each year in which there has been a
material change to executive compensation- Limits clawbacks to those current or former executives who had
control or authority over the companys financial reporting that resulted in the restatement
- Repeals the following Dodd- Frank Act disclosure requirements: Pay ratio Conflict minerals, coal or other mine safety, payments by resource extraction
issuers
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Financial Choice Act 2.0Impact on Reporting Requirements
Sarbanes Oxley 404(b) extends exemption from auditor attestation requirement- to any issuer with total market cap of less than $500M - for an additional 5 years for any issuer that ceased to be an EGC on
the last day of the FY after the 5th anniversary of its IPO, provided its average annual gross revenues are less than $50M and its not a large accelerated filer
Select capital formation/raising- Extend certain of the IPO on-ramp provisions of the JOBS Act,
currently available only to EGCs, to all issuers
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Advancing the Role and Effectiveness of Audit Committees SEC Chief Accountant Wes Brickers March 2017 speech
addressing the audit committees (AC) critical role in contributing to financial statement credibility through their oversight and resulting impact on the integrity of a companys culture and ICFR, the quality of financial reporting, and the quality of audits performed on behalf of investors
References: Speech: https://www.sec.gov/news/speech/bricker-university-tennessee-032417BDO Alert: https://www.bdo.com/insights/assurance/corporate-governance/sec-chief-accountant-speech-advancing-the-role-an
https://www.sec.gov/news/speech/bricker-university-tennessee-032417https://www.sec.gov/news/speech/bricker-university-tennessee-032417https://www.bdo.com/insights/assurance/corporate-governance/sec-chief-accountant-speech-advancing-the-role-an
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PCAOB Update
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PCAOB Current Projects Standard Setting
Refer to: https://pcaobus.org/Standards/Documents/Q22017-standard-setting-update.pdf
Project Current Stage Timing
Auditors Reporting Model Final standard issued - AS 3101 June 2017
Auditing Accounting Estimates, Including Fair Value Measurements
Proposed for public comment on June 1, 2017
Q2 2017
The Auditors Use of the Work of Specialists
Drafting proposal Q2 2017
Supervision of Audits Involving Other Auditors
Determining next action
Going Concern Outreach, monitoring, and research
Refer to: https://pcaobus.org/Standards/Documents/Q22017-standard-setting-update.pdf
https://pcaobus.org/Standards/Documents/Q22017-standard-setting-update.pdfhttps://pcaobus.org/Standards/Documents/Q22017-standard-setting-update.pdf
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PCAOB Current Projects Research
Refer to: https://pcaobus.org/Standards/Documents/Q22017-standard-setting-update.pdf
Project
Quality Control Standards, Including Assignment and Documentation of Firm Supervisory Responsibilities
Changes in the Use of Data and Technology in the Conduct of Audits
The Auditor's Role Regarding Other Information and Company Performance Measures, Including Non-GAAP Measures
Auditor's Consideration of Noncompliance with Laws and Regulations
https://pcaobus.org/Standards/Documents/Q22017-standard-setting-update.pdf
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Auditor Report - AS 3101 The new standard and related amendments retain the pass/fail opinion in the existing
auditors report, but significantly changes the existing auditors report through the following requirements: The new standard requires the auditor to communicate in the auditors report any
critical audit matters (CAMs) arising from the audit, or state that the auditor determined that there were no CAMs. CAMs are matters that were communicated or required to be communicated to the audit committee, and that (1) relate to accounts or disclosures that are material to the financial statements, and (2) involve especially challenging, subjective, or complex auditor judgment.
The auditors report will include disclosure of the auditors tenure, i.e., the year in which the auditor began serving consecutively as the companys auditor.
The auditors report will also include a statement that the auditor is required to be independent.
The phrase, whether due to error or fraud, will be included in the auditors report in describing the auditors responsibility under PCAOB standards to plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatements.
The opinion will appear in the first section of the auditors report, and section titles will be added to the report.
The auditors report will be addressed to the companys shareholders and board of directors or equivalents (additional addressees are also permitted).
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Auditor Report - AS 3101
The PCAOB adopted a phased approach to the effective date for the new standard and amendments, to provide accounting firms, companies, and audit committees more time to prepare for implementation of the critical audit matter requirements, which are expected to require more effort to implement than the other improvements to the auditors report. Subject to approval by the Securities and Exchange Commission, the final standard and amendments will take effect as follows:
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Audit Quality Indicators
PCAOB 2015 Concept Release on Audit Quality Indicators - identified 28 potential quantitative audit quality indicators (AQIs) at both the firm and engagement level intended to provide additional information about whether audit work being performed is being conducted by the appropriate individuals with the requisite experience, skills, resources, and tools. The potential AQIs related to the following areas:
Audit Professionals measures dealing with the availability, competence, and focus of those performing the audit.Audit Process measures concerning an audit firm's tone at the top and
leadership, incentives, independence, investment in infrastructure needed to support quality auditing, and monitoring and remediation activities.Audit Results measures relating to financial statements (such as the
number and impact of restatements, and measures of financial reporting quality), internal control over financial reporting, going concern reporting, communications between auditors and Audit Committees, and enforcement and litigation.
http://pcaobus.org/Rules/Rulemaking/Docket%20041/Release_2015_005.pdf
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Audit Quality IndicatorsCAQ had developed its own approach to AQI and performed extensive outreach, including a pilot program and several public forums. Early in 2016, the CAQ released Audit Quality Indicators: Journey and Path Ahead describing its work and a suggested path forward to continue to identify more effective ways to determine and assess audit quality.
Both the PCAOB and the CAQ continue to monitor audit quality and how indicators about audit quality can best be identified, collected, and used to inform capital markets both in the U.S. and globally.
Recommended Resources Release DateCAQ Approach to Audit Quality Indicators April 2014
CAQ Audit Quality Indicators: Journey and Path Ahead January2016PCAOB Concept Release on Audit Quality Indicators July 2015
BDO Approach to Audit Quality August2016
http://www.thecaq.org/caq-approach-audit-quality-indicatorshttp://thecaq.org/audit-quality-indicators-journey-and-path-aheadhttp://www.thecaq.org/caq-approach-audit-quality-indicatorshttp://thecaq.org/audit-quality-indicators-journey-and-path-aheadhttp://pcaobus.org/Rules/Rulemaking/Docket%20041/Release_2015_005.pdfhttps://www.bdo.com/insights/assurance/corporate-governance/bdo-audit-quality-report
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PCAOB Enforcement Transparency Act
In March 2017, Senators Jack Reed and Charles Grassley reintroduced the PCAOB Enforcement Transparency Act of 2017 (Bill S. 610)
Intent of the bill is to make PCAOB disciplinary proceedings public to bring auditing deficiencies at the firms or the companies they audit to light in a timely manner and help deter violations.
