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December 2015
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Revenue from Contracts with Customers

Revenue from Contracts with Customers Revenue recognition has been a hot topic for the Financial Accounting Standards board (FASB) for a while now. The FASB has been trying to ensure that there is a level playing field when it comes to recognizing revenue. U.S. GAAP has been a complex, detailed, and disparate set of revenue recognition requirements for specific transactions and industries including, for example, software and real estate. As a result, different industries use different accounting for economically similar transactions.

In May 2014, the FASB issued Accounting Standards Update 2014-09, Revenue from Contracts with Customers, (FASB ASC Topic 606) representing the converged and clarified authoritative guidance issued as part of the joint project related to the principles for recognizing revenue. This is the culmination of a collaborative effort between the FASB and the International Accounting Standards Board (IASB) to converge IFRS 15, Revenue from Contracts with Customers, with U.S. GAAP.

The objective of the new guidance is to establish the principles to report useful information to users of financial statements about the nature, amount, timing, and uncertainty of revenue from contracts with customers.

The purpose of ASU 2014-09 is as follows:
  1. Remove inconsistencies and weaknesses in revenue requirements.
  2. Provide a more robust framework for addressing revenue issues.
  3. Improve comparability of revenue recognition practices across entities, industries, jurisdictions, and capital markets.
  4. Provide more useful information to users of financial statements through improved disclosure requirements.
  5. Simplify the preparation of financial statements by reducing the number of requirements to which an entity must refer.
The core principle for FASB ASC Topic 606, Revenue from Contracts with Customers, is that an entity recognizes revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services.

FASB ASC Topic 606, Revenue from Contracts with Customers, establishes principles for reporting useful information to users of financial statements about the nature, amount, timing, and uncertainty of revenue and cash flows arising from the entity’s contracts with customers.

This Topic is applicable to a contract only if the counterparty to the contract is a customer.

The guidance in ASU 2014-09 is effective for years beginning after December 15, 2016, including interim periods within those years for:
  • Public business entities
  • Not-for-profit entities that has issued, or is a conduit bond obligor for, securities that are traded, quoted, or listed on an over-the-counter market or exchange
  • Employee benefit plans that furnish or files financial statements with the SEC
Such entities cannot early adopt the guidance.

For all other entities (generally, nonpublic entities), the guidance in ASU 2014-09 is effective for years beginning after December 15, 2017, and interim periods within years beginning after December 15, 2018. Nonpublic entities may choose to adopt the guidance early, but not earlier than annual and interim reporting periods beginning after December 15, 2016, which is the effective date for public entities.

Companies using IFRS will be required to apply the revenue standard for reporting periods beginning on or after January 1, 2017 (early application is permitted).

Transition can be adopted using either the full retrospective approach or the modified retrospective approach.

Full retrospective approach. All prior reporting periods would be presented as though the new guidance had always been effective for retrospective application of a change in accounting principle. The date of the cumulative effect adjustment would be the start of the reporting period of the earliest period presented.

Modified retrospective approach. The cumulative effect of adopting the new guidance is recognized on the date of initial application. If this option is chosen, comparative periods prior to initial application are not restated. Entities using this approach would apply the guidance retrospectively only to those contracts that are not completed as of the initial application date.

Some contracts with customers may have no fixed duration and can be terminated or modified by either party at any time. Other contracts may automatically renew on a periodic basis that is specified in the contract. An entity shall apply the guidance in this Topic to the duration of the contract (that is, the contractual period) in which the parties to the contract have present enforceable rights and obligations.

FASB ASC 606-10-25-4

According to FASB ASC 606-10-05-4, an entity recognizes revenue in accordance with the core principle by applying the following steps:
  • Step 1: Identify the contract(s) with a customer
  • Step 2: Identify the performance obligations in the contract
  • Step 3: Determine the transaction price
  • Step 4: Allocate the transaction price to the performance obligations in the contract
  • Step 5: Recognize revenue when (or as) the entity satisfies a performance obligation
SEC Pay Ratio Cut Down

SEC Pay Ratio Cut Down Background

In August 2015, the SEC adopted a final rule that requires public companies to disclose the ratio of the compensation of its chief executive officer (CEO) to the median compensation of its employees. The new rule, mandated by the Dodd-Frank Wall Street Reform and Consumer Protection Act, provides companies with flexibility in calculating this pay ratio, and helps inform shareholders when voting on “say on pay.”

