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Althoughdiminishing,fearofthecloudisstillaprevalentfactorthatpreventssmalltomediumsizedpracticesandbusinessesfromreapingthebenefitsitcanofferthem.

Many legal and accounting practice owners are avoiding the transition to Cloud based accounting solutions due to perceived security, privacy and complexity issues in transitioning to the Cloud. These concerns are preventing small businesses from the benefits of increased efficiency and flexibility that are offered by Cloud accounting solutions.

NetSuite* recently released a white paper, From Fear to Fortune: Lessons from Leveraging the Cloud. In it, the author Tom Kelly presented a scientific term; Nephophobia, a fear of clouds. Although this term is usually used in a meteorological context, it is also meaningful in the technological sense; as many practice managers are afraid of adopting the Cloud. In saying this however, those who have taken the leap and embraced the Cloud are experiencing real business advantages.

According to Parallels** Global SMB Cloud Insights report, the global market for small to medium sized businesses (SMB) in 2012 was worth USD$45.2 billion. By the end of 2015, it will have more than doubled; a clear indication that fears are diminishing.

What is Cloud Based Accounting Software?Traditionally, a business would purchase accounting software as a ‘tangible’ product and install this onto their computer systems. With Cloud based accounting software, you are purchasing the right to use the software over the internet via a subscription model, Software as a Service (SaaS).

Benefits of Cloud Based Accounting Software for SMBsSo what are these benefits that Cloud accounting solutions claim to offer the small to medium sized accounting and legal practices in particular?

Benefit#1:FavourableeconomicsCloud accounting provides a ‘pay as you go’ approach to your software use. Unlike the traditional accounting packages on your desktop, the need to purchase software licences and hardware upfront is eliminated. Any investment in the software typically increases or decreases in line with usage, hence any cost can be aligned to the business value and the benefit it delivers.

Internal costs involved in upgrading to newer versions are irrelevant as Cloud solution pricing includes automatic and ongoing releases,

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The benefits of Cloud accounting

Personal Property Securities Act – 3 a review

6 Events to watch out for...

Getting behind the numbers – financial 4 due diligence for professional practices

Voluntary solvent liquidation 5 or deregistration

SPRING 2013

This edition

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typically two or three releases per year. As a result, the need for traditional IT support and maintenance or enhancement are dramatically reduced, and the capacity can be released or redirected to other activities.

However, business owners must balance any anticipated cost savings with potential cost increases in other areas. Each business or practice must review their particular operating environment and constraints, specific business processes and the interfaces required.

For example, an organisation with multiple connected systems (some may be to external parties) may need some interfaces between these systems and the new Cloud accounting; and interfacing with a Cloud solution may be more involved than a traditional file transfer.

Benefit#2:Accesstoreal-timedataanywhere,anytimeAnother key benefit is the ability to access real-time information anytime from any place. This real-time information makes it possible for accountants to provide more accurate and timely advice and action tasks faster. With accounting information more accessible, from an offsite location for example, businesses can consider better sourcing options for their accountants and bookkeepers.

Benefit#3:ScalabilityandflexibilitytosupportgrowthThrough the nature of their design, Cloud based solutions not only cater for the growth of your practice in terms of users, but also for transaction volume growth and functionality flexibility. Xero (one of the Cloud solutions), offers alternative pricing packages to customers based on the amount of invoices and transactions processed on a monthly basis, regardless of the amount of users accessing the system. Practice owners can also benefit by paying for only the functionality they need and when they need it through the more innovative vendors. For example, Reckon One (another Cloud solution) even allows you to deactivate/reactivate a piece of functionality on an ‘as required’ basis.

Benefit#4:SecurityOne of the reasons that might prevent practice owners from adopting a Cloud product is a fear around security. In reality, practice owners

using Cloud accounting software typically benefit more from the fast deployment of software patches and security upgrades as part of the automatic upgrades. Leading vendors are well equipped to stay on top of security concerns (and in most cases are much better equipped than small practices).