Similar attempts were made in previous years to get such legislation through congress.
https://na01.safelinks.protection.outlook.com/?url=http://CAQ.informz.net/z/cjUucD9taT02NDE3MjQyJnA9MSZ1PTEwNzg3NDQ5NjgmbGk9NDIyMTQyODM/index.html&data=02|01|[email protected]|41844fc2840e49afc63408d4711812c9|6e57fc1a413e405091da7d2dc8543e3c|0|0|636257795601675062&sdata=lenp50Jh1EWS/QUTL0Ei%2BFbgqV9EOFH4H/f6X4vPyQ8%3D&reserved=0
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Other Governance Matters
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The Boards Role in CybersecurityAICPA Cybersecurity Risk Management Framework to assist boards, management, and other pertinent stakeholders. The subject matter of such a cybersecurity examination engagement will be composed of three key elements:
1. Managements narrative description of the entitys cybersecurity risk management program
2. Managements written assertion that the controls implemented as part of the program were effective to achieve the entitys cybersecurity objectives
3. Practitioners examination report expressing an opinion about whether managements description of the entitys cybersecurity risk management program and the effectiveness of controls within that program achieve the entitys cybersecurity objectives.
AICPA Cybersecurity Resource Center:https://www.aicpa.org/interestareas/frc/assuranceadvisoryservices/pages/cyber-security-resource-center.aspx
https://www.aicpa.org/InterestAreas/FRC/AssuranceAdvisoryServices/Pages/AICPACybersecurityInitiative.aspxhttps://www.aicpa.org/interestareas/frc/assuranceadvisoryservices/pages/cyber-security-resource-center.aspx
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Cybersecurity Resources
Here are recent archived webinars for use by Audit Committees in this area:
Recommended Resources Release Date
AICPAs New Examination Engagement: SOC for Cybersecurity May 2017
BDO Archived Webinar: A New Normal: The NY FDS Cybersecurity Regulationand the Financial Services Industry April 2017
BDO Archived Webinar: What Boards Need to Know About Cybersecurity (ButMay Be Afraid to Ask) March 2017
BDO Archived Webinar: Navigating the Rising Tide of CybersecurityRegulation How is Your Board Preparing? July 2016
BDO Archived Webinar: Management Risk Elevation of Cybersecurity to theBoardroom
February2016
http://www.aicpastore.com/InformationManagementTechnologyAssurance/aicpa-s-new-examination-engagement--soc-for-cybers/PRDOVR%7EPC-WC1415638/PC-WC1415638.jsp?_ga=2.190548527.564792482.1495194188-1081748325.1487865943https://www.bdo.com/events/a-new-normal-the-nydfs-cybersecurity-reg-fshttps://www.bdo.com/events/what-boards-need-to-know-about-cybersecurity-(buthttps://www.bdo.com/events/navigating-the-rising-tide-of-cybersecurity-regulahttps://www.bdo.com/events/managing-risk-elevation-of-cybersecurity
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Cybersecurity Resources
Recommended Resources Release Date
NACD and ISA Cyber Risk Oversight Directors Handbook Series 2017
CAQ Comment Letter: Enhanced Cyber Risk Management Standards JointAdvance Notice of Proposed Rulemaking
January2017
Directors & Boards Article: Cyber Responsibility Officially Reaches theBoard
January2017
CAQ Cybersecurity: How CPAs Are Addressing a Dynamic and Complex Risk October2016
BDO Knows Cybersecurity Alert August 2016
BDO Article: Cyber for the C-Suite 3 Tips for Closing the Information gap June 2016
BDO Practice Aid: Elevating Cybersecurity to the Board Questions BoardsShould Be Asking March 2016
CAQ Understanding Cybersecurity and the External Audit February2016
https://www.nacdonline.org/Cyberhttp://www.thecaq.org/federal-reserve-occ-fdic-enhanced-cyber-risk-management-standards-joint-advance-notice-proposedhttps://www.directorsandboards.com/articles/singlecyber-responsibility-officially-reaches-boardhttp://thecaq.org/cybersecurity-how-cpas-are-addressing-dynamic-and-complex-riskhttps://www.bdo.com/insights/consulting/bdo-knows-cybersecurity-alert-august-2016https://www.bdo.com/insights/consulting/cyber-for-the-c-suite-3-tips-for-closing-the-infohttps://www.bdo.com/insights/assurance/corporate-governance/elevating-cybersecurity-to-the-boardhttp://thecaq.org/understanding-cybersecurity-and-external-audit
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NY DFS Cyber Regulation Countrys first cybersecurity
regulation went into effect March 1, 2017.
Regulators put responsibility for cybersecurity squarely on the Board.
Board must approve the companys written cybersecurity policy.
The Chief Information Security Officer must report to the Board at least annually.
Certification of compliance. Questions can be directed to
BDOs Judy Selby: [email protected]
Resources to learn more: Webinar - A New Normal: The NY FDS
Cybersecrity Regulation and the Financial Services Industry https://www.bdo.com/events/a-new-normal-the-nydfs-cybersecurity-reg-fs
D&B Article - Cyber Responsibility Officially Reaches the Board https://www.directorsandboards.com/articles/singlecyber-responsibility-officially-reaches-board
mailto:[email protected]://www.bdo.com/events/a-new-normal-the-nydfs-cybersecurity-reg-fshttps://www.directorsandboards.com/articles/singlecyber-responsibility-officially-reaches-board
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Cyber Board Certification
Certification of Compliance with New York State Department of Financial Services Cybersecurity Regulations
The Board of Directors or a Senior Officer(s) of the Covered Entity certifies: (1) The Board of Directors (or name of Senior Officer(s)) has reviewed documents, reports, certifications and opinions of such officers, employees, representatives, outside vendors and other individuals or entities as necessary; (2) To the best of the (Board of Directors) or (name of Senior Officer(s)) knowledge, the Cybersecurity Program of (name of Covered Entity as of (date of the Board Resolution or Senior Officer(s) Compliance Finding) for the year ended (year for which Board Resolution or Compliance Finding is provided) complies with Part ___.
