Welcome to your July/August issue of Today’s CPA. This is my first chair’s message, which is special to me because my involvement in TXCPA began when I was invited to serve as a member of the TXCPA Editorial Board. I have served in many different roles for the past 20 years, at both the state level and for TXCPA Houston.
I am grateful to have been introduced to volunteer leadership with TXCPA by originally helping steer the direction and content for this magazine.
My time as TXCPA Chair comes at a particularly exciting time for an accounting educator like me. You’ve no doubt read and heard about TXCPA’s commitment to growing the CPA pipeline and our multiyear CPA Pipeline Strategy that launched
CHAIR
Mohan Kuruvilla, Ph.D., CPA
PRESIDENT/CEO
Jodi Ann Ray, CAE, CCE, IOM
EDITORIAL BOARD CHAIR
Jennifer Johnson, CPA
STAFF
MANAGING EDITOR
DeLynn Deakins, MBA
ddeakins@tx.cpa
972-687-8550
800-428-0272, ext. 8550
“The talent challenges are impacting all of us – from employers to educators – and I am encouraged by the way our profession is committed to reversing the trends
in 2022-2023. This past May, AICPA’s National Pipeline Advisory Group (NPAG) released a draft report with proposed profession-wide solutions to tackle the talent shortage and attract more people to a rewarding career in accounting.
At the Annual Meeting of Members in Frisco, Texas at the end of June, our agenda included time devoted to discussing how we can be a part of the solution and incorporate NPAG’s proposals into our own plans and actions. The talent challenges are impacting all of us – from employers to educators – and I am encouraged by the way our profession is committed to reversing the trends and how our members are pledging to share the many ways they benefit from being CPAs.
I am honored to serve as your TXCPA Chair as we navigate the pipeline challenges and other critical professional is-
COLUMN EDITOR
Don Carpenter, MSAcc/CPA
WEB EDITOR
Wayne Hardin, CDMP, PCM® whardin@tx.cpa
CONTRIBUTORS
Melinda Bentley; Kenneth Besserman; Holly McCauley; Shicoyia Morgan; Craig Nauta; Kari Owen; John Ross; April Twaddle
CHIEF OPERATING OFFICER
Melinda Bentley, CAE
CLASSIFIED
DeLynn Deakins
Texas Society of CPAs 14131 Midway Rd., Suite 850 Addison, TX 75001
sues together. You can learn more about my background and vision in the cover story, and I welcome your feedback throughout the year if there is anything TXCPA can do to help support you or add value to your membership.
I look forward to serving with you!
Mohan Kuruvilla, Ph.D., CPA-Houston TXCPA Chair
Let’s Connect!
Drop me a note at chair@tx.cpa
Baria Jaroudi, CPA-Houston; Elle Kathryn Johnson, CPA-Houston; Jennifer Johnson, CPA-Dallas; Joseph Krupka, CPA-Dallas; Lucas LaChance, CPA-Dallas, CIA; Nicholas Larson, CPA-Fort Worth; Anne-Marie Lelkes, CPA-Corpus Christi; Bryan Morgan, Jr, CPA-Austin; Stephanie Morgan, CPAEast Texas; Kamala Raghavan, CPAHouston; Amber Louise Rourke, CPABrazos Valley; Nikki Lee Shoemaker, CPA-East Texas, CGMA; Natasha Winn, CPA-Houston.
DESIGN/PRODUCTION/ ADVERTISING
Media By Design, LLC
Design: Sherry Gritch
TWill Others Follow BDO’s Lead to Attract and Retain Staff?
he shrinking number of new entrants into the accounting profession and the number of those leaving the profession in the post-pandemic years has been widely reported by the business press. In addition to the perception that the degree and certification make for difficult qualification, the starting compensation for entry level accountants has failed to keep up with competing majors such as finance.
KEY TERMS
Employee acquistion and retention
BDO’s ownership shifted to shareholders and a $1.3 billion debt was arranged to create an ESOP trust managed by a thirdparty trustee. This debt funded the purchase of shares from former partners, which were then allocated to employees based on their salaries. BDO can deduct these contributions and the interest on the debt for tax purposes.
Traditional partnership model vs. Employee Stock Ownership Plan (ESOP)
In this environment, BDO USA announced last year that it had implemented an Employee Stock Ownership Plan (ESOP) to distribute the ownership of the firm across its employee base. This is a distinct break from the traditional partnership models that have governed the accounting profession for years.
Employee motivation
Prior to BDO’s departure from the standard, accountants faced a demanding career path, aiming for a partner position that only one in 50 achieve, causing many to leave public accounting early. The partnership structure also presents tax complications, as partners are taxed at higher personal rates compared to the 20% corporate rate and state tax returns must be filed for each partner’s profit allocation in every state the firm operates. This model can lead partners to prioritize short-term profits over long-term growth.
BDO has shifted away from this model, placing ownership in the hands of its 10,000 employees. This is not entirely unprecedented. Redpath and Company used a Subchapter S structure for a similar change 20 years ago, followed by other small firms. However, BDO’s decision is notable as it is the 6th largest accounting firm in the United States.
To implement the ESOP, BDO converted from a limited liability partnership to a professional corporation (PC), a structure reserved for licensed professionals like accountants, attorneys and engineers. In a PC, ownership is in shares and individuals are liable for their own negligence but not of other owners.
Details of BDO’s ESOP are not fully disclosed, but typically participants vest in shares similarly to a 401(k) plan. Vesting can occur either on a three-year cliff basis or a five-year graded schedule. Payouts, generally in cash, are triggered by retirement, death or disability, based on the shares’ fair market value.
Shares repurchased from employees’ accounts can be reused for future awards, with payouts as lump sums or equal payments over up to five years. Extended payout periods apply to balances above IRS-set amounts.
Since “partners” will remain the more highly compensated employees in the new BDO model, they’ll receive the largest ESOP allocations, but now non-partner employees also have a stake in the business’s success. If BDO prospers, ESOP participants’ accounts increase in value, aligning interests across all staff levels.
The ESOP motivates employees to stay with BDO, rewarding longevity with annual share allocations and allowing employees to benefit from the firm’s long-term success. Only time will tell if other large and mid-market firms consider the ESOP structure, but at a minimum, one can assume they will be monitoring the impact it has on BDO’s success.
The 2024 Election
and the Upcoming 2025 Legislative Session
The 89th Session of the Texas Legislature will begin on January 14, 2025, but before we get there, the citizenry of Texas must continue its journey through the never ending 2024 election. In recent months, the Texas House of Representatives has seen intense election battles, with many incumbents challenged, statewide officials endorsing challengers and significant outside funding.
The primary election and runoff drastically changed the Texas House political landscape. In March 2024, 10 incumbent Republican members were defeated, and another eight were pushed into runoffs, including House Speaker Dade Phelan.
Having the sitting House Speaker come in second in a primary is seismic. The Speaker faced heavy opposition from Lt. Governor Dan Patrick, Attorney General Ken Paxton and former President Donald Trump.
On May 28, Phelan narrowly won by just over 350 votes. However, several of his key legislative allies lost in the runoffs. Additionally, other close associates either lost in the March primary or retired. With many new House members being anti-
Phelan, maintaining his speakership will be challenging.
With the general election set for 2024, Republicans will maintain control of the Senate and House, though Democrats might gain three to six seats due to new voters and demographic changes in some districts.
TXCPA will continue to monitor the general election, build relationships with new House members and reengage with legislative allies to prepare for the 2025 session. The new House may challenge business groups with priorities like school choice, property tax reductions, and conflicts between the House Speaker and Lt. Governor.
TXCPA will remain vigilant and focus on issues such as the CPA pipeline and potential legislative changes, artificial intelligence regulations, the public information act, and increasing licensing threats, which include moves towards universal licensing models and weakening regulatory boards, a change that could impact CPA mobility.
As we embark on another legislative session, TXCPA and its government relations team would like to hear from you about legislative issues that are important to you and the profession. Please reach out and let us know your thoughts.
KEY POINTS TO CONSIDER
2025 Legislative Session: Begins January 14, 2025.
2024 Election Turmoil: Numerous challenges to incumbents, heavy funding and campaigning.
Primary Outcomes: 10 incumbent Republicans lost in March; 8 went to runoffs.
House Speaker Runoff and Leadership Losses: House Speaker Dade Phelan narrowly won his runoff and several of his allies lost their elections or retired.
5. New House Dynamics: Many new anti-Phelan members complicate governance.
6. Republican Control: Republicans retain Senate and House control; exact split uncertain.
7. Democratic Gains: Expected 3-6 seat increase due to demographic shifts.
8. TXCPA's Focus: Monitoring elections, building legislative relationships and addressing CPA profession concerns.
9. Important Issues: CPA pipeline, AI regulation, public information and licensing threats.
10. Member Engagement: TXCPA seeks your feedback on legislative priorities. Contact Kenneth Besserman at kbesserman@tx.cpa
BY KENNETH BESSERMAN, Director of Government Affairs and Special Counsel.
Contact him at kbesserman@tx.cpa.
CYBER INSURANCE: What
It Is, How It Works and Why You Need It
Every 40 seconds, a cyberattack occurs somewhere in the world. In the average time it takes to read this article, 10 to 15 attacks will have happened on global networks and servers.
That equates to 2,220 global attacks per day, according to Security Magazine1. That’s more than 800,000 a year.