What about compliance?What about your data being stored outside your business’ premise? What will be the risk around the data protection in terms of data loss and theft? No legislation stops businesses from using the Cloud, but seek legal advice on ‘how to’ setup and ensure implementation complies with your industry obligations and the risk profile of your Board.

So what’s next?Now that you are comfortable considering the Cloud, what’s next? Look at your specific business accounting needs (and operating constraints) and compare market solutions (e.g. Xero, MYOB Live, Reckon One or JCurve to name a few). Be mindful that many of the market offerings are designed as ‘one size fits all’ and therefore may not fit your organisation ‘shape’. Some of the larger practices may also have processes that are too complex for entry level online accounting systems. All things considered, changing some of your processes to better fit a Cloud solution may be a viable option for your practice. Many of the more successful software implementations have involved a realignment of business processes. This could be an opportunity for your organisation to change and improve the way things are done.

Deciding on the software that best suits your practice, gives you the more favourable economics and best value involves careful consideration.

* NetSuite is the world’s leading provider of Cloud based business management software.

** Parallels is a global leader in hosting and Cloud services enablement and cross platform solutions.

The benefits of Cloud accounting>>continued from page 1

Saleem Azad Consultant – IT Consulting Telephone (03) 8610 5505

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a well-known New Zealand case of Graham v Portacom which had strikingly similar background facts.

There are some clear messages to businesses, and it is important that businesses take the following steps, as a minimum, to protect their assets:

• Review your trading activities to determine whether or not you need to register a security interest over your customers, particularly where you sell goods on retention of title terms, have items on consignment, or where your business hires or leases out assets.

• If you have any asset protection strategies in place, particularly where assets are being leased or hired out to related entities, you must secure the lease arrangement by lodging your security interest on the PPS register. These assets may be at risk if the entity that has possession of those assets is placed into external administration, despite not having legal title. The decision in Maiden Civil has made the outcome clear.

The consequences of not protecting your assets under this new regime can be far reaching. As seen in the matter of Super Butcher, suppliers themselves have been placed under considerable financial stress given that they did not protect their positions and this in turn, may lead to further exposure to their own creditors and financiers.

Ithasbeenjustover20monthssincethePersonalPropertySecuritiesAct(Act)commencedon30Jan2012,andfromourobservations,thereisstillagenerallackofunderstandingbymanybusinessesandadvisorsontheimpactofthislegislation.Asaconsequence,losseshavebeensufferedduetoassetsnotbeingadequatelysecuredorprotected.

In this article, we will explore how businesses have been affected since the legislation came into effect and what steps can be taken by businesses in order to protect their assets.

The Act provided for the creation of a new national securities register, called the PPS Register and it replaced a number of state, territory and federal security registers. As a result, a number of security registers, including the ASIC Register of Charges and the Vehicles Securities Register have been closed. All lenders and financiers are now required to lodge their security interests over assets that have been pledged on the PPS register and the register will also deal with any variations to security interests and subsequent discharge.

The Act however, has deemed certain transactions to be security arrangements which are now required to be registered on the PPS Register such as:

• Goods that are supplied on credit, and subject to retentions of title;• Goods that are supplied on consignment; and • Assets that are leased or hired out to other parties, including

related entities.

Prior to the Act commencing, it was well established that suppliers could rely on their retention of title terms to reclaim any unpaid stock if the customer was placed into external administration. Suppliers who sold goods on consignment or parties who hired or leased out assets could comfortably take possession of their property in an insolvency event. The Act has now changed the rules. If businesses do not register such transactions on the PPS register, then they may lose title to the assets or goods in an insolvency event.