Signed by the Chairperson of the Board of Directors or Senior Officer(s) (Name) Date: ___________________
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Diversity on Boards
In March 2017, Representative Carolyn Maloney introduced H.R. 1611, which would require the SEC to establish a Gender Diversity Advisory Group to study and make recommendations on strategies to increase gender diversity among members of boards of issuers
The bill would also amend the SEC 34 Act to require issues to make disclosures to shareholders with respect to gender diversity
In its most recent quarterly report, the Gender Diversity Index (GDI), Equilar reports that only 15.1% of board seats at the Russell 3000 companies are occupied by women At this pace, boards will reach gender parity in 2055!
Refer to: https://boardroomresources.com/insight/boardroom-update-gender-diversity-2017/
Refer to BDO June 2017 webinar that takes diversity a step further from the perspective of diversity in thought within the boardroom
https://na01.safelinks.protection.outlook.com/?url=http://CAQ.informz.net/z/cjUucD9taT02NDA4ODEzJnA9MSZ1PTEwNzg3NDQ5NjgmbGk9NDIxMzkwMDI/index.html&data=02|01|[email protected]|3b5d7885887c4ae8660908d46f84d884|6e57fc1a413e405091da7d2dc8543e3c|0|0|636256063748587572&sdata=9cL56u7Ug1BLaimw2bzFtOHCR8Xf86rDg8OZvi6pHdM%3D&reserved=0https://boardroomresources.com/insight/boardroom-update-gender-diversity-2017/
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Resources
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The BDO Center for Corporate Governance and Financial Reporting
AN INCREDIBLE RESOURCE AT YOUR FINGERTIPSThe BDO Center for Corporate Governance and Financial Reporting was born from the need to have a comprehensive, online, and easy-to-use resource for topics relevant to boards of directors and financial executives. We encourage you to visit the Center often for up-to-date information and insights you can rely on. What you will find includes:
Thought leadership, practice aids, tools, and newsletters
Technical updates and insights on emerging business issues
Three-pronged evolving curriculum consisting of upcoming webinars and archived self-study content
Opportunities to engage with BDO thought leaders
External governance community resources
For more information about BDOs Center for Corporate Governance, please go to www.bdo.com/resource-centers/governance
To begin receiving email notifications regarding BDO publications and event invitations (live and web-based), visit www.bdo.com/member/registration and create a user profile.
If you already have an account on BDOs website, visit the My Profile page to login and manage your account preferences www.bdo.com/member/my-profile.
Finally, a resource center with the continual education needs of those charged with governance and financial reporting in mind!
A dynamic and searchable on-line resource for board of directors and financial executives
http://www.bdo.com/resource-centers/governancehttp://www.bdo.com/member/registrationhttp://www.bdo.com/member/my-profile
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CAQ Audit Committee ToolsPreparing for the New Revenue Recognition Standard: Understanding the new revenue recognition standard
what is it? Evaluating the companys impact assessment how will
revenue change? Evaluating the implementation project plan how do we
need to prepare? Other implementation considerations what else do we
need to consider?
CAQ Non-GAAP Financial Measures: Continuing the Conversation The CAQ intends to use the questions in this tool in
roundtables and panels in which management, investors, investment analysts, members of the legal community, AC, internal and external auditors, regulators, and academics can come together to share perspectives on non-GAAP financial measures
http://thecaq.org/preparing-new-revenue-recognition-standard-tool-audit-committeeshttp://www.thecaq.org/non-gaap-financial-measures-continuing-conversation
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CAQ Audit Committee Tools
https://www.bdo.com/insights/assurance/corporate-governance/caq-questions-on-non-gaap-measures-a-tool-for-au
http://www.thecaq.org/docs/default-source/reports-and-publications/questions_on_non-gaap_measures_final.pdf
CAQ tool to help audit committees determine the meaningfulness of non-GAAP measures and whether:(1) management is complying
with SEC rules and related interpretations to non-GAAP measures and
(2) non-GAAP measures are aiding analysts and investors in understanding the business and its performance
https://www.bdo.com/insights/assurance/corporate-governance/caq-questions-on-non-gaap-measures-a-tool-for-auhttp://www.thecaq.org/docs/default-source/reports-and-publications/questions_on_non-gaap_measures_final.pdf
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BDO Audit Committee Alert: Emphasis and Focus on Controls and Non-GAAP
Regulators are in agreement on continued need for company vigilance around internal controls particularly: Audit areas where deficiencies have been
identified in previous PCAOB inspections Management review controls Non-GAAP measures New FASB standards on revenue
recognition, leases, financial instruments, and credit losses
Reference: BDOs practice aid available in your handouts
https://www.bdo.com/insights/assurance/corporate-governance/audit-committee-
alert-emphasis-and-focus-on-contr
https://www.bdo.com/insights/assurance/corporate-governance/audit-committee-alert-emphasis-and-focus-on-contr
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BDO Practice Aid: Audit Committee Requirements
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Questions?
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BDO USA, LLP, a Delaware limited liability partnership, is the U.S. member of BDO International Limited, a UK company limited by guarantee, and forms part of the international BDO network of independent member firms.
TAX AUTOMATION&
ASC 740 UPDATE
June 14, 2017
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WITH YOU TODAY
Bill ConnollyTax Managing Director National Tax OfficeBDO USA, LLPBoston, [email protected](617) 239-4127
Barbara TorzewskiSenior Tax ManagerBDO USA, LLPTroy, [email protected](248) 244-6527
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AGENDA
Tax Automation Artificial Intelligence, Data Analytics & Robotics Oh My!
ASC 740 Developments
Other Considerations / Current Topics
Questions & Wrap Up
Appendix A Recent ASC Changes & Proposed Changes
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Tax AutomationArtificial Intelligence, Data Analytics & Robotics Oh My!
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What Does All This Mean?
A Definition of Data Analytics
The process of collection, identifying details, categorizing key items and creating visualizations that help users understand a set of data and its meaning. The key to data analytics is not only to understand the data but having a good understanding of the questions that need to be answered. It is also important to note that when someone is reviewing data in a manual fashion, the more data they have the more difficult it is to understand. With Data Analytics the larger the data set available, the clearer the results become and the easier it will be to draw more accurate conclusions.
Tax Specific Example
Sales & use tax bot which generates estimates of possible refund amounts to assess whether a sales and use tax reverse audit has viability.
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What Does All This Mean?
A Definition of Robotics
The automation of repeatable tasks performed by data and application users. Often when employees are working with data there are initial steps that they need to perform to gather consolidate, integrate with other data and finally use the information. Software Robotics is intended to remove the steps needed to process and present data by employees and give them more time to consume the data and make better use of the information.
Tax Specific Example
Bridging a trial balance via upload from source system generated report into a tax provision software tool to automatically calculate tax sensitive schedule Ms.
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What Does All This Mean?
