BUSINESS GOALS
FAMILY GOALS
OWNER GOALS
July/August 2013
OWNER GOALS ____________________________________________________________ Cash Transfers From Entities Loans or Distributions?
BUSINESS GOALS ____________________________________________________________ Simpler Financial Reporting Standards for Private Companies
FAMILY GOALS ____________________________________________________________ Belk sponsors 12th season of ‘Project Runway’
Letter from Partner
TODAY’S MOST PREVALENT AND RELEVANT STRATEGY FOR BUSINESS OWNERS: GROWTH!
Contents July/August 2013
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2 T ODAY ’S MO S T P R E VA L E N T A N D R E L E VA N T S T R AT EGY F OR BUS I N E S S OW N E RS: G ROW T H! As an advisor to many companies, I leverage the past to push clients to think about their future.
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4 C A SH T R A N SF E RS F ROM E N T I T IE S L OA N S OR D IS T R IBU T IO N S ? When dealing with related party shareholders or members it is very important to demonstrate whether an amount transferred is considered to be a distribution or a loan from the entity.
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6 S IMP L E R F I N A N C I A L R E P OR T I NG S TA N DA R D S F OR P R I VAT E C OMPA N IE S During 2012, the Financial Accounting Foundation (FAF) created the Private Company Council (PCC) in part to consider exceptions and modifications for private companies to financial reporting standards...
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7 BE L K SP O N S ORS 12 T H SE A S O N OF ‘P RO J EC T RU N WAY ’ Belk Inc. will promote its brand on the national stage as a sponsor of fashion-design TV show Project Runway.
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TODAY’S MOST PREVALENT AND RELEVANT STRATEGY FOR BUSINESS OWNERS: GROWTH! BY DAVID KRAJANOWSKI | PARTNER
dkrajanowski@singerlewak.com | 949.261.8600
As an advisor to many companies, I leverage the past to push clients to think about their future. There is no single strategy more prevalent among business owners and entrepreneurially – minded CEO’s right now, than growth. Since we just presented a workshop dedicated solely to this topic through our SingerLewak Academy, I thought I would share some thoughts with you as they were presented. In order to grow, one must look at the challenges. What are some common problems that hinder organic growth? • MISSION – Clearly understood by management, the “WHY” must inspire as well as set forth the expectations to be achieved. • MASTERY – Focus on what you are good at! Hire great for everything else. • MARKETING – What is your differentiator in the marketplace and how can it be leveraged? This must be specific, not general, and clearly hit home with the recipient.
• MULTIPLIER FACTOR – Don’t plan on 2-7% growth. Add a zero to the end and shoot for 20-70%. What would you have to do / change dramatically to make this happen? You may not hit it, but you will blow past your first targets.
In order to grow, one must look at the challenges. What are some common problems that hinder organic growth? Now is the time to develop strategies and build easily-learned skills. These, not luck, will set your course.
• TALENT AND CULTURE – Get the right people. We have all heard about the right people on the bus in the right seats. What about leveraging the right people to maximize the performance of others? Clear the way to let your stars leverage the Team. One interesting fact is that productivity doubles with an engaged workforce (average engagement in a workforce is 28%). How engaged is your workforce? • STRATEGY – We have all seen the standard matrix with four quadrants (new products, existing products, new markets and existing markets). New products take cash, lots of it (research and development), as do new markets (people and contacts in a new area that understand the new market). Existing products and markets require a completely different strategy. • EXECUTION – This is the bottom line, as everything else means nothing without this. How good are you at executing, assessing and adjusting
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on a daily basis? Is your organization open to transparent accountability so that it can become self-governing with performers, not talkers? Studies have shown that if you reduce the review interval, performance increases. Lastly, does your strategy for constant communication with your customers include the use of social media? If not, it should. Your competition is using it successfully! Growth through acquisition: How do I find targets if my desire to grow is through acquisition, as opposed to internal growth? Investment bankers are usually thought of when selling a company. However, many specialize in helping acquirers find targets (so-called “buy-side representation”). What do you look for? What needs to happen in due diligence to find out the 3 | SingerLewak
real value of a company? What are the pitfalls you have to be careful of? Most often, these pitfalls involve the integration of people, cultures, processes and systems. Operations are typically the main focus, but ignoring integration, the Achilles’ heel of acquisitions, can be a painful and costly mistake. Lastly, how are you financing growth? Standard lending may be secured, based on the strength of your company. Many times, asset based lending is the answer, as additional growth usually increases the noncash balance sheet accounts such as accounts receivable, inventory and fixed assets. Other financing arrangements may include mezzanine financing where debt can be subordinated and leveraged, though the cost of this source of funding will reflect the added risk a lender takes on. In addition, private equity arrangements may enable
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an owner(s) to take some money off the table and leverage other people’s money to share the risk (but also the upside) especially if growth plans are very dynamic. The bottom line, or should I say top line, will be the key to a company being successful in the future and differentiating themselves from the pack. Hopefully your plans will include an emphasis in this area. For more information, please go to www.SingerLewak.com to view this and other workshops in our SingerLewak Academy curriculum.