Not only is the frequency of attacks on the rise, so is the cost. IBM estimated the average global cost of a data breach to be $4.45 million2. That marked a 15% increase over three years.
The damage adds up quickly. Victims of cyberattacks incur many of the following expenses:
• Infrastructure damage;
• Incident communication to clients, employees and stakeholders;
• Identity restoration for impacted parties;
• Network interruption;
• Lost revenue;
• Inability to fulfill contracts;
• Security enhancements;
• Litigation costs and attorney fees;
• Regulatory penalties;
• Loss of intellectual property and clients;
• Ransom payments to hackers.
BIG OR SMALL, HACKERS ATTACK ALL
The IBM report also noted the financial sector ranked second in sustaining damage from attacks. Only health care suffered more. Accounting Today reported a 300% increase in cyberattacks on accounting firms3 since the start of the COVID-19 pandemic in 2020.
Hackers target accounting firms of all sizes. The following incidents have occurred:
• Last year, three of the Big Four accounting firms were among 500 targets of a global ransomware attack4
• In November 2022, a Minnesota accounting firm with 270 employees suffered a breach5 that compromised Social Security numbers and other sensitive data.
• Last year, Accounting Today6 reported a malware attack on a small CPA firm in Georgia. An employee clicked a malicious link, encrypting the firm’s data. They paid a $450,000 ransom to recover their files.
Most small and medium-sized businesses could only survive for a week7 if they suffered a severe cyberattack. Accounting firms no longer have to assume all of the risk.
HOW CYBER INSURANCE WORKS
Cyber insurance, also known as cyber risk or cyber liability insurance, is a fairly new type of standalone policy covering losses from cyberattacks, including breaches or losses of confidential information.
Firms can recover some or all costs from a cyberattack, depending on the policy terms. This insurance requires regular premium payments, and firms can file a claim with the insurer if their network or digital assets are attacked.
A typical cyber insurance policy provides coverage in the following four key areas.
Incident Response covers the costs of dealing with a cyber incident, including forensic investigations, data recovery, legal advice, notification expenses, and public relations efforts.
Business Interruption aids businesses in recovering financial losses from cyber incidents that disrupt normal operations, such as ransomware attacks that shut down critical systems or data breaches causing downtime.
Cybercrime coverage protects businesses from financial losses due to cybercrimes, including social engineering scams, fraudulent wire transfers, funds transfer fraud, and extortion.
Privacy Liability helps businesses cover costs related to legal fees, settlements and damages resulting from data breaches or other privacy incidents that expose sensitive customer or employee information.
STANDALONE VS. ENDORSEMENTS
Cyber coverage is often added as a rider to business or property insurance policies. However, these endorsements don’t offer the extensive protection and higher coverage limits of standalone cyber policies. A dedicated cyber insurance policy provides broader coverage for the risks CPAs face, including both first-party and third-party attacks.
FIRST-PARTY AND THIRD-PARTY COVERAGE
First-party attacks target an accounting firm’s network directly, while third-party attacks occur through another party, such as a client or vendor.
Cybercriminals are not unlike a runof-the-mill burglar, who continuously searches for weak entry points. In the cyberworld where everything is connected by a network of wires, servers and clouds, a firm’s most vulnerable point is often a third party’s network.
Third-party coverage is crucial for CPAs, as hackers can use breached firm data to target clients, causing financial harm. This coverage helps with attorney costs to defend the firm, crisis management and public relations, settlement costs, court-ordered damages if the firm is found liable, regulatory inquiry responses, and government fines and penalties.
HOW COVERAGE IS UNDERWRITTEN
The higher the risk to the insurer, the higher the cost. Cyber insurance carriers evaluate risk based on the following factors. Industry. High-risk industries like health care, legal and financial services are prime targets due to the sensitive data they store.
Company size. Larger companies have more network entry points.
Annual revenue. Higher revenue makes a company a bigger target for cybercriminals, especially for ransomware
attacks. Revenue also indicates the potential financial impact of a breach.
Strength of security measures. Cyber insurance companies assess a company’s security measures, including:
• Enforcement of MFA, encryption, patch management, backups, email filtering, and endpoint protection;
• Secondary communication methods for validating fund transfers;
Protect What Matters Most with TXCPA Member Insurance
Safeguard your family, property and career with TXCPA Member Insurance. Our associationendorsed insurance offers value and reliability you can trust.
Why choose the TXCPA Member Insurance Program?
• Coverage designed for professionals and their families.
• Exclusive member rates from top-rated carriers.
• Your participation supports the mission of the Texas Society of CPAs.
Learn more at txcpainsure.org or call us at 800-428-0272.
• Document retention and disposal policies;
• Access controls and password requirements;
• Security testing procedures;
• Effectiveness of employee cybersecurity training programs.
THE BENEFITS OF BUYING GROUP COVERAGE
Due to rising risks and claims, cyber insurance premiums have surged. Purchasing coverage through a
professional association like TXCPA can benefit members in a number of ways:
• Competitive pricing;
• Expert advice;
• Access to multiple carriers, including A+ rated insurers;
• Free, personalized risk assessments.
Go to our website to learn more about the TXCPA-endorsed cyber liability insurance plan.
A VITAL TOOL
Cyber insurance is a vital tool for accounting firms to protect themselves from the potential financial and reputational impacts of cyberattacks. Accounting firms should evaluate their cyber risk exposure, compare different cyber options and select the policy that best suits their needs and budget. By doing so, firms can enhance their cyber resilience, confidence and competitiveness in the digital age.
2. Cost of a Data Breach Report 2023. IBM, Overview Page. Referenced on May 9, 2024. www.ibm.com/reports/data-breach
3. Salman, Gary. “The rise of cybercrime in the accounting profession continues.” Accounting Today, Aug. 24, 2020. The rise of cybercrime in the accounting profession continues | Accounting Today
4. Schappert, Stefanie. “Deloitte joins fellow Big Four MOVEit victims PWC, EY.” Cybernews, Nov. 15, 2023. https://cybernews.com/security/ deloitte-big-four-moveit-pwc-ey-clop/
5. Phillips Erb, Kelly. “Big Four Accounting Firm Deloitte Confirms Cyber Attack. Forbes, Sept. 26, 2017. Big Four Accounting Firm Deloitte Confirms Cyber Attack (forbes.com)
6. Kelly, Sav. “Brady Martz & Associates faces four class-action complaints for 2022 data breach.” Grand Forks Herald, accessed from Yahoo!, Sept. 23, 2023. Brady Martz & Associates faces four class-action complaints for 2022 data breachGrand Forks Herald | Grand Forks, East Grand Forks news, weather & sports
7. Gaetano, Chris. “Cybersecurity for CPAs: One expensive click.” Accounting Today, April 12, 2023. www.accountingtoday.com/list/ cybersecurity-for-cpas-one-expensive-click
TXCPA TXCPA
In What’s Happening Around Texas, we give you highlights of events and activities happening around the state in TXCPA and the TXCPA chapters.
TXCPA Corpus Christi members enjoyed a Scholarship Fundraiser at Nueces Brewing! Attendees were given a private tour of the brewery. All proceeds went to fund the chapter’s scholarships.
TXCPA East Texas members had a swinging good time at their year-end happy hour event at Nip It Golf in Longview!
TXCPA Panhandle’s 2024-2025 Board of Directors was all smiles thinking about the amazing year they had just planned for the chapter! It’s going to be a great year!
TXCPA South Plains had a great turnout at their annual “Bankers Meeting.” Members heard an excellent presentation and had the opportunity to network with the banking community.
In TXCPA Southeast Texas, a small group braved the rain and floods to attend the annual May Chapter Meeting with students at Lamar University! They recognized several award winners and their chapter scholarship recipients.
TXCPA Victoria members had a fantastic time at their Axe Throwing Mixer at The Axe Society! CPAs and students met together for the event. They enjoyed food and drinks and learned the art of axe throwing.
TXCPA’s 2024 Leadership Day in Dallas began with Chair Mohan Kuruvilla discussing the organization’s 2024-25 themes. Human behaviorist Amilya Antonetti gave a high-energy talk on leadership that will help attract, retain and engage talent. Jovan Glasgow concluded with an insightful and energetic presentation on “Navigating Complexity With Confidence.”