A Definition of Artificial Intelligence (AI) AI and Machine Learning are important next steps in the use of Data Analytics within the business environment. Similar to standard data analytics, AI & Machine Learning collect, identify and categorize the data. However, through the use of AI, the patterns found within the datasets can now be adjusted by the code we use. Outliers can be automatically identified as issues or false positives matches. AI can also be used to identify trends that can be applied from one dataset to another and visuals (such as dashboards) can be adjusted accordingly. Data added in future imports will have the new logic and also contribute to the growing understanding of our information by the system.
Tax Specific Example Watson (owned by IBM) has teamed up with tax preparers to assist in coming up with client specific questions to find potential tax breaks based on client profiles. The tool also is meant to assist in visiting the tax preparer a more engaging and interactive experience for the client. The tool shows questions and suggestions to clients on a separate screen as the return is being prepared. The verdict is out on whether clients agree if the experience of filing their tax has improved or not!
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Introducing.our BOTs
Robot Process Automation (RPA)/Software Robotics/Automation
Uses software applications to automate manual and repetitive tasks
Removes the robot from the human
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Tax Provision Footnote Bot
3 reports are run from OneSource
Template is configured specifically for client data
Footnotes are created and updated
Final draft of statements is automatically generated
Original process to update footnotes3-5 hoursNew process takes 10 minutes
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Many resources doing the same task
Data or information produced by the task could
be shared
Timely processing of data is vital to the business
The people performing the task do not enjoy the task
The task is repeated often and is time consuming
When to Use Software Robotics
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Tax Automation Top 10 Factors to Ensure a Successful Implementation
1. Software alone is not the answer 2. Change management is crucial 3. Demo multiple packages 4. Do not start a project without enough budget 5. Dont try to implement the software yourself 6. Hire a consulting firm with appropriate experience 7. Assign an internal point person to lead the project 8. Dont spend months on the implementation 9. Ensure your department is properly trained 10. Ensure your department is properly supported
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The examples we will review are for discussion purposes only and have been intentionally simplified for the classroom setting. Specific situations need to be analyzed based on the facts and circumstances of each case. Also, please discuss with your attest firm since there are divergent views in practice with respect to many issues. BDO will not be responsible for any loss sustained by any person who relies on these materials.
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ASC 740 Developments
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ASC 740 DEVELOPMENTS
ASU 2015-17, Balance sheet classification of deferred taxes Effective date(s) and early adoption: Public business entities for annual periods beginning after December 15, 2016 Entities other than public business entities for annual period beginning after
December 15, 2017 and interim reporting periods within annual reporting period beginning after December 15, 2018.
Early adoption for all entities as of the beginning of any interim or annual reporting period.
ASU 2016-09, Improvements to Employee Share-Based Accounting Effective dates and early adoption:
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ASC 740 DEVELOPMENTS (CONTD)
Public business entities for fiscal periods beginning after December 15, 2016, including interim periods within those fiscal years
Other entities for fiscal years beginning after December 15, 2017 and interim periods within fiscal years beginning after December 15, 2018
Early adoption is permitted for: Public business entities for reporting periods for which financial statements have
not yet been issued All other entities fore reporting periods for which financial statements have not
yet been made available for issuance An entity that elects to early adopt in an interim period shall reflect any adjustments
as of the beginning of the annual period that includes that interim period
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ASC 740 DEVELOPMENTS (CONTD)
ASU 2016-16, Intra-Entity Asset Transfers Effective date(s) and early adoption: Public business entities should apply the amendments in annual reporting periods
beginning after December 15, 2017, including interim reporting periods within those annual reporting periods.
Entities other than public business entities should apply the amendments in annual reporting periods beginning after December 15, 2018, and interim periods in annual periods beginning after December 15, 2019.
Early adoption for all entities as of the beginning of an annual reporting period for which financial statements (interim or annual) have not been issued or made available for issuance. That is, earlier adoption should be in the first interim period if an entity issues
interim financial statements.
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ASC 740 DEVELOPMENTS (CONTD)
Disclosure framework project July 26, 2016, proposed ASU issued September 30, 2016, comment period ended January 25, 2017, Board discussed comments received March 17, 2017, Roundtable on all disclosure projects Final ASU no time frame as yet
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Case Study 1
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Other ASC 740 Topics of Current Interest
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PASS-THROUGH SUBSIDIARIES
Investments in partnerships can be accounted for under the consolidated, equity or cost method of accounting
Partnerships and other entities treated as partnerships (i.e. LLCs/S-Corps) are not taxable entities. Rather, the tax consequences of transactions within the partnership flow through to the partners
The partners then report their proportionate share of the partnerships income or loss in their individual capacities
Under ASC 740, a partners future tax consequences of recovering the financial basis of its investment in the partnership are recognized as deferred tax assets or liabilities
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PASS-THROUGH SUBSIDIARIES (CONTD)
Deferred taxes are recognized on the outside basis difference of investments in pass-through subsidiaries the difference between the financial statement carrying value and the tax basis of the investment in the partnership- Will often be equal to the net basis differences in the assets and liabilities of the
partnership- Watch for exceptions related to goodwill and/or investments in foreign
subsidiaries discussed on next two slides The exceptions to recognizing deferred taxes in ASC 740 (both taxable and deductible)
do not apply to the outside basis of the investment in pass-through subsidiaries- Consideration is necessary for recoverability should there be a deductible
temporary difference- Ordinary versus capital?