Some of the first casualties of the legislation were creditors of an independent meat retailer, Super Butcher, that was placed into administration shortly after the commencement of the Act. These creditors had supplied meat on either consignment or on retention of title terms, and almost all of the creditors failed to register their security interests over the goods supplied on the PPS register. As a result, they were unable to take possession of their goods upon the administrator’s appointment and ranked as unsecured creditors with regard to their claims. The fallout from the collapse of Super Butcher continued when two meat wholesalers, Ambrosia Meats and Harris Meats had to be placed into external administration as they were owed approximately $350,000 each by Super Butcher.

In the case of Maiden Civil (Maiden Civil v Queensland Excavation Services (QES) (2013) NSWSC 852 (1), Maiden Civil leased 3 Caterpillar excavators from QES. QES however failed to register the lease arrangement on the PPS register. Maiden Civil was subsequently placed into liquidation and the NSW Supreme Court found that, despite QES having legal title to the excavators, another financier was entitled to take possession of the excavators as it had the ability to exercise its security over those items given that the financier had registered its security on the PPS register. The Court also made some reference to

Personal Property Securities Act – a review

David Vasudevan Partner – Business Recovery & Insolvency Telephone (03) 8610 5542

4Critical Point Network

Financialmodelsareusedextensivelythroughoutmostorganisationstogeneratemanagementinformationandreports,tocostandpriceactivities,tobuildabusinesscasefornewprojectsorinitiatives,andtobudgetabusiness’netresultandcashflow.

Transactions involving professional practices – whether an acquisition, injection of capital or debt financing – require financial due diligence which considers factors specific to these businesses.

Professional practices include legal practices, accounting firms, medical practices, engineering firms, architecture firms and consultancy firms, to name just a few.

Satisfactory due diligence findings will normally be a required in order to proceed with the transaction and satisfy key stakeholders.

In our experience, there are three specific areas that can either provide added value to the transaction or create a stumbling block:

Revenue recognition Regardless of whether a professional practice is priced in reference to its revenue or earnings performance, the recognition of revenue is paramount.

Aggressive historical revenue recognition policies can lead to over-valuation as well as leaner post-acquisition revenue performance. Perhaps even more of an issue than aggressive (but consistent) revenue reporting policies are cases in which revenue recognition has been inconsistently applied, as unravelling the impact year on year becomes far more difficult.

Project billing or time-based recording using charge out rates can also create revenue recognition issues and the impact on profitability can be significant. When conducting due diligence, it is therefore important to understand the correlation between work-in-progress (WIP) and the ultimate billing event to determine if profit is being brought to account early.

Quality of earnings Underpinning revenue performance is typically EBITDA (earnings before interest, tax, depreciation and amortisation). Statutory financial statements are not created with the intention of splitting historical profitability between ‘normal maintainable earnings’ and ‘one-off items of income or expenditure’. Hence, further investigation is often required to understand the quality of reported profits.

The most common examples of profit distortions on revenue adjustments we come across in relation to professional practices include:

• Redundancies or reduction in staff numbers. While the one-off cost of the redundancy payment is often adjusted, it’s also important to consider the future earnings capacity of the business based on reduced staff levels.

• Provision releases, which clearly distort both the period in which the provision was accounted for, as well as the period in which the unrequired provision is released.

• Changes in provisioning policies, where this results in an approach which is materially more, or less, aggressive.

• Changes in methodology for valuing work-in-progress and the extent of provisioning/impairment adjustments carried out.

• Closure of offices where either the cost of closure or the loss of revenue can have a material impact on maintainable earnings going forward.

In smaller businesses, personal expenditure and commercial remuneration of the owners, together with market rental on owned buildings can also be a factor affecting earnings.

Working capital and cash flows Understanding the cash flows of any business is always essential. Cash flows provide an insight into key areas such as profitability, working capital cycle and the cash required to manage the business on a day-to-day basis, and ultimately disclose the cash return available to an owner or investor. Cash measurement carries less judgment than accounting policies for revenue and profit recognition and can therefore provide especially strong evidence as to whether the policies are appropriate to the business.