TXCPA Corpus Christi
TXCPA Southeast Texas
TXCPA Victoria
TXCPA East Texas
TXCPA Panhandle
TXCPA Leadership Day
TXCPA South Plains
ABILENE CHAPTER
Nathan George, President
Jessica Ambrose, President-elect
Joseph Warrix, Vice President
2024-2025 TXCPA Chapter Officers
Sharmon Daley, Secretary/Treasurer
AUSTIN CHAPTER
Larry Stephens, President
Kara Hamann, President-elect
Stacey Mahajan, Vice President
Sarah Loghin, Vice President
Jason Lucio, Vice President
Jan Keeling, Secretary/Treasurer
Amanda (Mandy) Klein, Secretary/ Treasurer-elect
BRAZOS VALLEY CHAPTER
Shelby Lesseig, President
TBD, President-elect
Jade Engel, Secretary
Verna Fritsche, Treasurer
CENTRAL TEXAS CHAPTER
Travis Skinner, President
Cheyenne Tanner, President-elect
Christine Wells, Vice President
Will Cummings, Secretary
Jessica Hopfenspirger, Treasurer
CORPUS CHRISTI CHAPTER
Ginger DeLatte, President
Priyanka Desai, President-elect
Anita Cadena, Vice President
Alyssa Monette, Secretary/Treasurer
DALLAS CHAPTER
Donovan Miller, Chair
Isreal Miller, Chair-elect
Aaron Borden, Treasurer
Chris Hes, Treasurer-elect
EAST TEXAS CHAPTER
AJ Evans, President
Kevan Kirksey, President-elect
Mehgan Ibanez, Vice President
Ruben Rodriguez, Secretary/Treasurer
EL PASO CHAPTER
Sarah Robertson, President
Dahlia Garcia, President-elect
Erika Abes, Vice President
Daniel Gomez, Vice President
April Samaniego, Vice President
Larissa Adame, Secretary
Myrna Ortiz, Treasurer
FORT WORTH CHAPTER
Gary Tonniges, Jr, President
Kim Knox-Lewis, President-elect
Andy Hall, Vice President
Chris Lucas, Vice President
Josh Willson, Vice President
Katelyn Strittmatter, Secretary
Stephanie Buduhan, Treasurer
Jonathan Cameron, Treasurer-elect
HOUSTON CHAPTER
Katherine R. Rodriguez, President
Bradley Elgin, President-elect
Sheryl Jimerson, Vice President
Rolando Garcia, Secretary
Kelly Higginbotham, Treasurer
Baria Jaroudi, Treasurer-elect
PANHANDLE CHAPTER
Kaleen Reyna, President
Salina McCormick, President-elect
Preston Branch, Vice President
Evan Brantley, Secretary
Brian Leitch, Treasurer
PERMIAN BASIN CHAPTER
John Michael Jaramillo, President
Meredith McKeehan, President-elect
Mackenzie Craft, Vice President
Jennifer Smith, Secretary/Treasurer
RIO GRANDE VALLEY CHAPTER
Maria Cecilia Garcia, President
Art Lopez, President-elect
Yamely Medina, Vice President
Abigail Murray, Secretary
Mariela Ruiz, Treasurer
SAN ANGELO CHAPTER
Paige Vincent, President
Ryan Linebaugh, President-elect
Megan Solsbery, Secretary
Brianne Killam, Treasurer
SAN ANTONIO CHAPTER
Brandon Howard, President
Anette Flores, President-elect
Michael Spaniol, Vice President
Marina Polanco, Vice President
Nancy Ozuna, Vice President
Bryan Morgan, Secretary/Treasurer
SOUTH PLAINS CHAPTER
Will Sanders, President
Brandon Goen, President-elect
Andrew Blazier, Vice-President
Whitney Boyd, Secretary/Treasurer
SOUTHEAST TEXAS CHAPTER
Megan Gallien, President
Chip Majors, President-elect
Marylyn Byrd, Vice President
Jane Whitfield, Vice President
Christa Wofford, Secretary
Erik Angelle, Treasurer
TEXARKANA CHAPTER
Leslie Winton, President
Kelly Brzeski, President-elect
Jay Hoy, Vice President
Devona Harwood, Secretary/Treasurer
VICTORIA CHAPTER
Amber Bittlebrun, President
Hayden Schilling, President-elect
Jay Neukomm, President-elect Nominee
Tasha Langlinais, Secretary/Treasurer
WICHITA FALLS CHAPTER
Alex Pappas, President
Mikayla Schreiber, President-elect
Bradley Groves, Vice President
Vladimer “Lado” Jangjava, Secretary
Josh Whittiker, Treasurer
TXCPA Connects With 2,800+ Students During Accounting Opportunities Month and Nearly 12,000 Students in 2023-2024
During April’s Accounting Opportunities Month, we surpassed our goal of reaching 1,500 students! We thank the 101 members who volunteered for 31 career engagements – which included presentations, career fairs, panels and student facing events – and reached 2,866 students of all ages! These visits helped us get closer to our goal of reaching 12,000 students in 2023-2024.
Volunteers are needed for classroom visits year-round. If you’re interested in sharing your career journey with aspiring CPAs, please scan the QR code to submit an online volunteer interest form.
EMPLOYER GUIDE
Don’t Miss Listing Your Organization in TXCPA’s New Employer Guide!
TXCPA’s Employer Guide is a valuable recruitment tool to help you attract quality, top-tier employees for your organization. You can stand out from the crowd by
sharing your organization’s benefits and accolades with future CPAs throughout Texas. The deadline to purchase an Employer Guide listing for the 2024-2025 guide is July 31, 2024. Scan the QR code to learn more and purchase your listing.
Unlock Top Talent and Career Opportunities with
TXCPA’s Career Center!
Need to hire talent or find a new job opportunity? Check out TXCPA’s Career Center! With a focus on accounting and finance job openings, it’s the perfect resource for employers and job seekers alike. Members enjoy deep discounts on job postings and internships are always free!
Job seekers can browse postings, apply online and post a Job Seeker Profile for free. Simply log in with your TXCPA credentials to get started. For the best in hiring and career opportunities, visit https://careers.tx.cpa/ today!
TXCPA Recognizes 2023-2024 Award Recipients
TXCPA congratulates our 2023-2024 award recipients. The members include:
Meritorious Service to the Accounting Profession:
Kathy Kapka, CPA, CGMA - East Texas
Distinguished Public Service:
John Baines, CPA - Dallas
Distinguished Fellow:
Bill Moss, CPA - Dallas
Distinguished Fellow:
Bill Sims, CPA - Dallas
Young CPA of the Year:
Dahlia Garcia, CPA - El Paso
Honorary Member:
Meg Campbell - Dallas
Outstanding Committee Chair:
AWARDS
David Colmenero, J.D., LL.M., CPA - Dallas
B&I Award:
Tom Seale, CPA - East Texas
Rising Stars:
Lauren Albrecht, CPA - Corpus Christi
Candy Arroyo, CPA - Permian Basin
Katie Brown, CPA, CFF - Fort Worth
Jennifer Cadena, CPA - San Antonio
Andres Chavez, CPA - Abilene
Monica Corey, CPA - Permian Basin
Austin Fleet, CPA - East Texas
Evan Green, CPA - Permian Basin
D’Andra Isabel, CPA - Houston
Ashlei Lewis, CPA - San Angelo
Luis Lopez, CPA, CFE - Rio Grande Valley
Kyle Noack, CPA, CFP - Victoria
Jordan Payne, CPA - Houston
Andrew Peterson, CPA - Dallas
Alan Pruitt, CPA - Houston
Elsa Selleck, CPA - East Texas
Paige Smith, CPA - San Angelo
Jaimie Yang, CPA, CIA, CISA - Dallas
Find Your Zen: Top Meditation Apps to Stay Centered
Meditation is a great way to refocus and center yourself, but when life is hectic and distracting, it can be difficult to master. Here are a few apps that can help make meditation easier and more intuitive:
• Calm – www.calm.com
• Headspace – www. headspace.com
• Ten Percent Happier –www.tenpercent.com
• BetterSleep – www.bettersleep.com
• Mindful – www.mindful.org
If you’re struggling with addiction, substance abuse or mental health issues, TXCPA Peer Assistance is here to help. Join a weekly support group, send a confidential message and find more resources at www.tx.cpa/resources/acan
TXCPA is Now Accepting 2025-2026 Leadership Nominations
The nominations process for TXCPA’s 2025-26 leadership is now open! Your input for key leadership positions is vital to our organization’s success and future. We are currently accepting nominations for the following roles:
• Chair-elect;
• Treasurer-elect;
• Secretary;
• Board of Directors;
• Leadership Council Members-at-Large;
• Nominations and Board Development Committee Members-at-Large;
• Nominations Council Members-at-Large;
• AICPA Council.
The deadline for nominations is September 2. For complete details on the TXCPA leadership nominations process, including links to submit a nomination and an overview of the process, please scan the QR code.
Summit 2024
Bruce McGovern, JD, LL.M. Professor of Law / South Texas College of Law / Houston
2024-2025 Chair Has a Comprehensive Vision for Advancing the Accounting Profession
TXCPA Chair Mohan Kuruvilla, Ph.D., CPAHouston, is the Senior Professor of Practice, Director of the MSACCY Program at the Bauer College of Business, University of Houston. He oversees specialized accounting tracks at both undergraduate and graduate levels and teaches accounting courses in the MBA program and Auditing courses at UH Bauer College. He is also a Director of Datatracks Inc, one of the leading providers of XBRL services to U.S. public companies and other entities around the world. TXCPA President and CEO Jodi Ann Ray, CAE, recently talked with him about his career path, his roles in education and community service, and his goals this year as TXCPA Chair.
CAREER JOURNEY
Mohan was born into a family of accountants and always knew he would become a Chartered Accountant (the equivalent of a CPA under the British system). In fact, his dad was a Gold medalist, securing the top score in his year for the Chartered Accountancy Exam. As for Mohan’s own Chartered Accountancy Exam? “I just passed it - no such achievement!”
After working as a Chartered Accountant in India for three years, he moved to the U.S. to complete his MBA in finance and Ph.D. in accounting. During this time, he passed the CPA Exam and began his academic career at the Bauer College of Business.
A couple of years later, he joined a Big 4 accounting firm as a Director, gaining exposure to audit clients and IPO working groups. After
Key Facts About MOHAN
KURUVILLA, Ph.D., CPA-Houston
Senior Professor of Practice, Director of MSACCY Program at the University of Houston.