The exceptions in ASC 740-10-25-3 (general exceptions) and 740-30-25-9 (deductible outside basis difference) generally will apply to a pass-through subsidiarys investment in another entity
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PASS-THROUGH SUBSIDIARIES (CONTD)
Pass-through subsidiarys investment in another entity- Corporate parent with consolidated partnership where the partnership
consolidates a foreign subsidiary- A DTL for undistributed earnings for the foreign subsidiary should not be
recognized if the partnership is able to meet the indefinite reversal criterion If a pass-through has an investment in a corporate subsidiary, the outside basis
difference of the investment in the pass-through subsidiary by the ultimate corporate parent should be bifurcated into two components:- The outside basis difference related to the second tier subsidiary, and- The remaining outside basis difference
Deferred taxes generally should not be recognized for the portion of the outside basis difference that relates to the pass-through subsidiarys investment in the second tier corporate subsidiary that meets one of the exceptions to recognize deferred taxes for outside basis differences
If a pass-through has an investment in a domestic corporate subsidiary, the exception in ASC 740-30-25-7 would not be applicable as the partnership cannot recover its investment in the domestic subsidiary tax-free under the IRC
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PASS-THROUGH SUBSIDIARIES (CONTD)
Similarly, an ultimate corporate parent company may not recognize deferred taxes on the portion of the outside basis difference for its investment in a pass-through subsidiary attributable to nondeductible goodwill- Deferred taxes are not provided for nondeductible goodwill under ASC 805-740-25-
3 and 25-4- A partner may look through its partnership interest (outside basis) to the book
and tax differences of individual assets and liabilities within the partnership (inside basis differences)
There is diversity in practice where some recognize the entire outside basis difference, including the portion of nondeductible goodwill
Either practice can be used as long as it is consistently applied- Discuss with the audit firm involved- BDOs policy is to accept either as long as the practice is consistently applied
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TAX EFFECTS OF NON-CONTROLLING INTERESTS (NCI) IN PASS-THROUGH ENTITIES
Income taxes included in consolidated income taxes and attributed to non-controlling interests on the face of the consolidated income statement will vary depending on whether the subsidiary is a partnership or C corporation
For a partnership:- Tax consequences of transactions within the partnership flow through to the
partners- Partners then report their proportionate share of the partnerships income or loss
in their individual capacities Therefore, an entity with a controlling interest in a partnership would only report
taxes on its share of the partnership in consolidated income tax expense
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BUSINESS COMBINATION ACHIEVED IN STAGES
A business combination that is achieved in stages requires the acquirer to remeasure to fair value its previously held equity investment at the acquisition date
Example would be when an entity has an investment in a partnership accounted for under the equity method and subsequently acquires the remaining partnership interests from the other partners
Equity method investment is remeasured to fair value and any resulting gain or loss is recognized in earnings and not as part of acquisition accounting
Remeasurement upon obtaining control of the investee increases or decreases the financial statement carrying value of the previously held investment without a corresponding change in the tax basis
Remeasurment would generally be a non-recognition event for income tax purposes with no change in tax basis
The effect of derecognizing any deferred taxes related to the outside basis difference of the previously held equity method investment would be recognized in earnings as part of income tax expense
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BUSINESS COMBINATION ACHIEVED IN STAGES (CONTD)
Upon gaining control of the previously held equity method investee, the acquirer will apply acquisition accounting and recognize the assets and liabilities assumed, including goodwill ; however, for tax purposes only a portion would get a step-up in basis
The acquirer recognizes and measures deferred tax assets and liabilities arising from temporary differences in the assets acquired and liabilities assumed from the equity method investee- Deferred taxes recognized on the inside basis differences of the assets and liabilities
assumed is recorded as part of acquisition accounting- Includes the inside basis difference that arises from the portion of the previously
held equity method investment that would not generally get a step-up in basis- Results in larger inside book-over-tax basis differences as a result of the previously
held equity method investment which impacts the amount of goodwill recorded in acquisition accounting
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Case Studies 2, 3, & 4
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TAX REFORM PROPOSALS
Good Bad Ugly
Rate Change 35% to 20% - 15%
Expensing Allows deductibility of both tangible and intangible asset purchases
Net operating loss carryovers
Move from current 20 year carryover to unlimited carryover period
Eliminates current 2 year carryback
Only allowed to offset 90% of taxable income in carryforward year
Interest expense Only allows deduction of interest versus interest income, excess to be carried over
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TAX REFORM PROPOSALS (CONTD)
Good Bad Ugly
Territorial tax System
100% Dividends received deduction from subsidiaries
Still would tax foreign personal holding company income (Code Sec 954(a)(1))
Mandatory repatriation
Liability payable over eight years
8.75% tax rate is proposed on previously untaxed cash and cash equivalents with a reduced 3.5% rate for all other previously untaxed foreign earnings
Border Adjustment tax (BAT)
Exclude gross income (sales, services, royalties etc.) from the tax base for exports
Deny the deduction (basis or cost of goods sold) for imports
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TAX REFORM PROPOSALS (CONTD)
ASC 740 Considerations:
Rate Change Pursuant to ASC 730-10-45-15 the effect of changes in tax laws or rates shall be included in income from continuing operations for the period that includes the enactment date. Calculation complications when change is prospective versus retroactive at an interim date.
Expensing Should create additional deferred tax liabilities. Potential to create additional naked credits for entities in a valuation allowance position.
Interest expense Should create a deferred tax asset which would need to be assessed for recoverability/valuation allowance.
Net operating loss carryovers
For entities that are currently relying on carryback of net reversing deferred tax assets in support of reducing a valuation allowance, this source of income would be eliminated. Proposal could free up naked credits but realization of reversing taxable temporary differences would be limited to 90% of the amount expect to reverse in each subsequent year including the indefinite amount.
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TAX REFORM PROPOSALS (CONTD)
Territorial tax system
Would not have to provide on expected remittance with the exception of withholding tax. Still would need to monitor FPHCI for inclusion. Upon sale would still need provide for outside basis difference since no longer permanent in duration (see ASC 740-30-25-5). Does not appear to be any proposal to eliminate gain on sale from taxation.
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Case Studies 5 & 6
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BRANCH ACCOUNTING AND DEFERRED TAXES
Issue multiple deferred differences to report for the temporary differences of a branch U.S. GAAP to U.S. Tax U.S. GAAP to Foreign Tax U.S. tax impact of Foreign deferred Deferred tax asset for foreign deferred tax liability as (potential foreign tax credit) Deferred tax liability for foreign deferred tax assets
Watch dual consolidated loss disclosures
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Case Studies 7, 8, & 9
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PUSH DOWN ACCOUNTING FALLACIES
ASU 2014-17 was issued in November of 2014 and states: An acquired entity may elect the option to apply pushdown accounting in the reporting
period in which the change-in-control event occurs Above guidance relative to acquired entity and does not eliminate the requirement that
the acquiring corporation record acquisition related adjustments whether they are pushed down to the target or kept notionally at the parent level (ASC 805-20)
Main issue seen in practice is when the acquisition related adjustments are not pushed down to target and targets deferred tax items would be at a rate different than that of the acquirer and also in a different currency ASC 830-30-45-11 States: After a business combination, the amount assigned at the acquisition date to the
assets acquired and the liabilities assumed (including goodwill or the gain recognized for a bargain purchase in accordance with Subtopic 805-30) shall be translated in conformity with the requirements of this Subtopic
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PUSH DOWN ACCOUNTING FALLACIES (CONTD)
ASU 740-10-30-5 states: Deferred taxes shall be determined separately for each tax paying component (an
individual entity on group of entities that is consolidated for tax purposes) in each tax jurisdiction
To summarize above guidance: Record acquisition related adjustments in the appropriate currency even though they are
not pushed down to the target in the acquiring corporations financial statements or books and records
Practical issue exists of identifying the location of the acquisition related adjustments e.g. intangibles - when an entity is acquired with multi location subsidiaries
Need to work with accounting and valuation in order to assure appropriate jurisdictional values are assigned
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Case Study 10
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PRESENTATION OF DEFERRED FEDERAL INCOME TAXES ASSOCIATED WITH DEFERRED STATE INCOME TAXES
ASC 740-10-55-20 states: State income taxes are deductible for U.S. federal income tax purposes and therefore , a deferred state income tax
liability or asset gives rise to a temporary difference for determining a deferred U.S. federal income tax asset or liability, respectively. The pattern of deductible or taxable amounts in future years for temporary differences related to deferred state income tax liabilities or assets should be determined by estimates of the amount of those state income taxes that are expected to become payable or recoverable for particular future years and, therefore, deductible or taxable for U.S. federal tax purposes in those particular future years.
