Today’sCPA JAN/FEB 2014
T E X AS S O C IET Y OF
C ERT I F I ED P U BL IC AC C OU N TANT S
Accounting for Modifications to Loans Included Within Acquired Loan Pools Contractors and Texas Sales and Use Tax Tax Implications of the Windsor Opinion and Revenue Ruling 2013-17 for Same-Sex Couples
LARGE Employer Status Under the Affordable Care Act
Also: Expanding Your CPA Practice
From SAS 70 to SSAE 16 – The Impact of the Standard
LOYE E BE NE FI T
EMP • L
ry a s r e iv n n 10 th A
It’s a 10th Anniversary Celebration Like No Other For a short time, we’re unlocking several key member-only resources from both the Employee Benefit Plan Audit Quality Center (EBPAQC) and the Governmental Audit Quality Center (GAQC), including archived web events, practice aids and more. Use these resources to enhance the quality of your ERISA audits, Yellow Book audits, single audits, HUD audits, and financial statement audits of governments and not-for-profits. We are confident you’ll find the value in membership as do 99% of our members.* Join the Quality Celebration Today at auditquality.org/celebrate10
“The investment was recouped after the first email.” – GAQC member
*2012 GAQC & EBPAQC member surveys
Copyright © 2013 American Institute of CPAs. All rights reserved.
CHAIRMAN William Hornberger, CPA
EXECUTIVE DIRECTOR/CEO John Sharbaugh, CAE
JANUARY/FEBRUARY 2014 VOLUME 41, NUMBER 4
EDITORIAL BOARD CHAIRMAN Winford Paschall, CPA
Staff MANAGING EDITOR DeLynn Deakins email@example.com 972-687-8550 800-428-0272, ext. 250
TECHNICAL EDITOR C. William Thomas, CPA, Ph.D. Bill_Thomas@baylor.edu
COLUMN EDITORS Greta P. Hicks, CPA Mano Mahadeva, CPA, MBA James F. Reeves, CPA C. William (Bill) Thomas, CPA, Ph.D.
WEB EDITOR Wayne Hardin firstname.lastname@example.org
Ali Allie, Anice Asberry; Melinda Bentley; Rosa Castillo; Jerry Cross, CPA; Anne Davis, ABC; Donna Fritz; Wayne Hardin; Chrissy Jones, AICPA; Rhonda Ledbetter; Craig Nauta; Catherine Raffetto; Katey Selph; Patty Wyatt
22 Applicable Large Employer Status
5 Chairman’s and Executive Director’s Message
DIRECTOR, MARKETING & COMMUNICATIONS Janet Overton
6 Tax Topics
2014 Tax Season Time
12 Spotlight on CPAs
The Warren Group thewarrengroup.com email@example.com
7 Business Perspectives
17 Expanding Your CPA Practice
20 Capitol Interest
8 Accounting and Auditing
Donna Fritz Texas Society of CPAs 14651 Dallas Parkway, Suite 700 Dallas, Texas 75254-7408 972-687-8501 firstname.lastname@example.org
Editorial Board Arthur Agulnek, CPA-Dallas; Kristan Allen, CPA-Houston; James Danford, CPAFort Worth; Greta Hicks, CPA-Houston; Baria Jaroudi, CPA-Houston; Tony Katz, CPA-Dallas; Jeffrey Liggitt, CPA-Dallas; Mano Mahadeva, CPA-Dallas; Alyssa Martin; CPA-Dallas; Dawne Meijer, CPA-Houston; Winford Paschall, CPA-Fort Worth; Marshall Pitman, CPA-San Antonio; Mattie Porter, CPA-Houston; Kamala Raghavan, CPA-Houston; James Reeves, CPA-Fort Worth; Barbara Scofield, CPA-Permian Basin; Brinn Serbanic, CPA-Central Texas. © 2014, Texas Society of CPAs. The opinions expressed herein are those of the authors and are not necessarily those of the Texas Society of CPAs. Today’s CPA (ISSN 00889-4337) is published bimonthly by the Texas Society of Certified Public Accountants; 14651 Dallas Parkway, Suite 700; Dallas, TX 75254-7408. Member subscription rate is $3 per year (included in membership dues); nonmember subscription rate is $28 per year. Single issue rate is $5. Periodical POSTAGE PAID at Dallas, TX and additional mailing offices. POSTMASTER: Send address changes to: Today’s CPA; 14651 Dallas Parkway, Suite 700; Dallas, TX 75254-7408.