Responsible for specialized accounting tracks at undergraduate and graduate levels.
Teaches in the MBA program and Auditing courses at UH Bauer College.
Former Dean of the School of Business and Professor at Houston Baptist University for 6 years.
Former Director at KPMG for 4 years.
Certified Public Accountant (CPA) and Chartered Accountant (CA).
Holds an MBA in Finance and a Ph.D. in Accounting from the University of Houston.
Past President for TXCPA Houston.
Independent board member for Taurus Quest Limited and Data Tracks Limited.
Involved with non-profit organizations, including the Board of Asian American Family Services and Indo-American Charity Foundation.
Published and interviewed on various business issues; extensive consulting experience in the U.S. and globally.
four years, he returned to academia, becoming a Professor and Dean of the Business School at Houston Christian University (formerly Houston Baptist University). After six years as Dean, he wanted more time in the classroom and transitioned back to Bauer College of Business, where he now teaches and directs the STEM-designated M.S. in Accountancy program.
Mohan finds teaching to be very rewarding, seeing the impact on young minds and staying connected with former students even after 20 years, who often share how he has influenced their careers. He said it is a joy seeing the progress they have made in their professional life.
TRENDS IN ACCOUNTING EDUCATION
Mohan noted that while accounting education has evolved over time, there is still much progress to be made. He highlighted the growing emphasis on data analytics and predicted a shift towards AI
and tech-enabled processes in the future. He stated: “We need to reimagine accounting education to better prepare our students for the professional world of tomorrow.” Emphasizing critical thinking is essential for success. Students will need to advance the knowledge hierarchy; for example, focusing more on evaluation than just application.
ADDRESSING ACCOUNTING PIPELINE ISSUES
The talent shortage faced by so many professions is also hitting accounting. The 22-member National Pipeline Advisory Group (NPAG) is committed to developing an extensive strategy that addresses stakeholder needs, utilizes unbiased research and drives change. Representing TXCPA, President and CEO Jodi Ann Ray is part of this group. Their solutions aim to simplify CPA licensure and provide flexibility for diverse candidates.
partnerships between colleges and employers, with active engagement in class content, are essential,” Mohan said. NPAG also highlighted the need for a revamped approach to the Principles of Accounting course. Mohan concurs with this, as well, highlighting an urgency for change. He has observed that students often find the introductory principles class uninspiring. This foundational course, mandatory for all business majors, ought to undergo restructuring to offer a broad perspective on the pivotal role accounting plays in business and the many career paths that are available as a CPA.
Mohan advocates for the course to actively promote the accounting profession to students. He suggests that dynamic and enthusiastic professors spearhead these classes, sharing their passion and energy. “I had a recent conversation with a professor who pointed out that in some institutions, there are very tenured professors who have been teaching Principles of Accounting the same way with the same teaching materials for decades. It’s time for a shift in approach.”
A STEM-designated Program
The University of Houston’s C.T. Bauer College of Business’s Master of Science in Accountancy (MASCCY) has been designated as an official science, technology, engineering, and math (STEM)-designated program by the Texas Higher Education Coordinating Board. The STEM designation for the MS in Accountancy is a recognition of the program’s rigorous curriculum, emphasis on data analytics and technical skills, and preparing students with essential knowledge for the future professional landscape.
One NPAG recommendation is to make accounting education more engaging. Mohan agrees and suggests that impactful change can begin by incorporating experiential learning into the classroom. This requires partnerships between academic institutions and employers.
For example, auditing classes cover auditing theory and students engage in projects. Mohan believes it would be much more impactful if employers were in the classroom with live projects that could be assigned with close supervision. This collaboration would allow employers to educate and identify talent simultaneously. “Closer
A more effective approach to the course might involve a dual focus. The initial segment would address what the accounting profession is all about and its myriad opportunities. The latter part would introduce the financial statement, what it means and how to use it as a tool. “Then, work backwards to help students understand how the financial statements are created and what principles you need to understand to help guide businesses and financial decisions. Under the current approach, instead of selling them on the value and importance of accounting, we are driving them away.”
STEM DESIGNATION
The C.T. Bauer College of Business’s Master of Science in Accountancy (MSACCY) has been granted STEM designation by the Texas Higher Education Coordinating Board, marking it as an official science, technology, engineering, and math program. This designation holds significant implications for the accounting profession, particularly in helping to address pipeline challenges. Mohan stressed the importance of this designation: “Currently, our MSACCY program stands as the sole STEMdesignated program, a factor that holds considerable appeal for international students. This designation extends their Optional Practical Training (OPT) period from one year to three, providing ample time for them to gain invaluable experience and training, allowing both students and employers to assess their compatibility for continued employment.” For firms with locations in the students’
home countries, the transition post-OPT becomes a seamless progression.
In addition, securing STEM designation for accounting at the K-12 level holds promise in integrating the profession into educational curricula alongside established STEM fields like engineering and medicine. This exposure ensures that students are introduced to accounting concepts early in their academic path, potentially steering them towards careers in the profession. The STEM designation also opens avenues for accessing federal funding.
CHALLENGES AND OPPORTUNITIES AHEAD
Since addressing the talent shortage and shrinking pipeline are such critical concerns, Mohan said that TXCPA has been at the forefront of proposing solutions to tackle the issue head-on. Proposals aimed at
reducing barriers to entry into the profession have been spearheaded by TXCPA, with a recent bill facilitating CPA Exam eligibility after completing 120 credit hours, effective September 1, 2023. However, this is just a starting point. Further action and solutions are needed.
Mohan pointed out that despite the evolving landscape, starting salaries within the profession, particularly in public accounting, have failed to match the pace of inflation over the past two decades. Recently, there have been indications of progress in this regard, with some firms demonstrating movement in the right direction.
He believes there is a pressing need to reshape the perception of accounting among young students. The profession is undergoing significant disruption, leading to an expansion in the scope and diversity of services offered. Consequently, educational approaches must adapt to these changes to remain relevant and effective in preparing future CPAs.
He said that some CPAs are also concerned about how AI is going to impact the profession, but he sees this is an
opportunity to increase the value-added services a CPA can provide by leveraging technology.
OBJECTIVES AND PRIORITIES
In his role as TXCPA Chair for 2024-2025, Mohan has outlined several key objectives and priorities for the organization. He emphasizes the importance of continuous learning, stressing the need for current CPAs to engage in reskilling and relearning. To facilitate this, TXCPA offers continuing education opportunities through timely and relevant CPE courses geared towards preparing professionals for the increasingly technology-driven landscape. Additionally, Mohan envisions a robust leadership development program, delivered collaboratively with TXCPA chapters, that spans the entire state.
More work also needs to be done on addressing the pipeline issue and aligning TXCPA’s efforts with AICPA and NPAG. This involves expanding outreach to more high school students and forging partnerships with investment clubs in high schools to enable a coordinated approach to attract talent into accounting and finance.
A LIFE OF SPORTS, MUSIC AND GLOBAL ADVENTURES
In his time away from work, Mohan enjoys playing racquetball, a sport he has passionately pursued for many years. His dedication to the game has yielded notable achievements, including clinching the gold medal in Texas for the 50+ age category in both 2018 and 2019. Additionally, Mohan has recently ventured into playing padel tennis.
Beyond sports, Mohan’s interests extend to music, having played violin from around the age of eight. An avid traveler, he loves to explore diverse cultures, with visits to more than 24 countries across the globe.
LEADING TXCPA IN 2024-2025
As we begin the new year, we are excited to welcome Mohan’s leadership as TXCPA Chair. With a background spanning academia, industry and community service, he is well-equipped to guide us through the transformative change that lies ahead.
Mohan’s primary goals for the upcoming year revolve around tackling key challenges facing the accounting profession, including talent shortages and educational alignment with industry needs. His dedication to excellence positions him as a dynamic leader poised to guide TXCPA towards future growth and success.
JODI ANN RAY, CAE, is TXCPA's President and CEO. Contact her at jray@tx.cpa.
Corporate Transparency Act: An Update
BY NATHAN GEORGE, CPA, AND KEN HORWITZ, CPA, JD, LLM
In our previous article (September/October 2023 Today’s CPA), we discussed the details of the Corporate Transparency Act (CTA) and provided a summary of its provisions. Now that we have passed the 60-day mark since its implementation, we would like to provide an update on the latest issues surrounding the program.
January 1, 2024:
CTA Goes into Effect
Despite numerous calls for delaying the filing deadline (including comment letters from both AICPA and TXCPA1), Beneficial Ownership Information (BOI) reporting under the CTA went into effect on January 1, 2024, for new entities formed on or after that date. Companies existing prior to January 1, 2024, have until December 31, 2024, to file their initial report.
Despite choosing not to extend the initial effective date, the U.S. Department of the Treasury and Financial Crimes Enforcement Network (FinCEN) did provide reprieve for companies created or registered in 2024, but not thereafter, by allowing 90 calendar days (instead of the initial 30-day period) to file its initial BOI report.
What if reported information changes after the initial filing? Any change to the required information about the company or its beneficial owners requires the
filing of an updated report no later than 30 days after the date of the change. It is important that this rule be communicated to persons designated as “Beneficial Owners” together with the types of changes (including personal – not just business information) that trigger the supplemental reporting requirement.
