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November 2014
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SSARS No. 21: Clarification and Recodification of Accounting and Review Services
SSARS No. 21: Clarification and Recodification of Accounting and Review Services CPAs in corporate tax and/or accounting need to be aware of significant changes and revisions to standards issued for reviews, compilations and engagements to prepare financial statements. Requirements can have an impact on the services of hired public accounting firms and the financial statements as well as related reports issued by these firms.

Statement on Standards for Accounting and Review Services No. 21, Statements on Standards for Accounting and Review Services: Clarification and Recodification, (SSARS No. 21) was issued in October, 2014 and is effective for engagements on financial statements for periods ending on or after December 15, 2015 (early implementation is permitted).

The purpose of SSARS No. 21 is to clarify and revise the existing standards for reviews, compilations, and engagements to prepare financial statements as a result of the ARSC Clarity Project which was the endeavor of the AICPA’s Accounting and Review Services Committee’s (ARSC) to redesign the standards so they would be easier to read, understand, and apply.

SSARS No. 21 is structured with the following four sections:
  • Section 60, General Principles for Engagements Performed in Accordance With Statements on Standards for Accounting and Review Services
  • Section 70, Preparation of Financial Statements
  • Section 80, Compilation Engagements
  • Section 90, Review of Financial Statements
Section 60, General Principles for Engagements Performed in Accordance with Statements on Standards for Accounting and Review Services, includes requirements and guidance on:
  1. Ethical requirements
  2. Professional judgment
  3. Conduct of the engagement in accordance with SSARSs
  4. Engagement level quality control
  5. Acceptance and continuance of client relationships and engagements
This section also requires the accountant to agree upon the terms of the engagement with management or those charged with governance, as appropriate, which must be documented in an engagement letter or other suitable form of written agreement and signed by both the accountant’s firm and management or those charged with governance. This substantive change in signature requirement is intended to better ensure that management has read the letter and understands the terms of the engagement.

Section 70, Preparation of Financial Statements, is applicable when the accountant is not in public practice. This section does not require a report, even when the financial statements are expected to be used or provided to a third party. Section 70 requires either a legend on each page of the financial statements stating that no assurance is being provided or a disclaimer.

The substantive changes in Section 80, Compilation Engagements, include the requirement for a report for all compilation engagements. The compilation report is now streamlined to differentiate from assurance (review and audit) reports consisting of one paragraph with no headings. However, additional paragraphs are required when:
  • The financial statements are prepared in accordance with a special purpose framework (i.e., tax, cash, modified cash, etc.)
  • Management elects to omit substantially all disclosures required by the applicable financial reporting framework
  • When the accountant’s independence is impaired
  • There is a known departure from the applicable financial reporting framework
  • Supplementary information accompanies the financial statements and the accountant’s compilation report thereon
Section 90, Review of Financial Statements, was primarily a clarity redraft as a result of SSARS No. 21. This section may be applied to historical financial information other than historical financial statements, such as specified elements, accounts or items of a financial statement; supplementary information; required supplementary information; and financial information included in a tax return. Section 90 addresses the need for an emphasis-of-matter or other-matter paragraph in the accountant’s review report relating to specific circumstances including:
  • Financial statements prepared in accordance with a special purpose framework
  • A changed reference to a departure from the applicable financial reporting framework when reporting on comparative financial statements
  • Reporting on comparative financial statements when the prior period is audited
  • Reporting a known departure from the applicable financial reporting framework that is material to the financial statements
  • Reporting when management revises the financial statements for subsequently discovered facts that became known to the accountant after the report release date and the accountant’s review report on the revised financial statements differs from the accountant’s review report on the original financial statements
  • Supplementary information that accompanies reviewed financial statements and the accountant’s review report thereon
  • Required supplementary information
Share-Based Payments When Performance Target Could Be Achieved after Requisite Service Period

Share-Based Payments When Performance Target Could Be Achieved after Requisite Service Period Background

On June 19, 2014, the FASB issued ASU 2014-12, Accounting for Share-Based Payments When the Terms of an Award Provide That a Performance Target Could Be Achieved after the Requisite Service Period. ASU 2014-12 revises the accounting for stock compensation tied to performance targets and addresses an issue that was not covered in U.S. GAAP.