The new rule will provide shareholders with information they can use to evaluate a CEO’s compensation, and will require disclosure of the pay ratio in registration statements, proxy and information statements, and annual reports that call for executive compensation disclosure. Companies will be required to provide disclosure of their pay ratios for their first fiscal year beginning on or after January 1, 2017.

The rule addresses concerns about the costs of compliance by providing companies with flexibility in meeting the rule’s requirements. For example, a company will be permitted to select its methodology for identifying its median employee and that employee’s compensation, including through statistical sampling of its employee population or other reasonable methods. The rule also permits companies to make the median employee determination only once every three years and to choose a determination date within the last three months of a company’s fiscal year. In addition, the rule allows companies to exclude non-U.S. employees from countries in which data privacy laws or regulations make companies unable to comply with the rule and provides a de minimis exemption for non-U.S. employees.

The rule does not apply to smaller reporting companies, emerging growth companies, foreign private issuers, MJDS filers, or registered investment companies. The rule does provide transition periods for new companies, companies engaging in business combinations or acquisitions, and companies that cease to be smaller reporting companies or emerging growth companies.

Pay Ratio Disclosure Requirement

As required by the Dodd-Frank Act, the rule will amend existing executive compensation disclosure rules to require companies to disclose:
  • The median of the annual total compensation of all its employees, except the CEO;
  • The annual total compensation of its CEO; and
  • The ratio of those two amounts.
Filings Where Disclosure Is Required

Companies will be required to describe the information in registration statements, proxy and information statements, and annual reports that must already include executive compensation information as set forth under Item 402 of Regulation S-K. Companies will not be required to:
  • Disclose the pay ratio information in reports that do not require executive compensation information, such as current and quarterly reports.
  • Update their disclosure for the most recently completed fiscal year until the company files its proxy or information statement for its annual meeting of shareholders (or annual report for companies that do not file proxy or information statements for annual meetings), but not later than 120 days after the end of the fiscal year.
Companies Subject to the Disclosure Requirement

The disclosure requirement will apply to all companies required to provide executive compensation disclosure under Item 402(c)(2)(x) of Regulation S-K. Smaller reporting companies, foreign private issuers, MJDS filers, emerging growth companies, and registered investment companies would not be subject to the requirement.

A company subject to the pay ratio requirement would be permitted to omit from its calculation any employees obtained in a business combination or acquisition for the fiscal year in which the transaction becomes effective. The company would be required to identify the acquired business and disclose the approximate number of employees it is omitting.

Compliance Dates

Companies will be required to report the pay ratio disclosure for their first fiscal year beginning on or after January 1, 2017. A company that had not previously been a reporting company would be required to report the pay ratio disclosure for the first fiscal year following the year in which it becomes subject to the SEC’s reporting requirements, but not for any fiscal year commencing before January 1, 2017.
Planning for the New Overtime Pay Threshold

Planning for the New Overtime Pay Threshold Charles R. Goulding and Peter Saenz discuss how the new federal overtime pay threshold will affect businesses.

Accountants and financial advisors need to help their fast food, hospitality, and retail clients plan for federal increases in payroll costs. The Labor Department’s proposed rule for 2016 could potentially increase the salaried worker overtime standard to $50,440 and at the same time, hourly minimum wages are being increased in certain jurisdictions.

Current Rules

Current rules dictate that any employee whose yearly salary is under $23,660 is entitled to overtime pay if they work more than 40 hours in a week. This rule does not apply to workers that are classified as executive, administration, or professional employees. This rule makes it possible for say a manager at a fast food establishment earning over $23,660 a year, working 60 to 70 hours a week, to not be eligible for overtime pay. One reason for revamping overtime requirements is that the overtime threshold of $23,660 is lower than the poverty line for a family of four, which is at $24,008.