As outlined in the FAQs, the need to update a BOI report may be triggered by changes such as (but not limited to):
• Any change to the information reported for the reporting company, such as registering a new business name;
• A change in beneficial owners or a sale or other transaction that changes who meets the 25% ownership threshold;
• Any changes to a beneficial owner’s name, address or unique identifying number previously provided to FinCEN. If a beneficial owner obtained a new driver’s license or other identifying document that
includes a changed name, address or identifying number, an updated report would be required, including an image of the new identifying document.2
A few important observations. First, the deadline for filing the report is based on the date of receiving the actual or public notice that the entity’s creation or registration is effective.3
Second, the 90-day period for initial reporting only applies to entities created in 2024. Based on current guidance, the initial reporting deadline will revert back to the 30-day standard for companies created or registered on January 1, 2025, or after.
Third, as noted, the 30-day period still applies to any changes to the required reporting information.
Fourth, there may be multiple “Beneficial Owners” required to be disclosed for any particular reporting entity; the determination and identification of all may be complex
when, for example, the ownership is through tiered entities or there are one or more trusts in the ownership structure. Care needs to be taken and legal counsel may be advisable in such situations.
How to Report
On January 1, 2024, FinCEN opened its BOI E-Filing System4 by which reports can be submitted via two primary methods:
• File PDF BOIR
• Adobe Reader is required
• Prepare report offline at your own pace, save as you go
• Reuse PDF BOIR when filing updates/corrections
• Download BOIR transcript upon submission
• File Online BOIR
• Adobe Reader not required
• Prepare online and submit now
• Prepare new online BOIR when filing updates/correction
• Download BOIR transcript upon submission
In addition to these methods, some (tax) providers are offering software by which reports can be transmitted. It seems this may be separate from the typical tax suite and may vary by provider.
A sample of the form can be found and questions can also be submitted via FinCEN’s website.5
Unresolved Issues and Navigating the Complexities
Although the guidance may seem straightforward, there are numerous potential pitfalls and areas around which practitioners need to navigate.
No Exemption for You!
While there are many types of exemptions from BOI reporting requirements, it is likely your firm does not meet any of them. Among the 23 specific types of exempted entities is one for “public accounting firms.” To qualify, the entity must be “a public accounting firm
Key Points to Consider About the Corporate Transparency Act
Effective Dates and Deadlines: New entities must report starting January 1, 2024. Existing entities have until December 31, 2024. Entities created in 2024 have 90 days to report, reverting to 30 days from 2025.
Change Reporting: Updates to BOI must be filed within 30 days of any change.
Reporting Methods: Reports can be filed via FinCEN’s BOI E-Filing System using PDF or online methods.
Exemptions: Most entities are NOT exempt. Specific conditions apply for public accounting firms and large operating companies.
Unauthorized Practice of Law: Debate exists on whether CTA services constitute legal practice, affecting service provision and insurance coverage.
Legal Challenges: A federal judge ruled the CTA unconstitutional for specific plaintiffs; the decision is under appeal.
Penalties: Noncompliance can result in daily fines of $591, up to $10,000, and potential criminal charges.
registered in accordance with section 102 of the Sarbanes-Oxley Act of 2002.”6
As Friedlich explains, “(t)he Act requires public accounting firms to register with the Public Company Accounting Oversight Board (PCAOB) to prepare or issue an audit report for a U.S. public company or broker-dealer or play a substantial role in those audits … While there are more than 1,605 public accounting firms registered with the PCAOB, many small accounting firms are not among them.”7 Large firms, however, may be able to meet the large operating company if the entity meets the following criteria:
• Employs more than 20 full time employees who are employed in the United States;
• Has an operating presence at a physical office within the United States;
• File a federal income tax or information return in the previous year with more than $5,000,000 in gross receipts or sales. (Note: receipts or sales sourced outside the U.S. are to be excluded in meeting the threshold requirement);
• Reported the greater-than$5,000,000 amount as gross receipts or sales (net of returns and allowances) on the entity’s Form 1120, Form 1120-S, Form 1065, or other applicable IRS form.
Note that the second bullet requires a physical operating presence. Reporting criteria require that the address listed for the company must be a physical address and cannot be the address of the registered agent.
One other consideration is what to do if the status of the company changes. If an entity initially files a report and subsequently becomes exempt, the company should file an updated report indicating that it is no longer a reporting company. These abbreviated reports will only require that the entity identify itself and check the box indicating the newly exempt status.
In the event a previously exempt company no longer meets the exemption criteria, BOI reporting will be required, apparently with a 30-day deadline. Entities that are no longer exempt are subject to the special rule of 31 CFR 1010.380(a)(1)(iv), which requires
them to file a report within 30 days of ceasing to be exempt. If this subsequent exemption happens during the first year after the effective date, it seems the entity will benefit from the longer of the two applicable time frames (i.e., the remaining days in the one-year filing period or the 30-day calendar period.)8
Related CPE:
WEBCAST: The Corporate Transparency Act –What You Need to Know to Protect Your Client
Multiple Offerings
WEBCAST: Surgent’s Guide to the Corporate Transparency Act for Accounting and Finance Professionals
Multiple Offerings
WEBCAST: 2024 Corporate Transparency Act Developments and Proposed FinCen Reporting Requirements for Real Estate Sellers
Multiple Offerings
Go to the Education area of the TXCPA website and search Corporate Transparency Act to learn more and register.
Unauthorized Practice of Law
One of the hottest issues surrounding the CTA reporting program is whether consulting or providing services related to the CTA rises to the practice of law. In a February Texas State Board Report, the General Counsel to the Board addressed the issue as to whether preparation of BOI is the practice of law and deferred to the Texas State Bar Association.
Given the potential risk, many firms are taking the position of not providing any services or advice related to the CTA, and some have stated so explicitly via published guidance.9 Many legal firms are reluctant to do reporting or offer services in this area, with some expressing the expectation that CPAs will do the reporting.
Furthermore, whether insurance companies are willing to cover any liability related to CPAs, practicing in the CTA area varies by provider. While some insurance companies are refusing
to cover any liability related to CPAs practicing in this area, other companies have clarified that such practice is covered. For example, Berkley Select, the carrier for TXCPA’s Member Insurance program, and CNA, the carrier for AICPA’s member insurance program, will generally cover services related to CTA, at least as to work performed prior to a determination that it constitutes the unauthorized practice of law.10 CPAs should check with their carrier.
There are a number of entities, including several existing national corporate services firms, that have surfaced offering apparently very cost-effective services for the preparation of BOI forms, for existing entities as well as newly formed entities. Although a potential alternative, caution should be advised given the typical transactional nature of such a relationship. Meeting reporting requirements does not relieve the responsible party from meeting any follow-up requirements.
CPAs should note that actually filing organizational documents, aside from the risk that may constitute the unauthorized practice of law, now exposes the organizer of liability for failure to file the BOI report.
Legal Challenges
On March 1, 2024, a federal judge in the U.S. District Court for the Northern District of Alabama held the CTA to be unconstitutional.10 The ruling, however, may only apply to the plaintiffs in the case. Following the decision, FinCEN announced it would not enforce the CTA specifically against the plaintiffs, and that only those individuals and entities are not required to report BOI at this time. We understand that as of March 13, 2024, the government has appealed the decision. Developments in this connection may take considerable time to resolve the issues.
Call to Action
Even if not responsible for BOI filings or related services, CPAs may wish to serve their clients by keeping their existing client base informed. In this context, CPAs should monitor any changes to guidance and should actively relay this information to their clients. Given potential liability, this is probably a good time for firms to
revisit and discuss both their professional and general liability policies with their provider.
On the legal front, practitioners should continue to follow the law and not depend on the lower court ruling. It took 21 months for the national case to be decided at the district court level and the appeals process will take many more months. Noncompliance with the CTA opens up a reporting company to the stiff monetary penalties of $591 a day (effective January 25, 2024)11, up to $10,000 plus potential criminal charges.
Reporting: Frequently Asked Questions, H.2. Accessed from https://www.fincen.gov/ contact.
3 Beneficial Ownership Information
Reporting: Frequently Asked Questions, B.1. Accessed from https://www.fincen.gov/ boi-faqs
4 https://boiefiling.fincen.gov/fileboir
5 https://www.fincen.gov/contact
6 BOI Reporting Requirements: Small
entity compliance guide, p. 9. Accessed from https://www.fincen.gov/boi/smallentity-compliance-guide
7 Friedlich, M. Most small accounting firms are subject to the Corporate Transparency Act’s BOI reporting rules. Accessed from https://www.wolterskluwer. com/en/expert-insights/most-small-accounting-firms-are-subject-to-the-corporate-transparency-acts-boi-reporting-rules
8 31 CFR Part 1010, RIN: 1506-AB49.
9 WhitleyPenn. Corporate Transparency Act filing requirements begin in 2024. Accessed from https://www.
law firm of Glast, Phillips & Murray, P.C. in Dallas, Texas. Contact him at kmh@gpm-law.com
10 Waggoner, M. Federal court holds Corporate Transparency Act unconstitutional. Accessed from https://www. journalofaccountancy.com/news/2024/mar/ federal-court-holds-corporate-transparencyact-unconstitutional.html See National Small Business United v. Yellen, Case No. 5:22-cv-1448-LCB (US Dist. N.D.Ala. 3/1/2024).
11 https://federalregister.gov/d/2024-01420
at nathan.george@ condley.com.