| JANUARY/FEBRUARY 2014
Random Thoughts from the Capitol
Proof of Payment is the First Step Disrupt Yourself! Caught in the Middle
9 Emerging Issues
Accounting Education 2020: A Stakeholder’s Perspective
26 Accounting for Modifications to Loans Included Within Acquired Loan Pools
29 Contractors and Texas Sales and Use Tax
34 Tax Implications of the Windsor Opinion and Revenue Ruling 2013-17 for Same-Sex Couples 36 From SAS 70 to SSAE 16 – The Impact of the Standard
Chapters and the Responsibility of Individuals
14 Take Note
Today’sCPA JAN/FEB 2014
Y OF TEX AS SO CIET
AC C OUNTAN T S CERTIFIE D PUBLIC
42 Classifieds Accounting for s to Loans
Modification Included Within Acquired Loan Pools Sales Contractors and Texas and Use Tax the Tax Implications of Windsor Opinion and Revenue Ruling 2013-17 for Same-Sex Couples 16 – From SAS 70 to SSAE The Impact of the Standard
Employer Status Act
See the digital version of
Under the Affordable Care
Also: Expanding Your CPA Practice
Today’s CPA online at tscpa.org. 3
WHAT CAN YOU EXPECT
FROM TSCPA BESIDES Personal and Career Development Cutting-Edge Professional Information and CPE Enhancing the Image of the CPA Profession Recruiting New Members to the Profession Protecting the CPA Certificate You can expect special deals and discounts
New Member Benefit Radiate360 is an easy-to-use digital marketing platform that enables CPAs to manage
their web presence, social media accounts, business directory listings, online reputation and digital/ mobile media campaigns – all within one interface. For more information, a demo or to set up a meeting, visit http://www.radiatemedia.com/tscpa, or contact Robert Hernandez at 866-825-9005 or Robert.Hernandez@RadiateMedia.com.
Discount Sports Tickets TSCPA has arranged deals with the San Antonio Spurs, Houston Rockets and Dallas Mavericks. Visit the Member Benefits Marketplace at tscpa.org.
TSCPA Magazine Subscription Program Discounts on magazine subscriptions 800-603-5602
Texans Credit Union Full service financial institution 800-843-5295, www.texanscu.org
Paychex Partner Program
Becker CPA Review Direct Bill Program Save $600 per staff member off the cost of the full four-part CPA review course. Contact email@example.com
CPA Exam Review Discounts For a complete list of exam review discounts available, visit the Member Benefits Marketplace at tscpa.org.
InterCall Exclusive rates on audio and web conferencing services. 1-800-636-2377
Payroll processing. 877-264-2615
Online career center for accounting and finance professionals. tscpa.careerbank.com
Discounts on credit card processing 888-227-9856
Tech Depot Discounts on computer and technical products 888-289-6424
Infinet, Inc. AntiSpam/AntiVirus Protection 214-446-0089
Accurate Forms & Supplies Discounts on computer supplies and tax forms 800-777-0072
Monroe Systems for Business
Framing Success Discounts on professional framing of all certificates. 800-677-3726
Marsh Affinity Group Services TSCPA Insurance Trust offering a variety of insurance plans, including TSCPA-sponsored professional liability insurance. 800-262-7689
Office Depot Discounts on office supplies 201-253-5215
Discounts on calculators and other supplies www.monroe-systems.com
TSCPA Members’ Retirement Program – Members are waived $25 enrollment fee. 800-523-1125, www.axa-equitable.com/mrp
Bank of America
TSCPA credit card programs – Platinum MasterCard, CPA logo and other benefits. 800-932-2775
FedEx Office Discounted pricing on most services 646-302-9242
Quest Membership Program Save 50 percent on your next hotel bill 800-STAY450
Discounts on car rentals ID number: 1041643 800-654-2200, www.hertz.com
La Quinta Inns and Suites Ten percent off standard room rates. Discount code: TXSCPA. 800-531-5900, www.lq.com
UPS Shipping Save up to 36% on a broad portfolio of shipping services. www.savewithups.com/txscpa
Homeowners and auto insurance ID Number: 7026. 800-524-9400
Please visit the Member Benefits Marketplace at tscpa.org for complete information and links to each of our Member Discount Programs.