It is not appropriate to net the federal effect of a state DTL or DTA against the state deferred tax. ASC 740 generally requires separate identification of temporary difference and related deferred taxes for each tax-paying component of an entity in each tax jurisdiction, including U.S. federal, state, local, and foreign, tax jurisdictions. ASC 740-10-45-6 states the following regarding the offsetting of DTAs and DTLs: For a particular tax-paying component of an entity and within a particular tax jurisdiction, all deferred tax liabilities
and assets, as well as any related valuation allowance, shall be offset and presented as a single noncurrent amount. However an entity shall not offset deferred tax labilities and assets attributable to different tax-paying components of the entity or to different tax jurisdictions.
In addition to improper presentation of DTAs and DTLs in the balance sheet, improperly netting the federal effect of the state deferred taxes themselves can result in, among other things, (1) an improper assessment of whether a valuation allowance is necessary in a particular jurisdiction or (2) improper disclosures related to DTAs and DTLs.
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Case Study 11
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INTRAPERIOD ALLOCATIONException to the General Rule Losses from Continuing Operations
ASC 740 requires that items outside of continuing operations (extraordinary items, discontinued operations, OCI etc.) be considered in determining the amount of income tax benefit to be allocated to continuing operations in situations where there are pretax lossesfrom continuing operations and a valuation allowance at the beginning and end of the year.
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Case Studies 12 & 13
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UNCERTAIN TAX POSITIONS INDIRECT EFFECTSTransfer Pricing
Two sides to Every Transaction Consider Competent Authority
Amount of deduction in one jurisdiction vs. amount of income in the othertax authorities have conflicting interest
May have exposure in either or both jurisdictions
Tax treaties may provide for competent authority negotiations to resolve conflicts.- Generally high success rate (but may differ by jurisdiction)
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UNCERTAIN TAX POSITIONS INDIRECT EFFECTSTransfer Pricing
ASC 740 analysis with competent authority Determine exposure in each jurisdiction before potential CA relief Determine whether CA relief will be requested and success probability Determine potential settlement positions, book resulting exposure/asset in
each jurisdiction
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Competent Authority Relief FY 2011 through FY2015
RELIEF 2011 2012 2013 2014 20155-year Average
(2011-2015)
Correlative Adjustment 22.84% 34.24% 65.7% 88.7% 83.3% 58.96%
Adjustment Withdrawn 55.68% 63.59% 14.1% 10.8% 15.1% 31.85%
No Relief 21.48%* 2.17% 20.2% .5% 1.6% 9.19%
Total of Correlative Adjustment received or Adjustment Withdrawn 78.52% 97.83% 79.8% 99.5% 98.4% 86.11%
* 83% of this figure is attributable to a single case on which no relief was granted.
UNCERTAIN TAX POSITIONS INDIRECT EFFECTSTransfer Pricing
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Case Study 14
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VALUATION ALLOWANCESIn Business Combinations
Established at time of business combination
Evaluate evidence- Combined companys past and expected future results of operations as of the
acquisition date- Consider tax law provisions that restrict future use of temporary differences (Code
Section 382 limitations)
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VALUATION ALLOWANCESIn Business Combinations
Two deferred tax assets and valuation allowances need to be considered in these transactions
Acquired company:- Adjustments to target companys valuation allowance established for DTAs at the
date of acquisition are reflected as adjustments to goodwill.
Acquiring Company:- Adjustments to the acquirers valuation allowance is recorded as a component of
income tax expense (P&L) and not included as part of acquisition accounting (Goodwill).
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Case Study 15
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Circular 230 and General Disclaimer: These materials do not constitute tax or legal advice, and cannot be relied upon for purposes of avoiding penalties under the Internal Revenue Code. These materials may omit discussion of exceptions, qualification, definitions, effective dates, jurisdictional differences, and other relevant authorities and considerations. In no event should a reader rely on these materials in planning a specific transaction or litigation. Non-lawyers should not attempt to provide legal services or legal advice in circumstances where that would violate laws against the unauthorized practice of law. BDO will not be responsible for any error, omission, or inaccuracy in these materials.
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Questions?
Thank You!
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APPENDIX A SLIDES REGARDING RECENT
ASC 740 CHANGES
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BALANCE SHEET CLASSIFICATION OF DEFERRED TAXES ASU 2015-17ASU 2015-17 issued in November by the Board which requires deferred taxes to be shown as long term in a classified statement of financial position
Transition method The Board decided that entities should have a choice of applying the amendments
either prospectively or retrospectively to all periods presented. Transition Disclosures If an entity applies the amendments prospectively, the entity should disclose in the
first interim and annual period of change (1) the nature of and reason for the change in accounting principle and (2) a statement that prior periods were not adjusted. If an entity applies the amendments retrospectively, the entity should disclose in the first interim and annual period of change (1) the nature of and reason for the change in accounting principle and (2) quantitative information about the effects of the accounting change to prior periods.
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BALANCE SHEET CLASSIFICATION OF DEFERRED TAXES ASU 2015-17 (CONTD)
Effective Date and Early Adoption The Board affirmed the proposal that public business entities would be required to
apply the amendments in annual reporting periods beginning after December 15, 2016, including interim reporting periods within those annual reporting periods.
The Board affirmed the proposal that entities other than public business entities would be required to apply the amendments in annual reporting periods beginning after December 15, 2017, and interim reporting periods within annual reporting periods beginning after December 15, 2018.
The Board decided to allow earlier adoption for all entities as of the beginning of any interim or annual reporting period.