KENNETH M. HORWITZ, CPA, JD, LLM, is a Partner with the
NATHAN S. GEORGE, CPA, is a Tax Manager with Condley and Company, LLP in Abilene, Texas. Contact him
CURRICULUM:
Accounting and auditing
LEVEL:
Basic
DESIGNED FOR:
CPAs in public practice, management
OBJECTIVES:
To explain the classification and accounting implications of warrants issued with debt instruments, discuss different types of warrant instruments and analyze their classifications and accounting treatment based on relevant accounting standards
KEY TOPICS:
Debt instruments; fair value accounting; warrants; fair allocation methods; distinguishing detachable from embedded instruments; hybrid instruments; and indexed debts with embedded features
PREREQUISITES:
None
ADVANCED PREPARATION:
None
TAKE THE ONLINE CPE QUIZ
Today’s CPA offers the self-study exam for readers to earn one hour of continuing professional education credit. The questions are based on technical information from the following article. If you score 70 or better, you will receive a certificate verifying you have earned one hour of CPE credit in accordance with the rules of the Texas State Board of Public Accountancy (TSBPA).
Take the CPE quiz online on TXCPA’s website at https://www.tx.cpa/resources/ todays-cpa
BY JOSEF RASHTY
. Distinguishing Debts from Equity - Warrants Issued in Conjunction with Debt Instruments
BY JOSEF RASHTY
Stock warrant instruments give an entity the right to buy or sell a security at a certain price before a specific date. It is a type of derivative, similar to stock options, which derives its value from its underlying asset (the equity stock). Companies may issue stock warrants in conjunction with equity or debt instruments. This article expounds on warrants issued in conjunction with debt instruments, one of the topics of distinguishing debts from equity. It discusses different types of warrant instruments issued in conjunction with debt instruments and analyzes their classifications and their accounting implications based on ASC 470, Debt; ASC 825, Financial Instruments; ASC 480, Distinguishing Debt from Equity; and ASC 815, Derivatives and Hedging
The article begins with an introduction to debt instruments and their accounting features relevant to stock warrants that companies issue in conjunction with debt instruments (e.g., fair value accounting).
Debt Instruments
Debtors issue debt instruments in exchange for cash; a future privilege; property, goods, services; or a combination of them. The debt
instruments usually carry a stated interest rate that may differ from the market interest rate at the time of issuance and as a result, the debt may be issued at a premium (if the bond’s stated interest rate is higher than the market interest rate) or a discount (if the bond’s stated interest rate is lower than the market interest rate).
Debtors ground classification of their debts as current or noncurrent in the expectation of their settlement – noncurrent (long term) debt is any amount of outstanding debt a company holds that has a maturity of 12 months or longer. This guidance also applies to the classification of warrants issued with debt instruments; however, the classification of awards as current or noncurrent does not depend on the classification of debt instruments.
Fair Value Accounting
Debtors can make a one-time irrevocable policy election at the inception of the transaction to elect the fair value option (under ASC 825 or Subtopic ASC 815-15 on embedded derivatives) to reflect changes in fair value recognized in net income on an instrument-by-instrument basis (ASC 825-10-45-5). Electing the fair value option to measure debt may result in recording a
Stock warrant instruments are derivatives that grant the right to buy or sell a security at a predetermined price before a set date, deriving their value from the underlying equity stock and often issued alongside equity or debt instruments.
different initial fair value for debts – which is usually based on the present value of the proceeds.
Debt’s fair value is usually the present value of its cash flows. ASC 835-30 provides guidance on the initial measurement of debt under ASC 815-15 or ASC 825-10. The key concept of ASC 835-30 is that the initial recognition of debt is the present value of the debt’s principal and interest cash flows. Debtors usually measure the debt in the subsequent periods at amortized cost unless they have elected the fair value accounting option.
Residual and Relative Fair Allocation Methods
Companies use “relative fair value allocation method” for equity classified awards and “residual method (‘with or without’ method) for liability classified awards for the fair value allocation.
Relative Fair Value Allocation Method
The issuer (the debtor) determines the fair value of each separate component issued in a financing transaction. Then, it allocates the total proceeds to their relative fair values. For example, a debtor issues a $1,000 par value bond with detachable equity-
classified warrants. The fair value of the bond is $990 and the fair value of the warrants is $110. The debtor classifies the warrants as equity instruments under ASC 470-20-25-2 and 470-20-30-1.
Cash $1,000
Bond discount $100
APIC (warrants) $100
Bond payable $1,000
Value of bond is $900 = $1,000 x [$990 / ($990 + $110)]
Bond discount $1,000 - $900 = $100
Value of warrants is $100 = $1000 x [$110 / ($110 + $990)]
The net bond payable is $900 ($1000 - $100)
GAAP requires companies to amortize the bond discount based on a straight-line or effective interest method. However, most companies in practice choose the straight-line method due to its simplicity and immateriality. (The effective interest method results in front-loaded interest.)
Residual Method (“With or Without” Method)
The issuer (the debtor) determines the fair values of each component. Then, it records one or more components at the fair value and the remaining at the residual value. If the facts remain the same as in the previous example, the debtor classifies the warrants as a liability and accounts for them at fair value based on their residual values.
Cash $1,000
Bond (discount) $110
Bond (par value) $1,000 Warrants $110
Continued on page 24
The net bond payable in the above example is $890 ($1000 - $110) compared with $900 in the previous example.
Warrants
Warrant instruments give the holder the right, but not the obligation, to purchase or sell equity shares for a specified price (the exercise or strike price) during a specified period. For example, a debtor may issue a $1,000 two-year par value bond with detachable warrants that matures at the end of the second year.
Warrants are similar to stock options and companies often use the Black-ScholesMerton model to determine their values. However, companies often issue warrants with a $0.01 strike price, which makes their value nearly identical to the underlying pershare value when run through an option pricing model.
Redeemable
Warrants (Mandatory or Optional)
Redeemable warrants are financial instruments that may be redeemed at the issuer’s option (e.g., a callable warrant), holder’s option (e.g., a puttable warrant) or by contract (e.g., maturity of the instrument at a specific date) for cash or other securities. For example, if an issuer decides to redeem its redeemable warrants, the holder surrenders them for cash or other securities in exchange.
The redemption feature is in the underlying shares rather than the warrant. The redemption attribute can be mandatory or optional at any time or upon the occurrence of certain designated events (e.g., change of control). ASC 48010-25-4 requires that companies classify the mandatorily redeemable warrants as liabilities unless the redemption is to occur upon liquidation or termination of the reporting entity.
Detachable (Freestanding) Warrants
Companies may issue debts with detachable warrants. ASC 480 defines a detachable (freestanding) financial instrument as follows: (1) it is separate and apart from any of entity’s other financial instruments or
equity transactions, or (2) it is in conjunction with some other transaction and is legally detachable and separately exercisable. ASC 470-20-30-2 states:
When detachable warrants (detachable call options) are issued in conjunction with a debt instrument as a consideration in purchase transactions, the amounts attributable to each class of instrument issued shall be determined separately, based on values at the time of issuance. The debt discount or premium shall be determined by comparing the value attributed to the debt instrument with the face amount thereof.
Accounting for warrants issued with debt instruments is complex and involves significant management judgment, with companies preferring equity classification to avoid earnings volatility, though the SEC has recently challenged this preference in some cases.
Embedded Warrants
Debts may have embedded features (e.g., embedded warrants) that introduce variability into a fixed contract and are part of a conversion function. An issuer may issue multiple instruments to the same counterparty in one transaction (e.g., debts and warrants). ASC 815 requires that companies initially identify all freestanding financial instruments, then
account for their embedded features, if any, and bifurcate them and account for them separately.
A holder can exercise the warrants only upon surrender of the debt instrument. In this scenario, companies shall allocate the proceeds to the two elements based on their relative fair values: the debt instrument’s fair value without the warrants and the warrants themselves at the time of issuance (ASC 47020-25-3 and 25-12).
Call Warrants
Call options give the holder the right, but not the obligation, to buy an underlying (an underlying is the common stock that must be delivered when a warrant is exercised) at a specific price on or before a specified date. For example, companies may issue detachable warrants (call options) in conjunction with a debt instrument as consideration in purchase transactions.
Put Warrants
Put options give the holder the right, but not the obligation, to sell an underlying at a specified price on or before a specific date. A put warrant is an embedded put option that allows the holder to require the issuer to pay cash at a specified date for a fixed amount to either (1) repurchase the warrant itself or (2) purchase the shares that the holder has received upon the exercise of the warrant.
Distinguishing Detachable (Freestanding) from Embedded Instruments
Identifying whether an instrument is detachable (freestanding) or embedded involves understanding the form and substance of the transaction and requires substantial judgment. The contract per se that describes the transaction may not be determinative when evaluating that an instrument is freestanding or embedded in the transaction.
Companies should follow the following guidelines in exercising their judgment:
• If they have issued the instruments separately or concurrently in contemplation of each other;
TABLE 1. TYPES OF DEBTS AND DETACHABLE WARRANTS
• If the instruments can or cannot be separated. (If the exercise of one instrument results in the termination of the other instrument.)
Hybrid Instruments (Debt Issued with Other Instruments)
Financial instruments may not meet the definition of derivatives entirely; however, they may contain contractual terms that function similarly to derivatives. For example, debt and equity transactions often have embedded features that require additional analysis to determine their nature. These financial instruments are hybrid instruments and issuers may need to bifurcate embedded features and account for them separately. The most common embedded derivatives in debt and stock instruments are conversion options, puts, calls, and interest rate features.