DAVID KRAJANOWSKI CAN BE REACHED AT DKRAJANOWSKI@SINGERLEWAK.COM OR 949.261.8600
BUSINESS GOALS
CASH TRANSFERS FROM ENTITIES LOANS OR DISTRIBUTIONS?
FAMILY GOALS
OWNER GOALS
BY SHASHI MIRPURI | SENIOR MANAGER SMirpuri@SingerLewak.com | 818.999.3924
When dealing with related party shareholders or members it is very important to demonstrate whether an amount transferred is considered to be a distribution or a loan from the entity. The tax consequences can be quite different. Recently a California Appeals Court upheld the adjustments posted by the Franchise Tax Board in converting a loan to one of its members to a taxable distribution.
The demand nature of the note and other provisions such as the absence of interest payments tended to lessen is reliability as evidence of a loan LOAN VERSUS DISTRIBUTION: In determining whether a transfer should be treated as a loan or distribution, there are 8 bright line tests that need to consid-
ered: (1) the magnitude of the withdrawal and whether a ceiling existed to limit the amount advanced; (2) how the partnership recorded the withdrawals on its books and records; (3) whether the taxpayer executed a promissory note; (4) whether interest was paid or accrued; (5) whether the partnership ever undertook to compel a repayment; (6) whether security was given for the loan; (7) whether the taxpayer was in a financial position to repay; and (8) whether there was an indication the taxpayer attempted to repay. All 8 items will be evaluated separately to determine the appropriate classification. In this particular court case, the
parties observed the formality of executing a promissory note contemporaneously with the disbursement of the payment to the taxpayer, which weighed in favor of a bona fide loan. However, the demand nature of the note and other provisions such as the absence of interest payments tended to lessen is reliability as evidence of a loan. In addition, there were several other factors that either were not determinative or were inconsistent with a loan and a debtor-creditor relationship. TAX RAMIFICATIONS BY ENTITY In the event treating the transfer as a loan is proper, there are no tax consequences regardless of the type of entity (i.e. Corporation, S-Corporation and Partnership). However, if it is determined that the loan should be characterized as a distribution, the tax impact would depend on several factors. If the distribution is from a CCorporation, IRC Sec 301 would
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govern the ultimate treatment in the following order: (1) Treated as a dividend to the extent of current or accumulated earnings and profits, (2) return of shareholder investment/recovery of capital (non-taxable), and (3) gain from the sale or exchange of the stock which is taxed as a long term capital gain. If the distribution is from an S corporation, the ordering is a little different. First, the distribution comes out of the Accumulate Adjustments Account (AAA). This is generally the amount of taxable income that the shareholder has included on his personal return reduced by
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certain items including distributions (non-taxable). Second, if the entity was ever a C corporation and had earnings and profits, the distribution will be a taxable dividend. Third, out of the Other Adjustment Account (OAA) which is generally made-up of exempt income that is allocated to the shareholder. Any remaining amounts will be distributed similar to the C Corporation (return of capital followed by capital gain distribution). If the distribution is from a partnership (including LLC’s), the partner will recognize no gain or loss to the extent that he has basis in his partnership interest.
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However, if the distribution is in excess of the partner’s basis in the partnership then gain is recognized to the extent of the excess. The gain recognized is treated as long term capital gain. With careful planning and discussions with your SingerLewak professional you may be able to avoid any unforeseen tax consequences. SHASHI MIRPURI CAN BE REACHED AT SMIRPRUI@SINGERLEWAK.COM OR 818.999.3924
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SIMPLER FINANCIAL REPORTING STANDARDS FOR PRIVATE COMPANIES OWNER GOALS
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BY JEROME VERMEULEN | SENIOR MANAGER JVermeulen@SingerLewak.com | 818.999.3924
During 2012, the Financial Accounting Foundation (FAF) created the Private Company Council (PCC) in part to consider exceptions and modifications for private companies to financial reporting standards that cause unnecessary complexity and cost because they are not relevant in a private company environment.