Potential Cost Increases

With the new law, businesses nationwide could be paying out as much as $1.3 billion more in payroll. These are not the only costs. The National Retail Federation estimates that administration costs associated with increasing overtime eligibility could cost employers as much as $874 million. This figure includes the cost of updating payroll systems, converting salaried employees to hourly, and implementing systems to track hours. Manager overtime cost will escalate payroll, but when coupled with increases in minimum wage, many fast food establishments and retail will confront very large payroll increases.

The table below illustrates the increased annual payroll expenses a fast food franchise owner of eight restaurants could be paying. This example assumes a minimum wage increase from $8 to $15 per hour, with 16 employees and 2 managers. The managers in this example have annual salaries of $48,000 and work an average of 10 hours of overtime a week.

Annual Payroll Example

Manager Over Time and $15 Minimum Wage

Before Regulation Change

After Regulation Change

Total Payroll

Payroll for One Store




Payroll for Eight Stores




The result for the franchise owner is an increase of $2,151,680 in annual payroll costs for his eight restaurants. This is all before considering additional benefit costs.

Psychological Effects

Some commentators are concerned about the psychological impact that the new overtime standards will have on managers. The new overtime policy will force many white-collar workers to start clocking in. Psychologically, many American workers may correlate clocking in as a downgrade even if they are making more money, due to overtime. Requiring managers and supervisors to punch in alongside their subordinates could delegitimize their authority to a certain extent and lead to disputes. There is a certain sense of pride that workers get from being able to manage their own time. This pride usually translates into higher commitment, which then leads to higher productivity.

Using Technology to Reduce Psychological Impact

One way to mitigate the adverse psychological effects of forcing workers to clock in is to incorporate Radio Frequency Identification (RFID) technology into employee time tracking systems. This technology uses radio waves that allow a tag to communicate with a reader to reveal the location of the RFID tag. RFID tags could be integrated into employee ID cards and RFID readers could be installed at the entrances and exits to buildings. Under this system, workers would be free to walk in and out of their workplace without having to clock in manually, while at the same time have the amount of time that they work accurately logged.


Labor laws have been enacted over the years to protect workers. When these laws are not adjusted for inflation, they lose their potency as the years go by. When these laws are modernized after being neglected for so long, the sudden cost increase can be difficult to manage. Advisors need to help their clients prepare for the currently proposed large cost increases.
IRS Announces New Technology Approach to Combat Tax Refund Fraud

IRS Announces New Technology Approach to Combat Tax Refund Fraud As the 2015 tax season approaches, the IRS continues to battle with a particularly concerning issue – how to solve the identity theft and tax return fraud filing issues that have cost so many honest taxpayers long delays in receiving their refunds in recent years. On October 20, 2015, IRS Commissioner John Koskinen conducted a Security Summit press briefing to give taxpayers an update on the enhancements the agency is implementing to better safeguard taxpayers against tax refund fraud.

The U.S. Government Accountability Office paid out an estimated $5.8 billion in fraudulent tax returns in 2013. In a number of press releases and public announcements in 2014, the IRS made clear that they don’t quite know how to contain the problem. Since then, however, they have begun to address the issue. As they mapped out a strategy in March 2015, one thing has become clear – this is not a battle the IRS can win singlehandedly.

As the Commissioner discussed in the latest press briefing, there are now 20 major service providers in the tax and financial industries helping the IRS in this effort. These include large tax preparation software providers like Turbo Tax and H&R Block. In addition, 34 states have signed a memorandum of understanding to collaborate in the efforts with even more states planning to sign in coming weeks.