Entities commonly issue share-based payment awards that require a specific performance target to be achieved in order for employees to become eligible to vest in the awards. Examples of performance targets include an entity attaining a specified profitability metric or selling shares in an initial public offering. Generally, an award with a performance target also requires an employee to render service until the performance target is achieved. In some cases, however, the terms of an award may provide that the performance target could be achieved after an employee completes the requisite service period. That is, the employee would be eligible to vest in the award regardless of whether the employee is rendering service on the date the performance target is achieved.

Current U.S. GAAP does not contain explicit guidance on how to account for those share-based payments. Many reporting entities account for performance targets that could be achieved after the requisite service period as performance conditions that affect the vesting of the award and, therefore, do not reflect the performance target in the estimate of the grant-date fair value of the award. Other reporting entities treat those performance targets as nonvesting conditions that affect the grant-date fair value of the award. This ASU is intended to resolve the diverse accounting treatment of those awards in practice.

The amendments require that a performance target that affects vesting and that could be achieved after the requisite service period be treated as a performance condition. A reporting entity should apply existing guidance in FASB ASC 718, Compensation — Stock Compensation, as it relates to awards with performance conditions that affect vesting to account for such awards. The performance target should not be reflected in estimating the grant-date fair value of the award. Compensation cost should be recognized in the period in which it becomes probable that the performance target will be achieved and should represent the compensation cost attributable to the period(s) for which the requisite service has already been rendered. If the performance target becomes probable of being achieved before the end of the requisite service period, the remaining unrecognized compensation cost should be recognized prospectively over the remaining requisite service period. The total amount of compensation cost recognized during and after the requisite service period should reflect the number of awards that are expected to vest and should be adjusted to reflect those awards that ultimately vest. The requisite service period ends when the employee can cease rendering service and still be eligible to vest in the award if the performance target is achieved. As indicated in the definition of vest, the stated vesting period (which includes the period in which the performance target could be achieved) may differ from the requisite service period.

Effective Date and Transition

For all entities, the amendments in this ASU are effective for annual periods and interim periods within those annual periods beginning after December 15, 2015. Earlier adoption is permitted. The effective date is the same for both public business entities and all other entities. Entities may apply the amendments in this ASU either (a) prospectively to all awards granted or modified after the effective date or (b) retrospectively to all awards with performance targets that are outstanding as of the beginning of the earliest annual period presented in the financial statements and to all new or modified awards thereafter. If retrospective transition is adopted, the cumulative effect of applying this ASU as of the beginning of the earliest annual period presented in the financial statements should be recognized as an adjustment to the opening retained earnings balance at that date. Additionally, if retrospective transition is adopted, an entity may use hindsight in measuring and recognizing the compensation cost.
STEM Education Trends and the R&D Tax Credit

STEM Education Trends and the R&D Tax Credit Charles Goulding and Adam Starsiak of R&D Tax Savers discuss the implementation of STEM education, the skills gap, and the nation’s efforts towards increasing STEM programs.

The Great Recession has shifted growing areas of our economy towards science, technology, engineering and mathematics (STEM). With this shift comes new opportunities for companies to invest in research and development activities and take advantage of the Research and Development Tax Credit.

The R&D Tax Credit

The Research and Experimentation Tax Credit, or the R&D Tax Credit, enacted in 1981 and part of Internal Revenue Code Section 41 allows a credit of 13% of eligible spending for new and improved products and processes. Although the credit expired December 31, 2013 the consensus is that it will most likely either be extended or made permanent.

"The Skills Gap"

The skills gap is an employment and prosperity problem that strongly suggests that America currently struggles to fill top positions in science, technology, engineering, and mathematics. It is reported that the U.S. has over 4 million unfilled jobs due to lacking desired skill levels in STEM-related fields — a number partly supported by the Brookings Institute's often-cited findings from a study of aggregated lists of job openings.

The result has been a strong push towards reforming education in the 21st century; with universities, multiple levels of U.S. government and commercial businesses, and foundations pushing forward to change education.

STEM R&D Opportunities

The White House and the Department of Education have already begun initiatives to address the problem from the public end:
  • STEM Innovation Networks: $150 million for local educational agencies.
  • Effective Teaching and Learning: STEM $150 million for funding partnerships between local educational agency and institutions of higher learning.
  • STEM Teacher Pathways: $80 million for recruiting and training 100,000 excellent STEM teachers.
  • STEM Master Teacher Corps: $35 million for the creation of a corps of leaders and educators to improve STEM education.
  • STEM Virtual Learning Network: $5 million for creating a primarily online professional learning community.