In practice, companies first complete an evaluation to determine whether an instrument is within the scope of ASC 470 and ASC 480 for recognition and measurement. If the instrument is not within the scope of ASC 480, the company further evaluates it to determine if it is a derivative within the scope of ASC 815. If so, the instrument is subject to ASC 815-40 guidance for accounting and its required disclosures. The company should also evaluate the provisions of ASC 815-40-25-1 through 25-43 and
its implementation guidance ASC 81540-55-1 through 55-18 for its proper classification.
Classification of Detachable Warrants
If an issuer classifies an equity contract as equity, it should initially measure it at fair value and it will not recognize any subsequent changes in fair value. In contrast, if an equity contract indexed to the issuer’s stock fails the requirements for equity classification, it will classify it as an asset or liability at fair value with subsequent changes in fair value recorded in earnings.
Debts with Detachable EquityClassified Stock Purchase Warrants
ASC 470 provides accounting and reporting guidance for debt instruments with detachable warrants. Equity classification of warrants requires that companies reflect their fair values in additional paid-in capital (APIC). ASC 470-20-25-2 states:
Proceeds from the sale of a debt instrument with stock purchase warrants (detachable call options) shall be allocated to the two elements based on the relative fair values of the debt instrument without the warrants and the warrants themselves at time of issuance. The portion of the proceeds
so allocated to the warrants shall be accounted for as paid-in capital. The remainder of the proceeds shall be allocated to the debt instrument portion of the transaction. This usually results in a discount (or, occasionally, a reduced premium), which shall be accounted for under Topic 835.
Issuers often charge a lower interest rate in their debt securities with warrants. In these transactions, the issuer usually cannot force the holders of the warrants to exercise them and purchase the stock (ASC 470-20-05-3). Furthermore, companies may need to evaluate equity contracts under ASC 480 according to ASC 815.
The equity classification guidance generally indicates that a company with an equity contract indexed to its stock should classify the warrants as equity under either of the following types of settlement (ASC 815-40-25-1 through 2543 and ASC 815-40-55-2 through 55-18):
• Contract requires physical or net share settlement;
• Issuer has an alternative of physical or net share settlement regardless of its intent.
However, a contract cannot have equity classification if the following two conditions exist:
Continued on page 26
• The contract requires net cash settlement (including a requirement to net cash settle if an event occurs that is outside the control of the issuer);
• The holder has a choice of net cash settlement or settlement in shares (physical settlement or net share settlement).
ASC 815-40-25-7 through 25-8 include additional conditions for equity classification. The following is a list of some of the requirements:
• Settlement allows for unregistered shares;
• Issuer has sufficient authorized and unissued shares;
• Equity contract has an explicit share limit.
Public business entities (PBEs) should consider SEC staff guidance for their balance sheet presentations. ASC 480-10-S99-3A, SEC Staff announcement: Classification and Measurement of Redeemable Securities, requires companies to classify redeemable instruments in their balance sheets as temporary equity in the mezzanine section of the balance sheet.
Debts with Mandatory Redeemable Liability-Classified Purchase Warrants
ASC 480-10-25-4 states that a mandatorily redeemable financial instrument must be classified as a liability unless redemption occurs only upon the liquidation or termination of the entity. If a financial instrument has multiple components that require the issuer to repurchase shares (or is indexed to such an obligation) and may require a transfer of assets, the entire instrument is classified as a liability (ASC 480-10-25-8 to 25-13). ASC 480 does not specify when to classify these instruments as equity.
There are three scope exceptions: redemption upon liquidation or termination of the entity, non-SEC registrants for instruments with no fixed date and fixed amount (ASC 480-10-15-7A) and certain mandatory redeemable noncontrolling interest (NCI). If an instrument qualifies for an ASC 480 exception, PBEs may classify it as temporary equity.
(Non-PBEs are not required to follow this guidance.)
ASC 480 mandates that companies classify put warrants and warrants on redeemable shares as liabilities, as they involve an obligation to repurchase the issuer’s shares and may require asset transfer to settle the liability (ASC 48010-25-4). A puttable warrant is a written call option allowing the holder to buy the issuer’s shares and a put option enabling them to sell the warrants (or underlying shares) back at a specified price.
In practice, companies usually evaluate whether an instrument is within the scope of ASC 480 for recognition and measurement.
Accounting for puttable shares is identical to that for mandatorily redeemable warrants. ASC 480-10-55-33 states:
A warrant for puttable shares conditionally obligates the issuer to ultimately transfer assets – the obligation is conditioned on the warrant’s being exercised and the shares obtained by the warrant being put back to the issuer for cash or other assets.
Accounting for redeemable and mandatory redeemable warrants follows the guidance in ASC 480-10-25-8 through 25-13. These financial instruments have the following two characteristics:
• The instrument embodies an obligation (conditional or unconditional) to repurchase the issuer’s equity shares or is indexed to such an obligation. The instrument may require the issuer to settle the obligation by transferring assets.
• The instrument (call options) provides the right, but not the obligation, to buy from the seller shares of the issuer’s stock at a specified price. If the holder exercises the options, the issuer can settle the contract by physical settlement, net cash settlement or the choice of the issuer for settlement method (ASC 815-40-55-14).
Indexed Debts with Embedded Features
Equity and debt generally do not meet the definition of a derivative because they typically require payment in cash (or other assets) equal to the fair value of the debt or stock at inception unless they are hybrid instruments. A derivative is a financial instrument or an embedded feature that has all of the following characteristics:
• It has one or more underlying (e.g., an interest rate or a share price). An underlying has verifiable changes in its value that cause changes in the cash flow or fair value of the derivative;
• It has one or more notional amounts or payment provisions or both; the notional amount is a quantity that determines the size of the change that the underlying may cause;
• There is no requirement for an initial net investment;
• There is no net settlement provision through (1) implicit or explicit terms, (2) the existence of a market mechanism outside the contract, or (3) delivery of an asset (ASC 815-10).
In practice, companies usually evaluate whether an instrument is within the scope of ASC 480 for recognition and measurement. If it is not within the scope of ASC 480, companies assess it as derivative within the scope of ASC 815. These instruments may either be derivative or have embedded features as derivatives. If so, companies bifurcate and account for them separately. Companies remeasure derivatives, like liabilities, at fair value in each period.
A comprehensive analysis of debts with embedded derivatives is beyond the scope
of this article. However, a summary of accounting implications includes:
• Companies should evaluate whether they need to separately account for embedded features in indexed debts under Topic 815;
• If companies need to bifurcate the embedded feature, they should record it at fair value;
• They should allocate the amount to the host less the fair value of the embedded feature (i.e., the residual amount);
• If the amount allocated to the debt does not equal the debt’s par value, companies record the difference as a premium or discount.
In most instances, companies need to bifurcate a hybrid debt. If so, the companies measure the indexing feature at fair value in each period and reflect the changes therein in their earnings; however, the value of the debt remains unchanged.
On the other hand, if the indexing feature does not require bifurcation, companies
adjust the net carrying amount of the debt to reflect the increased liability from the index value and account for subsequent changes. Non-bifurcated embedded features are classified as equity or liability under ASC 470 or ASC 480 (e.g., call options, put options, conversion options, or contingent interests).
Accounting Complexities of Warrants Issued with Debt Instruments
Please see the TXCPA website at www. tx.cpa for an illustration.
Accounting implications of warrants issued in conjunction with debt instruments are complex. This article covered some of the basics of accounting for warrants.
In most cases, the application of accounting guidance requires significant management judgment. Companies often prefer to classify warrants as equity rather than liabilities and derivatives since liability
and derivative classified warrants require periodic valuation and may create volatility in the company’s earnings. However, the SEC has challenged the equity classification of awards in some cases recently.
JOSEF RASHTY, CPA, PH.D. (CANDIDATE),
is a member of the Texas Society of CPAs and provides consulting services in Silicon Valley, California. He can be reached at j_rashty@yahoo.com. *Submit
This special publication is an opportunity to highlight your organization to educators, university career centers, students, future CPAs and others!
Not only is it a great recruitment tool, the TXCPA Employer Guide also acts as an excellent resource for prospective employees with relevant editorial content focusing on careers in accounting. It will be mailed to Texas accounting department chairs, career centers, and TXCPA student and faculty ambassadors, as well as being emailed to over 24,000 individuals.
It’s a great way to extend your reach statewide!
Contact Lisa Turner or Gayle Massey at
Practices For Sale
ACCOUNTING BIZ BROKERS offers the following listings for sale:
Member of the Texas Association of Business Brokers
BUYING SELLING PRACTICES throughout Texas for over 40 years … Offering 95% conventional bank financing to buyers, so our sellers can cash out at closing! We only get paid for producing results! Confidential, prompt, professional. Practices available throughout Texas ... Contact Leon Faris, CPA ... PROFESSIONAL ACCOUNTING SALES ... 972-292-7172 … and visit our website: www.cpasales.com for the latest listings and information.
TEXAS PRACTICES CURRENTLY AVAILABLE THROUGH ACCOUNTING PRACTICE SALES
North America’s Leader in Practice Sales | Toll Free 1-800-397-0249. See full listing details and inquire/ register for free at www.APS.net.
