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TECHNICAL ACCOUNTING

July 2013 Essential Briefings FASB REFINES THE DEFINITION OF AN INVESTMENT COMPANY

REGULATORY REPORTING ____________________________________________________________ Conflict Minerals Rules – Compliance Exercise or Opportunity?

TAX ____________________________________________________________ Governor Brown Eliminates Enterprise Zone Tax Credit Program

INTERNAL CONTROLS ____________________________________________________________ SEC Should Consider Requiring Companies to Disclose Whether They Obtained an Auditor Attestation


Contents July 2013

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ESSENTIAL BRIEFINGS 2 FA SB R E F I N E S T HE D E F I N I T IO N OF A N I N V E S T ME N T C OMPA N Y FASB issued ASU 2013-08 in June 2013 with the objective of providing clarity regarding if an entity met the definition of an investment company. If so, companies could apply the AICPA Audit and Accounting Guide, Investment Companies (“AICPA AA Guide”), which allowed entities to report portfolio companies at fair value and not be required to consolidate such companies into their financial statements.

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REGULATORY REPORTING 4 C O N F L IC T MI N E R A L S RUL E S – C OMP L I A N C E E X E RC ISE OR OP P OR T U N I T Y ? Without question, the Dodd – Frank Act hosts many provisions whose intent is to pull the curtain back on many corporate business practices.

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TAX 6 GOV E R N OR BROW N E L IMI N AT E S E N T E R P R ISE Z O N E TA X C R E D I T P ROG R A M On June 27, 2013, the California State Assembly passed Assembly Bill (“A.B.”) 93 with a 54-to-16 vote, effectively eliminating the California Enterprise Zone (“EZ”) Tax Credit program.

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INTERNAL CONTROLS 8 SE C SHOUL D C O N S ID E R R E QUIR I NG C OMPA N IE S T O D IS C L O SE W HE T HE R T HE Y OB TA I N E D A N AUD I T OR AT T E S TAT IO N Since the implementation of the auditor attestation requirement of the Sarbanes-Oxley Act of 2002 (Sarbanes-Oxley Act), companies exempt from the requirement have had more financial restatements...

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ESSENTIAL BRIEFINGS

FASB REFINES THE DEFINITION OF AN INVESTMENT COMPANY BY SUZIE DORAN | PARTNER

SDoran@SingerLewak.com | 310.477.3924

SUMMARY: FASB issued ASU 2013-08 in June 2013 with the objective of providing clarity regarding if an entity met the definition of an investment company. If so, companies could apply the AICPA Audit and Accounting Guide, Investment Companies (“AICPA AA Guide”), which allowed entities to report portfolio companies at fair value and not be required to consolidate such companies into their financial statements. As part of the convergence efforts between the FASB and IASB, they agreed to find a consistent methodology for determining if an entity is an investment company. Under this ASU, an entity regulated under the Investment Company Act of 1940 automatically qualifies as an investment guide. For all other entities, the FASB applied a blended approach. EF F E C T I V E DATE: The ASU is effective for interim and annual reporting periods beginning after December 15, 2013. Early adoption is prohibited.

This ASU does not apply to real estate entities and the measurement of real estate investments at this time. BACKGROUND:

SCOPE : This applies to all entities, which are considered or have previously been treated as investment companies. It impacts all entities that are within the scope of Topic 946 that will no longer be investment companies as a result of the amendments. Entities that adopted SOP 07-1 before the FASB’s indefinite deferral of that SOP also must assess whether they continue to be within the scope of Topic 946 by determining whether they are investment companies as a result of the amendments to the investment company assessment in this Update. Also, entities that are currently not within the scope of Topic 946 may be investment companies as a result of the amendments in this Update.

Under this ASU, an investment company is an entity that meets both of the following criteria: i) obtains funds from investors and provides them with investment management services and ii) asserts that its business purpose and substantive activities are related to investing the funds for returns from capital appreciation, investment income or both. After the above criteria are met, specific facts and circumstances will need to be further analyzed, which would consider the following factors: • More than one investment exists • More than one investor exists • Investors are not related parties of the parent (if there is a parent) and investment manager • Ownership interests are in the form of equity or partnership interests July 2013

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• Substantially all of the investments are managed on a fair value basis An entity under the Investment Company Act of 1940 automatically qualifies as an investment company. Although the ASU specifies that substantive activities are investing, it allows for an exception related to non-investment activities such as investment advisory and transfer agent activities if such activities are necessary for meeting the purpose of the investment company. Disclosures were expanded to require the following: 1. Entity’s status as an investment company and that it follows the accounting and reporting requirements of ASC 946 3 | SingerLewak

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2. Any financial support given to any investees during the period, type of support given and the purpose for giving such support. 3. Any contractual obligations to support an investee that has not yet been paid and the amount, type and situations meriting payment. Assessment of the definition’s being met is done at the formation of the entity and does not need to be re-assessed unless there is a change in the purpose and design of the entity. If an entity does not apply as an investment company, the change is applied prospectively and the fair value would change the carrying value of the investments on the date that the change is made. Similarly when an entity subsequently meets the definition,

the change would be prospectively applied with the difference between the carrying value and the fair value being recognized as a cumulative-effect adjustment to assets on that date with any unrealized gains or losses being recognized in other comprehensive income. The reason for the change would also need to be disclosed. E FFE CTIV E DATE : The standard is effective for interim and annual reporting periods for entities with periods beginning after December 15, 2013. Early application is prohibited.