Many state universities have created or subscribe to a multitude of STEM initiatives. For example, State University of New York at Stony Brook has 22 STEM-related programs to help develop the quality and diversity of STEM programs. Many programs form partnerships between high schools and colleges to enrich the education of young people to drive them towards and support them in achieving more in STEM fields. They also provide services like scholarships, academic and career advisement, and research and internship opportunities.

These programs include S-STEM, which provides scholarships to students in engineering and applied sciences; STEP, which provides funding for underrepresented and income-eligible high school students for entry into STEM programs; and C-STEP, a collegiate program which provides funding to increase the number of underrepresented minorities and income eligible students pursuing degrees in STEM fields. These programs are funded from different levels of government programs as well as commercial programs.

STEM programs that foster diversity and access to collegiate STEM programs while providing greater access to resources and tools for education have proven successful at increasing enrollment, grade-point averages, and access to graduate programs in STEM fields. Through advancing access and increasing performance in these fields, innovation at the university and commercial level are both expected to increase, driving new products, markets, and advancements.

Over time, the increased focus on STEM education should result in an educated population that is better prepared for innovation and will make greater use of the R&D Tax Credit.
Sharp Fall in Oil Prices: Tax and Economic Impacts

Charles Goulding of R&D Tax Savers discusses the recent drop in oil prices and the possible implications on tax and other economic sectors.

Oil prices have quickly fallen as of October 2014 to 44 month lows. As seen in the chart below, which illustrates the average prices for the past four years, 2014 gas prices have significantly dropped.

CHART: Average prices for the past four years, 2014 gas prices have significantly dropped

Tax Impact

The most direct impact is the collection of federal highway and state taxes at the retail gasoline pump. The federal highway use tax, applicable to highway motor vehicles with a gross weight of 55,000 pounds or more, is 18.3 cents per gallon and 24.4 cents per gallon for diesel fuel. Federal gasoline taxes are used as the primary funding mechanism for highway infrastructure projects and this funding had been declining from steadily decreasing gasoline purchases. In the face of the country’s crumbling large infrastructure, this method of funding highways was already viewed as inadequate. Lower fuel prices and increased near term, vehicle-related fuel consumption should somewhat help the highway trust fund. However, in the long run the consensus is that the highway use tax is inadequate for America's needs and should be given thought as to alternative funding methods.


For many consumers, a major reduction of prices at the pump is economically equivalent to a tax refund and should stimulate consumer spending particularly at the retail level.

Trucking and Logistics

Fuel prices are a major cost for trucking and logistics companies and this is a welcomed cost reduction, particularly during the year-end holiday period which is the busiest time of the year.

Air Travel and Hospitality

After labor costs, fuel costs are this industry’s biggest variable cost. Virtually all of the major carriers are now operating post bankruptcy and have controlled many of their other costs. Hopefully these important cost containments will help the industry better weather a more challenging global economic environment.

Chemicals and Plastics

Oil is major raw material for products in these industries. Companies in these industries have already been enjoying a U.S. economic resurgence and competitive advantage from lower fuel costs in the U.S. Further oil price declines should help maintain this competitive cost advantage.

Electric Vehicles

Lower gasoline prices will mostly slow the introduction of electric vehicles (EVs). However, EV technology, including the number of charging stations, is steadily improving and the industry should be better positioned when the inevitable oil price cycle changes and reverts to higher prices.

A major swing in a core commodity’s pricing creates winners and losers. In the short run, a major decline in fuel prices should benefit most Americans.
Alternative Energy Tax Credit Intensive Utility Spinoffs

Charles Goulding and Andrea Albanese of R&D Tax Savers discuss the emergence of yield co’s and their role in alternative and clean energy projects.

Recently, multiple leading utilities have spun off alternative energy subsidiaries. Due to their higher after tax credit cash flow, these new entities are sometimes called yield co’s. Some of the most popular clean energy assets included in these entities are wind, utility scale solar generation, solar P.V., and natural gas electricity generation.

The two leading utilities that have garnered the most media attention are NRG Energy, Inc. with its spinoff NRG Yield Inc., and NextEra Energy (FPL) with its spinoff of NextEra Energy Partners, LP. NRG energy was the first mover in this area and is famous for its contrarian CEO who embraced the conversion to alternative energy rather than fighting the tide like many traditional utilities.