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ASU 2016-09 IMPROVEMENTS TO EMPLOYEE SHARE-BASED ACCOUNTING ASU 2016-09 issued on March 30, 2016 The changes as they relate to income taxes are as follows:
Classify cash paid when directly withholding shares to meet statutory withholding requirements as a financing activity in the statement of cash flow. Transition - Retrospective transition method (application of a different accounting
principal to one or more previously issued financial statements). Removal of requirement to present excess tax benefits as a cash inflow from financing
activities and a cash outflow from operating activities. Transition - Either prospective or retrospective application of this provision is permitted.
Board decided that all excess tax benefits and deficiencies be recognized within the income statement. Removes the requirement to recognize excess tax benefit until reduction of cash taxes. Transition - modified retrospective method, with a cumulative- effect adjustment
recognized in equity and prospective transition method for future excess benefits and deficiencies. All existing windfall benefits not recognized due to net operating losses are recognized.
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ASU 2016-09 IMPROVEMENTS TO EMPLOYEE SHARE-BASED ACCOUNTING (CONTD)
Other Issues
The ASU eliminates the requirement to defer recognition of an excess tax benefit until the benefit is realized through a reduction of taxes payable
Excess tax benefits and deficiencies are considered discrete items in the reporting period and are not included in the estimated effective tax rate
Excess tax benefits and deficiencies are excluded from the assumed proceeds available to repurchase shares in the computation of diluted earnings per share when an entity applies the treasury stock method
The tax impact of dividends on share-based payments will now be accounted for as income tax expense or benefit in the income statement rather than as an increase to APIC
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ASU 2016-09 IMPROVEMENTS TO EMPLOYEE SHARE-BASED ACCOUNTING (CONTD)
Effective date(s) Public business entities for fiscal periods beginning after December 15, 2016, including
interim periods within those fiscal years Other entities for fiscal years beginning after December 15, 2017 and interim periods
within fiscal years beginning after December 15, 2018 Early adoption is permitted for:
Public business entities for reporting periods for which financial statements have not yet been issued
All other entities for reporting periods for which financial statements have not yet been made available for issuance
An entity that elects to early adopt in an interim period shall reflect any adjustments as of the beginning of the annual period that includes that interim period
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ASU 2016-09 IMPROVEMENTS TO EMPLOYEE SHARE-BASED ACCOUNTING (CONTD)
If early adopted all amendments must be adopted at the same time
Disclosures In the period of adoption, entities are required to disclose:
The nature and reason for the change in accounting principle The cumulative effects of the changes on retained earnings or other components of
equity as of the date of adoption Cash flows related to excess tax benefits disclose either:
That prior periods have not been adjusted OR The effect of the change on prior periods retrospectively adjusted if the change is
applied retrospectively
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ASU 2016-09 IMPROVEMENTS TO EMPLOYEE SHARE-BASED ACCOUNTING (CONTD)
For changes in the statement of cash flows related to statutory tax withholding requirements, entities are required to disclose the effect of the change on prior periods retrospectively adjusted
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ASU 2016-09 IMPROVEMENTS TO EMPLOYEE SHARE-BASED ACCOUNTING (CONTD)
Other issues to consider
Valuation allowance Consider valuation allowance upon adoption Release after adoption
Determination of the discrete item related to excess tax benefits Direct effect Full ASC 740 with and without Incremental effect
Existing APIC Pools No reclassification to retained earnings upon adoption
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ASU 2016-09 IMPROVEMENTS TO EMPLOYEE SHARE-BASED ACCOUNTING (CONTD)
Early adoption other than first-quarter Must treat as if adopted at the beginning of the year Previously issued financials need to be recast in future filings (e.g. Form 10-Q,
Form 10-K)
Accounting policy change for forfeitures will create additional deferred tax considerations
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EXAMPLE OF SHARE-BASED PAYMENTS
Assume Fulham Co. grants a nonqualified stock option (NQSO) 40% rate Fair value at date of grant is $20 in 20x1 Strike price equals market at date of grant - $30 At date of exercise the fair value of the grant is $60
Fulham would recognize the following:
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EXAMPLE OF SHARE-BASED PAYMENTS
Assume the same facts as the previous example except the excess tax benefit recognized becomes part of an NOL carryover and Fulham will not record a valuation allowance with respect to its deferred tax assets.
Fulham would recognize the following:
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INTRA-ENTITY ASSET TRANSFERS ASU 2016-16
ASU 2016-16 was issued on October 24, 2016 Requires that an entity recognize the income tax consequences of an intra-entity asset
transfer, other than an intra-entity asset transfer of inventory, when the transfer occurs. For intra-entity asset transfers of inventory, the board decided to retain current GAAP, which requires an entity to recognize the income tax consequences when the inventory has been sold to an outside party.
The Board decided that entities should apply the amendments on a modified retrospective basis, with a cumulative-effect adjustment directly to retained earnings as of the beginning of the period of adoption.
The Board affirmed the proposal that entities should disclose in the first annual period after adoption, and the interim periods within the first annual period, the nature of and reason for the change in accounting principle and certain quantitative information about the change in accounting principle.
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INTRA-ENTITY ASSET TRANSFERS (CONTD)
The Board decided that public business entities should apply the amendments in annual reporting periods beginning after December 15, 2017, including interim reporting periods within those annual reporting periods.
The board decided that entities other than public business entities should apply the amendments in annual reporting periods beginning after December 15, 2018, and interim periods in annual periods beginning after December 15, 2019.
The Board decided to permit early adoption for all entities as of the beginning of an annual reporting period for which financial statements (interim or annual) have not been issued or made available for issuance. That is, earlier adoption should be in the first interim period if an entity issues
interim financial statements.
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INTRA-ENTITY TRANSACTION EXAMPLE - INVENTORY
Assumptions: Widget Company, a U.S. Corporation, owns 100% of Guiness Co., an Irish entity. Widget
and Guiness are included in a consolidated financial statement but file separate tax returns.
Widget sells inventory to Guiness with a book and tax value of $50 for $100 which has not been sold by Guiness at the reporting date.
Widgets tax rate is 40% and Guiness tax rate is 12.5%.
Question: What entries should be recorded in the consolidated financial statements of the
Widget/Guiness Group.