SUZIE DORAN CAN BE REACHED AT SDORAN@SINGERLEWAK.COM OR 310.477.3924


R E G U L ATO RY R E PO R TI N G

CONFLICT MINERALS RULES – COMPLIANCE EXERCISE OR OPPORTUNITY? BY ROB SCHLENER | PARTNER

RSchlener@SingerLewak.com | 949.261.8600

Without question, the Dodd – Frank Act hosts many provisions whose intent is to pull the curtain back on many corporate business practices. And no one will argue that the practical aspects of implementing the provisions contained in the Act have yet again raised the bar on compliance with additional and sometime onerous regulations. A little over a year ago in August 2012, the SEC approved its final rule on conflict minerals. Section 1502 of the Dodd Frank Act generally requires companies to disclose their use of specific metals in the making of their products (either directly or through their supply chain), and disclose if these metals were sourced from the Democratic Republic of Congo (DRC) or surrounding area. If it is determined that the company’s products in fact due contain certain metals that came from this embattled region, the company will be required to file a Conflict Minerals Report with the SEC and publish it on their company website. This report will detail the steps taken by the

company must disclose how they come to this conclusion.

company, to investigate their use of these specific metals. B Y THE NUMBE RS The Conflict Minerals Rules require the first reports be filed by May 31, 2014 for calendar 2013, then annually on that date thereafter. The specific metals in question are gold, tantalum, tin and tungsten. The three step process specifically mandated in the rules: 1. Investigate and determine if the conflict metals are used in a company’s product 2. Investigate and determine if the metals present in products, were sourced in the DRC or surrounding area. If not, the

3. If the company determines that the metal in question was sourced from this specific area, the company must disclose this source by tracing its procurement back through their supply chain and disclose its findings. The Conflicts Minerals Report must be independently audited.

This report will detail the steps taken by the company, to investigate their use of these specific metals THE OPPORTUNITY Compliance with the Conflict Minerals Rules will require companies to perform extensive due diligence on its supply chain partners. Though this will clearly be a daunting task in the initial reporting period, the exercise can be of value from a more practical standpoint. Companies will have

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carte blanche authority to get answers to questions that should help them with sourcing, in the long run. We can see companies realizing savings through their

We can see companies realizing savings through their supply chain, by reviewing their procurement process from top to bottom supply chain, by reviewing their procurement process from top to bottom. Unintended competition could arise from this global exercise, with acquiring companies

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being the beneficiaries. Companies may go the path of social responsibility (which is the intent of the regulations) and choose to not do business with suppliers who do in fact trace the source of these metals back to the region. Suppliers who make the compliance process easy and efficient for the reporting company may be replacing those suppliers who are less than helpful. CONCLUSION With the first half of 2013 behind us, now is the time to formulate plans to comply with Section 1502 of the Dodd Frank Act. Create a sense of accomplishment for your team(s) tasked with compliance with these rules

Create a sense of accomplishment for your team(s) tasked with compliance with these rules – challenge them to find opportunities to improve your supply chain relationships while at the same time being compliant. ROB SCHLENER CAN BE REACHED AT RSCHLENER@SINGERLEWAK.COM OR 949.261.8600


TA X

GOVERNOR BROWN ELIMINATES ENTERPRISE ZONE TAX CREDIT PROGRAM On June 27, 2013, the California State Assembly passed Assembly Bill (“A.B.”) 93 with a 54-to16 vote, effectively eliminating the California Enterprise Zone (“EZ”) Tax Credit program. The Bill, which is highly likely to be signed by Governor Jerry Brown into law, will be effective January 1, 2014. Now is the time to act! Businesses who have not taken advantage of the benefits of the California Enterprise Zone Tax Credit program, are encouraged to evaluate the potential benefits under existing law. C HA N G E S UN DER A. B . 93 Under A.B. 93, the California EZ program will be replaced with a hiring credit with significant limitations, and will impose stricter qualification requirements, such as: • Demonstration of a net increase in new employees; • Qualified wages must be between $12.00 and $28.00 per hour, based on 150- and 350-percent of California’s minimum wage; and

• Only full-time employees will be considered for the hiring credit, and must qualify under one of four criteria: -- Unemployed/displaced worker; -- A U.S. military veteran: -- An ex-offender; or -- Recipient of the Earned Income Credit. The new hiring credit may only be claimed on a timely-filed, original return, and is subject to a competition process, based on the limited availability of funds within a respective fiscal year set by the newly-created California Competes Tax Credit Committee, which will be responsible for establishing limits on the aggregate amount of credits

available to taxpayers. Businesses seeking to claim these credits must request a tentative credit reservation with the Franchise Tax Board (“FTB”) within 30 days of the employee’s date of hire, and must submit an annual certification of employment for each full-time employee to remain eligible for the credit during the 60-month credit period. Businesses will also be subject to credit recapture requirements upon the termination of a qualified employee who is terminated within 36 months from the date of hire, absent a statutorily enumerated exception (i.e., voluntary separation of employee, disability, and terminations for cause, among other less common scenarios).