We anticipate issuing the proposals for public comment later this month, and encourage our stakeholders to review them and let us know whether they believe they will improve financial reporting for private companies The creation of the PCC has been seen by many CPAs to be a welcome relief and according to Barry C. Melancon, President and CEO of the American Institute of Certified Public Accountants, “Ef-
forts to improve private company financial reporting date back at least to the 1970s. We can now see a path toward real change, which is good news for private companies, their financial statement users and the CPAs who serve them.”
cerns about the complexity and relevance of certain standards for private companies that prepare GAAP-based financial statements,” said FASB Chairman Leslie F. Seidman. “We anticipate issuing the proposals for public comment later this month, and encourage our stakeholders to review them and let us know whether they believe they will improve financial reporting for private companies.”
Since its creation, the PCC has been hard at work and on June 10, 2013, the Financial Accounting Standards Board (FASB) voted to endorse three alternatives within U.S. Generally Accepted Accounting Principles (GAAP) proposed by the PCC. The proposals involve accounting for intangible assets acquired in business combinations, goodwill and certain types of interest rate swaps.
The first proposal—Accounting for Identifiable Intangible Assets in a Business Combination—would not require private companies to separately recognize certain intangible assets acquired in a business combination. The proposal enables private companies that elect the alternative within U.S. GAAP to recognize only those intangible assets arising from noncancelable contractual terms or those arising from other legal rights. Otherwise, an intangible asset would not be recognized separately from goodwill even if it is separable.
“Today’s decision by the FASB to endorse three PCC proposals represents significant progress in our joint efforts to address con-
The second proposal—Accounting for Goodwill Subsequent to a Business Combination—would allow for amortization of goodwill and
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a simplified goodwill impairment model. This would enable private companies that elect the alternative within U.S. GAAP to amortize goodwill over the useful life of the primary asset acquired in a business combination, not to exceed 10 years. Goodwill would be tested for impairment only when a triggering event occurs that would more likely than not reduce the fair value of a company below its carrying amount. Moreover, goodwill would be tested for impairment at the company-wide level as compared to the current requirement
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to test at the reporting unit level. The third proposal—Accounting for Certain Receive-Variable, Pay-Fixed Interest Rate Swaps—would allow private companies the option to use two simpler approaches to accounting for certain types of interest rate swaps that are entered into by a private company for the purposes of economically converting its variable-rate borrowing to a fixed-rate borrowing. Under both approaches, the periodic income statement charge for interest would be similar to the amount that would result if the private com-
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pany were to have entered into fixed-rate borrowing instead of variable-rate borrowing. The two approaches would apply to all private companies, except for financial institutions. Please do not hesitate to contact us if you have further questions about these proposals and/or any other accounting matter. JEROME VERMEULEN CAN BE REACHED AT JVERMEULEN@SINGERLEWAK.COM OR 818.999.3924
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BELK SPONSORS 12TH SEASON OF ‘PROJECT RUNWAY’ OWNER GOALS
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BY JENNIFER THOMAS | STAFF WRITER, CHARLOTTE BUSINESS JOURNAL Belk Inc. will promote its brand on the national stage as a sponsor of fashion-design TV show Project Runway. The Charlotte-based retailer said Wednesday it will sponsor this season’s accessory wall, which the show’s participants use to accessorize their looks. Belk has supplied more than 200 accessories, and its logo will be featured on the show’s accessories wall. The show also will feature a Modern. Southern. Style. design challenge — based on the Belk’s slogan — with a Belk executive serving as a guest judge.
Project Runway will provide us the perfect opportunity to extend the Belk brand “Project Runway will provide us the perfect opportunity to extend the Belk brand,” says Kathryn
Belk plans a sweepstakes on Facebook in which entrants can win a selection from the accessory wall or a trip to New York City to see a taping of Project Runway.
Bufano, Belk president and chief merchandising officer. “As the authority on lifestyle and fashion in the South, we are looking forward to adding our perspective to the show.” This year’s winning designer will have the opportunity to design and sell an exclusive line at Belk. The 12th season of Project Runway premieres on July 18 on Lifetime.
Belk is the nation’s largest privately owned department-store company, with 301 stores in 16 states. Its sales totaled $3.96 billion in fiscal 2013, which ended Feb. 2. The company has a ticker symbol, BLKI, but is not listed on any stock exchanges.
As the authority on lifestyle and fashion in the South, we are looking forward to adding our perspective to the show
During the season, Belk will feature the show at Belk.com/ projectrunway. That website will provide information about accessories seen on the show, video clips and featured products based on the winning design.
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