NEW $555,000 gross. Tyler-Longview metro area CPA practice. Quality business clients provide opportunities for expansion. Revenues derived from 70% tax work and 30% accounting, half of which from businesses. TXN1629
NEW $299,000 gross. NW Houston CPA firm. Service mix is 81% tax and 19% accounting. Excellent cash flow with knowledgeable staff in place to support the buyer. Prime location with a reputation in the community that brings in constant referrals. Ideal opportunity for either an individual looking to get into practice ownership or an existing firm looking to add revenues. TXS5078
NEW $146,600 gross. Johnson County CPA practice. Revenues derived from tax services and caters to quality, loyal individual and business clients across a variety of industries. Has strong fees and minimal
overhead yielding cash flow to owner above 50% gross. Officed at home with clients faxing, emailing and mailing in info for easy transition for new buyer in time for tax season! TXN5075
NEW $831,000 gross. Bryan-College Station CPA firm. Owner looking to sell to focus on consulting business. 2023 gross revenue estimated over $900K! The service mix includes tax (57%), accounting (38%) and other (5%). Solid reputation in the community with growth opportunities. Knowledgeable staff in place for smooth transition. Buyer can lease or buy building. TXS5067
$840,000 gross. East Texas (Near I20) CPA practice for sale. First-rate client base of mostly businesses, business owners and high-net worth individuals. Exceptional cash flow to owner of 70%. Lots of room for expansion and flexible owner willing to aid in transition. TXN1630
$285,000 gross. Brazoria County CPA practice. Revenues derived from 94% tax work and 6% accounting. Knowledgeable staff in place for smooth transition with new owner. TXS1326
$1,303,000 gross. Midland-Odessa CPA practice. Revenues derived from 40% tax, 40% bookkeeping, 4% franchise reports and 16% payroll. Cash flow to owner 57% of gross. One owner is retiring. One owner is staying full time and all staff will assist in transition. TXW1034
$486,000 gross. Amarillo CPA practice. Single owner CPA in vibrant community. Desirably made up of 67% tax preparation and 33% bookkeeping for year-round income. Cash flow is over 61% gross revenues and has knowledgeable staff ready to assist in transition. TXW1032
$209,600 gross. Plano CPA practice. Located in a desirable community. Nice mix of revenues for year-round cash flow. 80% tax prep, 10% accounting services, 10% consulting/payroll/other services. Seller assisted transition. TXN1624
$513,000 gross. Heart of Texas CPA firm. 80% tax (78% inv., 13% bus., 9% other), 11% bkkpng, 9% audits/ reviews, cash flow around 43%, staff in place, owner available to stay on as employee after sale if needed. TXC1078
$480,000 gross. Houston CPA firm. Service mix includes tax (57%), accounting (42%) and other (1%). Year-round cash flow with experienced staff in place to continue with new owner. Wonderful reputation in the community that brings in constant referrals. Ideal opportunity for either an individual looking to get into practice or an existing firm. TXS1315
$347,000 gross. Galveston County CPA. Service mix includes 67% tax, 14% audit/review and 6% other.
Year-round work provides excellent cash flow. Prime location with loyal clients. TXS1287
$2,380,000 gross. West Texas firm. Highly motivated multi-owner CPA firm. Revenue mix is 14% accounting services, 29% tax preparation (49% individual, 41% business), 10% other and 57% attest services. Large tenured staff and long assisted transition by owner. TXW1030
$750,000 gross. West of Houston CPA firm. Primarily tax 88% with desirable year-round income from accounting and other work 12%. Great cash flow and knowledgeable staff ready for an owner assisted transition. TXS1319
$363,500 gross. Wichita Falls CPA tax and accounting practice. Revenues derived from 25% bookkeeping, 32% payroll and 43% tax work. Strong fee structure and yields cash flow to owner of 56% of gross. TXN1639
$354,500 gross. Corpus Christi area tax practice. Highly reputable firm with continued growth expected. 100% income from tax work, both individual and business. Staff and owner willing to transition sale of firm. TXS1318
$410,000 gross. Brownwood, TX CPA practice. High-quality client base made up of large businesses, providing room for growth. Balanced revenues of tax work (66%), accounting (14%) and other services (14%). TXN1638
$1,200,000 gross. East Texas CPA practice. Loyal client base of individuals and businesses. High referral rate to generate additional business and nice mix of services for year-round income. Strong, tenured staff and owner assisted transition. TXN1631
$354,000 gross. South Plains CPA practice. Single owner CPA firm with loyal clients. Revenues derived from 66% tax and 34% bookkeeping. Solid cash flow to owner of almost 60% gross. Full-time staff and leased office space available. TXW1033.
$517,000 gross. Ellis County/South of Dallas CPA practice. Mix of high-quality, loyal individual and business clients. 85% rev from profitable tax preparation. Strong, experienced staff in place provides continuity in transition and capacity for growth. Ideal for start-up or expansion. AVAILABLE AFTER 4/15/24. TXN5096
$595,000 gross. Hurst, TX CPA practice. Highquality clients include businesses, business owners, loyal individuals. Rev is 64% tax work, 30% accntg and 6% review/comp/misc consulting. Experienced staff and strong fee structure make a turn-key practice. AVAILABLE AFTER 4/15/24. TXN5103
$1,208,000 gross. Heart of Texas CPA firm. Tax preparation is 85-90% of revenue each year, approx. 2/3 of this is individuals. The rest is business and trust returns. Bookkeeping is 10-15% of revenue. Owner’s discretionary cash flow is 48% of revenue. Five employees staying and seller will transition for agreed time. AVAILABLE AFTER 4/15/24 TXC1077
$472,000 gross. Fort Worth CPA practice. Loyal client base. 70% tax work and 30% accounting services. Rapid, consistent growth combined with an experienced staff make this an exceptional opportunity. AVAILABLE AFTER 4/15/24. TXN1626
$800,000 gross. Northeast Dallas suburb CPA practice. Revenues nicely balanced between tax work (72%), monthly/quarterly/annual accounting services (22%) and payroll services (5%) providing steady, year-round income. About 60% revenue from businesses and strong fees yield solid cash flow to owner of about 50% gross. Experienced and dedicated staff in place and seller is willing to work after closing if desired. AVAILABLE AFTER 4/15/24 TXN5084
$460,000 gross. Frisco CPA practice. Clients are loyal individuals and a mixture of businesses that should continue to provide referrals and offer plenty of opportunity for expanding services. Strong fees should generate cash flow to the owner above 50% gross. With no long-term lease and many clients accustomed to remote/virtual service, these clients would make a profitable addition to another firm around Frisco. AVAILABLE AFTER 4/15/24 TXN1642
ACCOUNTING PRACTICE SALES
For more information, call toll free 1-800-397-0249. See full listing details and inquire/register for free at www.APS.net.
Classified Advertising in Today’s CPA
TXCPA offers opportunities to advertise in the Classifieds section of Today’s CPA magazine. For more information and to place a classified ad, please contact DeLynn Deakins at ddeakins@ tx.cpa or 800-4280272, ext. 8550, 972-687-8550 in Dallas.
Practices Sought
SEEKING CPA FIRM SELLERS
Selling in 2024? Accounting Biz Brokers has GREAT NEWS for you! Accounting Biz Brokers has been selling CPA firms for over 19 years and we know your market. Selling your firm is complex. We can simplify the process and help you receive your best results! Our “Six Steps to Success” process for selling your firm includes a personalized, confidential approach to bringing you the “win-win” deal you are looking for. Our brokers are the only Certified Business Intermediaries (CBI) specializing in the sale of CPA firms in the nation! When you are ready to sell, we have the buyers, financing contacts and the experience to assist you with the successful sale of your firm! Contact us TODAY to take the first step!
Member of the Texas Society of CPAs Member of Texas Association of Business Brokers
BUYING OR SELLING? First talk with Texas CPAs who have the experience and knowledge to help with this big step. We know your concerns and what you are looking for. We can help with negotiations, details, financing, etc. Know your options. Visit www.APS. net for more information and current listings. Or call toll-free 800-397-0249. Confidential, no-obligation. We aren’t just a listing service. We work hard for you to obtain a professional and fair deal.
ACCOUNTING PRACTICE SALES, INC.
North America’s Leader in Practice Sales
Miscellaneous
CLARUS PARTNERS - NATIONAL SALES TAX COMPLIANCE AND ADVISORY FIRM
Do you have questions about sales tax? Need help with multistate compliance after Wayfair? Taxability issues? Audit defense? Refunds? Business registration and licensing compliance? Voluntary disclosure?
Let us be a resource for your firm and your clients. Clarus Partners is a national sales tax compliance and advisory firm. With offices across the U.S., our four partners have a combined 100+ years of experience in this arena.
Let us know any way we can help.
Steve Hanebutt, CPA Clarus Partners | This firm is not a CPA firm 972-422-4530 | claruspartners.com | stevehanebutt@claruspartners.com
MICHAEL J. ROBERTSON,
CPA
Texas Sales and Mixed Beverage Tax Solutions
Client audited, liability, needs a review, we have found errors and changed the liability. Does your client have a compliance issue or general question about sales tax? Call our team of sales tax experts. Our team provides over 100 years of experience with the Comptroller of Public Accounts as former auditors and supervisors. We work to ensure a fair audit. Should your client need a payment plan, we’ll negotiate with the Comptroller of Public Accounts.