Businesses who have not taken advantage of the benefits of the California Enterprise Zone Tax Credit program, are encouraged to evaluate the potential benefits under existing law

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Qualified employees hired on or before December 31, 2013, and obtain the required credit vouchering, will continue to generate hiring credits under the existing rules. However, the carry-over periods for the EZ hiring credits will be limited to 10-years, as opposed to indefinitely under current law. The new bill also eliminates the Sales and Use Tax component of the Enterprise Zone program, for sales taxes paid on qualified asset purchases on or after January 1, 2014. Instead, A.B. 93 provides a Sales and Use Tax exemption

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The new bill also eliminates the Sales and Use Tax component of the Enterprise Zone program, for sales taxes paid on qualified asset purchases on or after January 1, 2014 on qualified purchases of tangible personal property made on or after July 1, 2014, and before January 1, 2019 (or July 1, 2021 for certain businesses located in specifically-designated economic

development areas determined on an annual basis). Generally, the qualified property must be used in manufacturing and/or research and development activities. If you are concerned or have any questions regarding how A.B. 93 will impact your business, please contact any of the individuals in SingerLewak’s Credits & Incentives Practice.


INTERNAL CONTROLS

CONGRESS INTRODUCES BILL TO HAVE IRS AUTOMATICALLY FILL OUT TAX FORMS WH AT G AO F OU ND Since the implementation of the auditor attestation requirement of the Sarbanes-Oxley Act of 2002 (Sarbanes-Oxley Act), companies exempt from the requirement have had more financial restatements (a company’s revision of publicly reported financial information) than nonexempt companies, and the percentage of exempt companies restating generally has exceeded that of nonexempt companies. Exempt and nonexempt companies restated their financial statements for similar reasons (e.g., revenue recognition and expenses), and the majority of these restatements produced a negative effect on the companies’ financial statements. Views on the costs and benefits of auditor attestation vary among companies and others. Although companies and others reported that the costs associated with compliance can be significant, especially for smaller companies, GAO’s and others’ analyses show that these costs have declined for companies of all sizes since 2004.

Companies and others reported benefits of compliance, such as improved internal controls and reliability of financial reports. However, measuring whether auditor attestation compliance costs outweigh the benefits is difficult and views among companies and others were mixed as to whether the costs exceeded the benefits of compliance. A majority of empirical studies GAO reviewed suggest that compliance with the auditor attestation requirement has a positive impact on investor confidence in the quality of financial reports. Some interviewees said the independent scrutiny of a company’s internal controls is an important investor protection safeguard. The Securities and

Exchange Commission (SEC) does not require exempt companies to disclose in their annual report whether they voluntarily obtained an auditor attestation. SEC officials said it is not common for SEC to require a company to disclose voluntary compliance with requirements from which it is exempt. However, federal securities laws require companies to disclose relevant information to investors to aid in their investment decisions. Although information on auditor attestation status is available to investors, requiring a company to explicitly state whether it has obtained an auditor attestation on internal controls could increase transparency and investor protection. W HY GAO DID THIS S T U DY Section 404(b) of the SarbanesOxley Act requires a public company to have its independent auditor attest to and report on management’s internal control over financial reporting; this is known as the auditor attestation requirement. In July 2010, the

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Dodd-Frank Wall Street Reform and Consumer Protection Act exempted companies with less than $75 million in public float from the auditor attestation requirement. The act mandated that GAO examine the impact of the permanent exemption on the quality of financial reporting by small public companies and on investors. This report discusses (1) how the number of financial statement restatements compares between exempt and nonexempt companies (i.e., those with $75 million or more in public float), (2) the costs and benefits of complying with the attestation

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requirement, and (3) what is known about the extent to which investor confidence is affected by compliance with the auditor attestation requirement. GAO analyzed financial restatements and audit fees data; surveyed 746 public companies with a response rate of 25 percent; interviewed regulatory officials and others; and reviewed laws, surveys, and studies. WH AT GAO RE COMME NDS GAO recommends that SEC consider requiring public companies, where applicable, to explicitly disclose whether they obtained

an auditor attestation of their internal controls. SEC responded that investors could determine attestation status from available information. But without clear disclosure, investors may misinterpret a company’s status; therefore, this warrants SEC’s further consideration. FOR MORE INFORMATION: A. NICOLE CLOWERS AT (202) 512-8678 OR CLOWERSA@GAO.GOV


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CFO Essentials Newsletter - July 2013