As part of the initiative, the federal and state governments, as well as private industry contributors, have all agreed to strengthen safeguards at their respective levels of engagement and share data with each other so they can make more intelligent decisions about tax fraud prevention strategies. As the commissioner made clear in the briefing:
It’s critical for us to continue making progress in this area, because refund fraud related to identity theft has become a more complicated, serious threat to the nation’s tax system. Over the last few years, we’ve seen an increase in identity theft crimes being perpetrated by organized crime syndicates around the world. These criminals have been able to gather enormous amounts of personal data from sources outside the IRS. This makes protecting taxpayers more challenging and difficult.

As technology advances and innovations come to market, modern tax scams have become increasingly sophisticated. In order for the IRS to keep pace with the perpetrators, they must implement equally sophisticated solutions. Most of these solutions, as discussed by the commissioner in his press briefing, support a new, intelligent fraud detection system. Although the Commissioner was careful not to give criminals a roadmap to the new system, he did touch on some of the basics which include the following:
  • If multiple tax returns come from the same foreign internet address, the IRS will be alerted automatically.
  • If many tax returns are being filed from the same device, the IRS will be able to identify it.
  • The IRS will use metadata to identify trends which indicate suspicious activity.
  • The IRS can now see how long it takes to prepare a return online, from the time a person logs in, to when the return is filed electronically. If a tax return appears to be automatically generated by a machine, the IRS will be automatically alerted.
As for the private industry, they will play an important role in the initiative as well. Most of the efforts there involve more effective ways of identifying whether the electronic filer is actually the person entitled to the return. The brief by the commissioner mentioned the use of security questions and device recognition. It is also likely that, to some extent, the software industry will employ the use of big data analytics in a manner similar to the IRS as described above. With the new information sharing model described in the press briefing, there will now be multiple parties searching for suspicious activity so potential threats can be identified and then communicated across organizational boundaries.

Taxpayers have a role to play too. As part of the initiative, the IRS has created a group that will begin a public education campaign before tax season to share important information that will help taxpayers be proactive and protect themselves at tax time. Taxpayers as well as tax professionals can also educate themselves by participating in online educational courses such as Thomson Reuters’ course Tax Fraud Perpetrated by Identity Theft.
Providing Tax and Accounting Advice for University Business Start-Ups

Providing Business Tax & Accounting Advice for 3D Printer Purchase Decisions Charles R. Goulding and Peter Saenz discuss the increasing number of university startup businesses and the integral part they play in the U.S. economy.

In today’s economy, with fewer established company job opportunities, university students are creating their own jobs with start-ups. Campus incubators are one of the many factors that attribute to this trend. Universities account for around one-third of business incubators in the United States. Universities such as the Massachusetts Institute of Technology with its $100,000 Entrepreneurship Competition have helped to create 130 start-ups and 2,500 jobs. There is a growing opportunity in providing university start-ups with tax, accounting, and business advice.

Many founders of university start-ups are from the burgeoning Science, Technology, Engineering, and Math (STEM) fields. Individuals from these backgrounds may have great ideas for new businesses however, typically do not have accounting and tax experience.

Choosing a Start-Up Advisor

One of the best ways universities can aid start-ups in addressing business concerns is to introduce start-ups to experienced accounting firms and advisors, especially firms with flexible fee structures. Firms and advisors with flexible fee structures work by charging low or sometimes no fees in the beginning and then increase fees later when companies begin to generate a profit. Many accounting firms provide this kind of service for promising start-ups because they know that it takes some time for a newly formed company to become profitable. Accounting firms and advisors offer flexible fee structures as a strategic way to build long-term relationships with newly formed businesses that have strong potential for growth.

Keeping Track of Capital Contributions

Advisors should endeavor to identify all capital contributions. With these types of start-ups, capital contributions include and are not limited to:
  1. Personal contributions
  2. Friends and family contributions
  3. Credit card funding
  4. University Grants
Properly categorizing capital contributions is important for multiple reasons. Accurate accounting will keep from inadvertently classifying capital contributions as gross receipts that might trigger income taxes or sales tax. In addition, accurate capital contributions are crucial for establishing “tax basis” that may reduce future income taxes on distributions or business income. Recording capital contributions in the beginning stages also allows founders to keep track of how much equity they have invested in their start-up and helps to mitigate equity disputes in the future.