Florida Power and Light (FPL), the precursor to NextEra Energy, invested in its first wind project back in 1998. It should be noted that these spinoffs often invest in a wide geographical range of projects often well outside the utility parent’s rate payer location. Other renewable energy spinoffs include Pattern Energy Group, Terraform Power, and Abengoa Yield, a clean energy spinoff from a Spanish multinational that listed in the U.S. in June 2014. The belief is that renewable energy portfolio standards that mandate higher levels of alternative energy generation in many jurisdictions will further buttress the opportunities for these entities.

CHART: Alternative Energy Tax Credit Intensive Utility Spinoffs
The charts illustrate the NextEra Energy, Inc. NRG Energy, Inc. yield co’s.

The proffered economic justification for these spinoffs is that they will trade at higher multiples than their utility parents and thereby increase overall shareholder value on a combined entity basis.

In addition to the management of the alternative energy, yield co's can focus on developing and acquiring additional clean energy assets. For example, on August 24, 2014 NRG Yield Inc. acquired the Alta Wind Energy Center, located in the Tehachapi Mountains of California for $870 million. The Alta facility is the largest wind facility in the nation. In addition to the yield co's, Berkshire Hathaway, Warren Buffet’s flagship company, has been focusing on tax credit enhanced alternative energy investments and has amassed a $15 billion dollar portfolio that he recently indicated he will be expanding.

The growth of both publicly traded yield co's and Warren Buffet's acquisitions perform an important role in that they allow wind and solar project developers an opportunity to exit mature projects and obtain the funding for developing new projects. Many leading financial companies that would have served as tax equity partners and provided funding for these projects before the economic down turn, have now been constrained from doing so. As the economic environment shifts, it creates an opportunity for alternative funding sources to step in and fill the gap.
Gun Manufacturers Confront Constrained Lending Market

Gun Manufacturers Confront Constrained Lending Market Charles Goulding of R&D Tax Savers discusses the recent decision of lenders to deny funding to U.S. gun manufacturers and their suppliers, and the subsequent impact for accountants and financial advisors.

Recently, many leading lenders have decided as matter of policy that they do not want to lend money to U.S. gun manufacturers and their component suppliers. Accountants and financial advisors servicing this industry need to be aware of these restricted bank lending underwriting standards since this is very large industry within the United States. There are of course many legitimate uses for firearms including military, police, gun club, and hunting usage. The U.S. gun industry is estimated to have a $32 billion per year impact on the economy and employs over 200,000 people.

The U.S. Gun Industry Has an Extensive Supply Chain

The U.S. gun industry supply chain includes numerous suppliers, such as gun components, encompassing a wide variety of both metal and wood products. Chemicals are used to bathe and finish the metal and wood elements. Ammunition and clips are large volume replacements items. The gun components are supplied to gun manufacturers who assemble the firearms. The gun manufacturers are large purchasers of expensive, high-tolerance, computer controlled machine tools. In addition, the very essence of gun products and ammunition requires durable customized packaging and guns are sold through trade shows, gun shops, sporting stores, and big box retailers.

Actual Business Example

Recently one of our clients, a large, well-capitalized machine shop that supplies high-tolerance parts to a variety of industries, was preparing to finance an expensive machine tool that was ordered from Germany with a long lead time related to the customized nature of the machine. Our client’s machine shop supplies a few major vertical market product categories including gun components, aerospace, textile machines, and architectural metals. The new machine tool would be used for all product lines. This was normally a routine financing transaction for the company. Our client, when getting ready to conclude the purchase, was shocked to learn that its regular major bank of over 50 years would not finance the transaction due to the company’s regular sales to a leading recreational gun manufacturer. The good news is that due to our client’s strong financial position, another lender stepped in and provided financing.

Business Planning

Accountants and advisors to gun supply chain companies need to understand whether their usual bank now has a policy that would preclude lending. Growing businesses are always advised to maintain good banking relationships and it takes some time and effort to educate a new lender about your business. Alternative lenders are typically available and other options may include non-bank lenders and vendor financing including leasing. Typically, advanced manufacturing machine tools are coming from non-U.S. manufacturers particularly Japan and Germany so foreign owned lenders may be a logical choice.
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