Understanding a business’ working capital and cash flow requirements is critical to judging if growth potential can be achieved, particularly in firms that have considerable ‘lock up’/ working capital. This information also provides the basis for the amount of capital, be it debt or equity, required to fund the acquisition and consummate its business plans, including the business’ ability to grow.

In conclusion, good financial due diligence aims to give a view of the underlying profits of the business which can be used as a basis to project future revenue, by giving a clear vision of the assets and liabilities of the business. Accounting is not a science and audited accounts contain many judgments. The purpose of financial due diligence is to provide insight into those judgments and to look further than the statutory accounts to understand the underlying profits and cash flows of the business.

Michael Sonego Partner – Transaction Services Telephone (03) 8610 5485

Getting behind the numbers Financial due diligence for professional practices

Michael Sonego is a partner of Pitcher Partners Melbourne and specialises in advising clients on buying and selling businesses, including conducting due diligence. Email: Michael.Sonego@pitcher.com.au

Pitcher Partners is a leading accounting firm servicing the middle market with a Transaction Services team focused on assisting you to help your clients grow.

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Why is the decision so important?We often receive queries about the merits of winding up an unwanted (but asset rich) company through a Members’ Voluntary Liquidation as opposed to the voluntary deregistration of the company. The wrong choice may prove to be very costly for the members.

Beware the tax aspectsDespite the increased initial cost, a Members’ Voluntary Liquidation may provide a more tax effective outcome for the members.

Tax implicationsThe relative tax benefits of liquidation may become apparent when a company has significant net assets that are represented in members’ equity by accumulated profits and capital reserves. The winding down of the company will inevitably require a distribution of these profits and capital reserves to members. Outside of a liquidation, these distributions will be fully taxable to members as dividends. However, a liquidator’s distribution is not subject to the ordinary tax provisions dealing with dividends. A liquidator’s distribution is dealt with under specific income tax provisions and the capital gains tax regime. In some circumstances this distinction will provide definite tax advantages for members.

When will a Voluntary Liquidation be beneficial?Two common situations where members may benefit on liquidation are as follows:

• Sharesacquiredbefore20September1985. The principal benefit arises where the company has gains that were

realised on the disposal of pre-CGT assets (i.e. assets acquired before

Voluntary solvent liquidation or deregistrationThe right decision can save your client millions!

20 September 1985). Such gains can be distributed to the relevant members tax free, via liquidation.

• AcompanywhichhasutilisedthesmallbusinessCGTconcessions. Often the sale of the business assets may qualify for a 50% CGT

exemption if certain criteria are satisfied. If this tax-free gain is distributed to members in the ordinary course, then it will be fully assessable as a dividend. By contrast, a liquidator is able to preserve a significant proportion of this tax concession for the benefit of members.

ExampleBeach House Pty Ltd was incorporated in 1982 with $2 in share capital. Neville and Joy were allotted one share each which they continue to hold. Neville and Joy lent $200,000 to the company to acquire a property in 1983. This property was sold recently for $700,000 realising a tax-free capital gain of $500,000. The company has approximately $500,000 in the bank after repaying the debt to members. Neville and Joy wish to wind-up the company.

Option 1 – Deregistration The company would need to distribute the cash to Neville and Joy prior to deregistration. All but $2 of this amount will be assessable as an unfranked dividend. A dividend of $500,000 will be liable for tax of up to $232,500 (based on the top marginal tax rate of 46.5%).Option 2 – Liquidation The capital gain may be distributed tax-free to Neville and Joy.

Pitcher Partners can perform Members’ Voluntary Liquidations for your clients on solvent entities and/or we can also assist you in winding down and voluntary deregistering unwanted companies.