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INTRA-ENTITY TRANSACTION EXAMPLE-CURRENT & PROSPECTIVE ACCOUNTING-INVENTORY
WidgetDr A/R 100
Cr. Sale 100Dr Cogs 50
Cr. Inventory 50Dr Current tax Expense 20
Cr Current tax Payable 20Guiness
Dr Inventory 100Cr A/P 100
ConsolidationDr A/P 100Dr Sales 100
Cr Inventory 50Cr. Cogs 50Cr. A/R 100
Dr Prepaid tax 20Cr Current tax Expense 20
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INTRA-ENTITY TRANSACTION EXAMPLE-EXPOSURE DRAFT ACCOUNTING (REJECTED)-INVENTORYFacts are the same as the previous example.Journal entries are as follows:
WidgetDr A/R 100
Cr Sale 100Dr Cogs 50Cr. Inventory 50
Dr Current tax Expense 20Cr Current Tax Payable 20
GuinessDr Inventory 100Cr A/P 100
ConsolidationDr A/R 100Dr Sales 100
Cr Inventory 50Cr Cogs 50Cr A/R 100
Dr Deferred tax asset 6.251.
Cr Deferred Tax benefit 6.25
1. (50x12.5%)
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INTRA-ENTITY TRANSFER FINAL - NON-INVENTORY TRANSFER
Assumptions: Widget Company, a U.S. Corporation, owns 100% of Guiness Co., an Irish entity. Widget
and Guiness are included in a consolidated financial statement but file separate tax returns.
Widget sells intellectual property (IP) to Guiness for $100 which has a zero basis. Guiness is able to amortize the IP for tax purposes over a ten year period which approximates the estimated book life.
Widgets tax rate is 40% and Guinesss tax rate is 12.5%
Question: What entries should be recorded in the consolidated financial statements of the
Widget/Guiness Group with respect to the IP sale?
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INTRA-ENTITY TRANSACTION EXAMPLE NON INVENTORYPrior Accounting
WidgetDr A/R 100
Cr Income 100Dr Current tax
expense 40Cr Current tax
payable 40
GuinessDr I.P 100
Cr A/P 100
ConsolidationDr prepaid tax 40Cr Current Tax
expense 40Dr Income 100
Cr I.P. 100
ASU 2016-16
WidgetDr A/R 100
Cr Income 100Dr Current tax
expense 40Cr Current Tax
payable 40
GuinessDr I.P 100
Cr A/P 100
ConsolidationDr Deferred tax
asset 12.5Cr Deferred Tax
benefit 12.5Dr Income 100
Cr I.P. 100
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DISCLOSURE FRAMEWORK PROJECT
On July 26, 2016 the Board proposed an Accounting Standards Update, with a comment period of 60 days or ending on September 30, 2016, whichever is longer.
The Board decided to require prospective transition for all income tax disclosures. Currently, some disclosure requirements in Topic 740, Income Taxes, are required of
public entities and some are required of nonpublic entities. The Board decided to replace the term public entity with the term public business entity as defined in the Master Glossary of the Codification. The result is that some disclosures will be required of public business entities while other disclosures will be required of entitles other than public business entities.
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DISCLOSURE FRAMEWORK PROJECT FOREIGN DISCLOSURES & UNDISTRIBUTED EARNINGS TENTATIVE DECISION
Disclose
Income (loss) before income tax expense (benefit) disaggregated between domestic and foreign
Income tax expense (or benefit) from continuing operations disaggregated between domestic and foreign shall be disclosed
An explanation of circumstances that caused a change in assertion about the indefinite reinvestment of undistributed foreign earnings and the corresponding amount of these earnings
The aggregate of cash, cash equivalents and marketable securities held by foreign subsidiaries
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DISCLOSURE FRAMEWORK PROJECT-UNCERTAIN TAX POSITION DISCLOSURE TENTATIVE DECISION
Disclose
Settlements between cash and noncash items UTPs by balance sheet line item
Removes
The disclosure of tax positions that could reasonably change within the next twelve months pursuant to ASC 740-10-50-15d
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DISCLOSURE FRAMEWORK PROJECT- OTHER ASC 740 ISSUES
Disclose If a change in tax law has been enacted and it is probable that the change will affect
the reporting entity in a future period Income taxes paid between domestic taxes paid and foreign taxes paid Foreign income taxes paid to any country that are significant relative to total income
taxes paid The change in the valuation allowance and explaining the nature and amounts recorded
or released during the reporting period (for public business entities only)
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DISCLOSURE FRAMEWORK PROJECT- OTHER ASC 740 ISSUES (CONTD)Rate Reconciliation Public Business Entity
Reconciliation between total income tax expense/(benefit) from continuing operations and PBT times the applicable statutory federal income tax rate showing the estimated reporting currency amount of each reconciling difference
Should the public business entity be a foreign entity, the income tax rate in that entitys country of domicile shall normally be used as the starting point of the reconciliation (emphasis added) Different rates shall not be used for subsidiaries or other segments of the public
business entity If the rate used is other than the U.S. federal tax rate, the rate used and the basis
for using that rate shall be disclosed If no individual reconciling item amounts to more than 5% of the computed amount and
the total difference to be reconciled is < 5%, no reconciliation need be provided
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DISCLOSURE FRAMEWORK PROJECT- OTHER ASC 740 ISSUES (CONTD)
Rate Reconciliation Public Business Entity (contd) Reconciling items that are individually less than 5% of the computed amount may be
aggregated in the reconciliation The reconciliation may be presented in percentages or in the reporting currency The statutory tax rates shall be the regular tax rates if there are alternative tax
systems Explanations of year-to-year changes in the reconciling items shall also be
disclosed
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DISCLOSURE FRAMEWORK PROJECT OTHER ASC 740 ISSUES (CONTD)
The amounts of federal, state, and foreign carryforwards (not tax effected) by time period of expiration for each of the first five years after the reporting date and a total of the amounts for the remaining years. (public business entities)
The deferred tax asset for carryforwards (tax effected) before valuation allowance disaggregated by federal, state, and foreign. Those amounts should be further disaggregated by time period of expiration for each of the first five years after the reporting date and a total of the amounts for the remaining years. (public business entities)
The total amount of unrecognized tax benefits that offset the deferred tax asset attributable to carryforwards
For entities other than public business entities the amounts of federal, state, and foreign carryforwards (not tax effected) should be disclosed
The terms of any rights or privileges granted by a governmental entity directly to the reporting entity that have reduced, or may reduce, the entity's income tax burden. Does not apply to circumstances in which the entity meets the eligibility requirements that are broadly available to taxpayers without specific agreement between the entity and the government
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DISCLOSURE FRAMEWORK PROJECT OTHER ASC 740 ISSUES (CONTD)Potential Sample of Carryforward Disclosure
Year of Expiration
FederalCarryforward
State Carryforward
Foreign Carryforward
Federal DTA
StateDTA
ForeignDTA
Less UTP
Net DTA Before VA
2017
2018
2019
2020
2021
Thereafter