Managing Payroll Tax

Many founders may be “do-it-yourselfers” and think that with a little research and hard work they will be able to navigate the complexities of payroll tax filing successfully. This may not be the best approach because every hour spent on trying to learn and execute support functions takes away time from core business activities and future growth of the business. Another factor that makes it impractical for start-ups to undertake the responsibilities of payroll is that the state and federal laws associated with payroll are always changing. It can be easy to make mistakes or miss deadlines. Failure to report payroll tax filings in an accurate and timely manner can result in large penalties.

A practical option for start-ups is to seek out a third party payroll processer or even a Professional Employer Organization (PEO) to manage payroll and compliance. A PEO is a company that, for tax purposes, employs the workers of several other businesses and provides human resource related functions for those companies. PEOs perform employee benefit administration, payroll, recruiting, employee training, worker compensation administration, and safety and risk management. The main advantage of a PEO is that it allows the start-up to focus on future growth while at the same time address the complexities of human resources.

PEOs can also help to provide start-ups with more attractive benefits packages. PEOs are often larger companies, so they can negotiate with insurance companies for better benefits at cheaper prices. University start-ups can take advantage of these superior benefits to attract and retain talented employees.

Research & Development Tax Credit

Start-ups often generate an opportunity for the federal Research and Development Tax Credit. It is important to calculate the R&D credit on a contemporaneous basis. Even in initial tax loss years, the credit can be a deferred asset that can be used to offset future perspective tax owed by the company.


The number of university start-ups is on the rise. It is important to provide these start-ups with sound business advice. It is recommended for accountants and tax professionals to over communicate when dealing with university start-ups. Professionals working with start-ups can play a valuable role in this growing sector.
Providing Tax and Accounting Advice for the Reinvigorated Commercial Airline Industry Supply Chain

Providing Tax and Accounting Advice for the Reinvigorated Commercial Airline Industry Supply Chain In this article, Charles R. Goulding and Peter Saenz present the resurgence of the commercial airline industry and future trends of the airline industry supply chain.

The United States has the oldest and deepest commercial airline supply chain in the world. After decades of losses, the reorganized commercial airline industry now has three large, financially strong U.S. carriers – Delta, American, and United. In addition, regional U.S. carriers Southwest and JetBlue are also financially strong.

Perhaps more importantly, some of the world’s largest airlines now operate outside of the United States, including in Asia and the Emirates, and are growing even more rapidly than U.S. airlines.


Growth Impact

This level of industry growth impacts the entire airline industry supply chain. Increased orders for new planes ripple through the entire supply chain. Existing aircraft bodies themselves can last for decades, however sustained growth generates engine and component replacements including landing gear, tires, and seats. Existing aircraft can be updated to today's avionics and the seat replacements can include today's entertainment systems and accompanying audio visual systems.

Tax and accounting advisers have the opportunity to provide a variety of airline supply chain growth related services.

Financial Statements and Loans

Expanding aircraft suppliers need working capital and facility expansion financing which often requires regular, timely, and typically a higher level of financial statement preparation.  To get lenders comfortable with the new industry environment, advisers should communicate recent positive industry trends to the lending community.

Equipment Purchases

A strong commercial airline supply chain needs new machine tools and other equipment.  Today's advanced machine tools provide the precision and quality necessary in this industry.  The aircraft industry has become the leading purchaser of new 3D printers for both original equipment manufacturing (OEM) and replacement parts.

Regulated Industry

For obvious safety and reliability reasons, the airline parts and equipment business is highly regulated.  U.S. suppliers have made major investments in time and money to achieve the certifications and approvals necessary to supply and serve this industry. 

Informed advisers can help the U.S. airline supply chain industry leverage its existing intellectual property and position in this industry and capture a large percentage of this new growth in the U.S.
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