Andrew Yeo Partner – Business Recovery & Insolvency Services Telephone (03) 8610 5190

Marcus Rodaughan Senior Manager – Business Recovery & Insolvency Services Telephone (03) 8610 5461

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CPN CONTACTS

MELBOURNEGess Rambaldi, Andrew Yeo or David Vasudevan Level 19, 15 William Street Melbourne VIC 3000Telephone +61 3 8612 9261 Facsimile +61 3 8610 5999 partners@pitcher.com.au

SYDNEYAnthony Elkerton Level 22, MLC Centre, 19 Martin Place Sydney NSW 2000Telephone +61 2 9228 2212 Facsimile +61 2 9223 1762 partners@pitcher-nsw.com.au

PERTHDaniel Bredenkamp Level 1, 914 Hay Street Perth WA 6000Telephone +61 8 9322 2022 Facsimile +61 8 9322 1262 partners@pitcher-wa.com.au

ADELAIDEMichael Basedow 160 Greenhill Road Parkside SA 5063Telephone +61 8 8179 2800 Facsimile +61 8 8179 2885 partners@pitcher-sa.com.au

www.pitcher.com.au

Pitcher Partners is an association of independent firms. Liability limited by a scheme approved under Professsional Standards Legislation.

Critical Point Network is a business of Pitcher Partners Advisors Limited ABN 27975255196. Critical Point Network is a registered trademark.

The material contained in this publication is general commentary only for distribution to clients of Pitcher Partners. None of the material is, or should be regarded as advice. Accordingly, no person should rely on any of the contents of this publication without first obtaining specific advice from one of the Partners of Pitcher Partners. Pitcher Partners, its Principals & agents accept no responsibility to any person who acts or relies in any way on any of the material without first obtaining such specific advice. © Pitcher Partners 2010 PrintPost Approved PP381827/0043

CPN is printed on paper Certified Carbon Neutral. With 55% recycled fibre it is FSC Mixed Source Certified, sourced from sustainable plantation wood, Elemental Chlorine Free and manufactured by an ISO 14001 certified mill.

ProfessionalAdvisors’Conference–25October

The Professional Advisors’ Conference is an all-day information conference hosted by the Critical Point Network. It provides solicitors and accountants with expert advice and assistance on a range of topical and relevant issues to improve the services you provide your clients and the knowledge you need to run a thriving practice.

Details of the upcoming Professional Advisors’ Conference are as follows:

Date Friday 25 October 2013Venue The Langham, 1 Southgate Avenue, SouthbankTime 8.30am – 4.15pm

Drinks Reception: 4.15pm – 5.15pmRSVP Please confirm registration by Wednesday 23 October 2013Location CPN Members $380*

Non Members $480* * Ticket price includes food and refreshments throughout the day along

with support material for all sessions. Group discount available for bookings of three or more guests (please note that discount offers will not be combined)

The conference will cover a range of topics, including our ‘regular’ tax stream of presentations along with topical issues. We are also pleased to have guest speaker, Simon Hammond, Director of Hammond Thinking delivering his entertaining keynote presentation on fears, frustrations and desires.

Conference brochures with session options and registration instructions will be sent out shortly!

CPNBreakfastBriefing-ATOComplianceProgram2013/14

Session 1Date Thursday 14 November 2013Time 7.15am for 7.30am start – 9.00am conclusionLocation Pitcher Partners, Level 19, 15 William Street, MelbourneCost Members $40 and Non-Members $60

Session 2Date Friday 15 November 2013Time 7.15am for 7.30am start – 9.00am conclusionLocation Pitcher Partners South East Office

80 Monash Drive, Dandenong SouthCost Members $40 and Non-Members $60

Invitations will be sent out in early October.

CPNFishingCharters

Friday15November2013 St Kilda Marina, Marine Parade, Melbourne (6.00pm – 9.00pm)Saturday16November2013St Kilda Marina, Marine Parade, Melbourne (10.30am – 1.30pm)Friday22November2013St Kilda Marina, Marine Parade, Melbourne (6.00pm – 9.00pm)Saturday23November2013 St Kilda Marina, Marine Parade, Melbourne (10.30am – 1.30pm)

Events to watch out for...