Questions? Contact the Member Benefits Administrator at 1-800-428-0272 ext. 216 or firstname.lastname@example.org.
Chairman’s and Executive Director’s Message By William H. Hornberger, CPA | TSCPA Chairman & John Sharbaugh, CAE | TSCPA Executive Director/CEO
2014 Tax Season Time In this upcoming tax season, CPAs will need to be prepared for a remarkable number of tax law changes. The American Taxpayer Relief Act, passed in early 2013, brought some certainty when many expiring tax breaks were extended and lower rates were preserved for most individuals, but those with upper-income levels face higher top rates on ordinary income, capital gains and dividends. There are two new taxes, a 0.9 percent payroll tax on certain wages and selfemployment income, as well as a 3.8 percent tax on net investment income. CPAs will also need to deal with tax issues related to the Patient Protection and Affordable Care Act (PPACA) and the Defense of Marriage Act (DOMA). This issue of Today’s CPA magazine includes an article on each of these topics. We also want to remind members that in addition to Today’s CPA magazine, TSCPA’s Tax Issues Community on the website offers a wealth of information and resources to use during tax season and throughout the year. In the Federal Information section of the community, there are links to IRS directories, news releases, the Taxpayer Advocate Service site, AICPA’s online tax center, and more. The community’s State Taxation section contains links to information on 2013 Franchise Tax updates, along with links to Texas tax forms, the Texas Comptroller of Public Accounts and State Tax Automated Research System (STAR) websites, Texas comptroller audit manuals, and other information. To keep members current on federal tax legislation and regulation during tax season, TSCPA provides news
alerts and updates the Federal Tax Policy blog. There are links available to several other tax-related blogs, including the TaxProf Blog, the Tax Foundation’s Tax Policy Blog, and Don’t Mess With Taxes Blog. In the Tax Issues Community, members will also find links to: • online resources and a tax calculator; • archives of TSCPA’s Tax Issues electronic newsletter and the Today’s CPA magazine Tax Topics column written by Greta Hicks, CPA; • TSCPA’s Ask a Member program where CPAs can connect with other members for informal consultation on questions or concerns; • resources for identity theft prevention and awareness; • CPE tax and compliance seminars, and • much more. SECURING THE PROFESSION CPAs have worked hard to earn and keep their credential and want it to be protected. TSCPA works hard to secure the protection of the profession through regulatory and political advocacy, creating opportunities for dialogue between CPAs and standardssetting bodies. In its activities throughout the year, TSCPA’s Federal Tax Policy Committee solicits input from members and responds to actual and proposed federal tax legislation, regulations and administrative pronouncements. The primary focus is on issues of tax administration.
This year, the Federal Tax Policy Committee issued comments to the IRS on proposed regulations, sent letters to members of Congress on issues impacting the profession, made Capitol Hill visits, released a revised “Analysis of Legislative Proposals to Repeal Certain Tax Treatments of Domestic Oil and Gas Exploration and Development,” and more. The Relations with IRS Committee maintains communications between TSCPA and the IRS to exchange ideas and information on topics related to the administration of federal tax laws and regulations. TSCPA/IRS joint meetings are held regularly throughout the year and are hosted by TSCPA’s Relations with IRS Committee. The primary focus is on issues of tax administration that impact CPAs. At press time, TSCPA is closely watching for any tax reform legislation that may come from Congress, as well as information on beneficial tax incentives slated to retire at the end of 2013 unless Congress acts. The start date of the 2014 filing season has been delayed. The IRS announced it will start accepting returns on Jan. 31, 2014. Be sure to watch your communications from TSCPA for news on any last-minute changes affecting tax season. The weekly electronic Viewpoint newsletter contains current updates on tax matters. The Tax Issues Community, with links to TSCPA’s tax-related blogs, is available in the Resource Center at tscpa.org. Under the Resource Center tab, scroll down to Member Communities, select Tax Issues, and log in as a member. ■
Willie Hornberger can be contacted at email@example.com. John Sharbaugh can be contacted at firstname.lastname@example.org.
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Tax Topics By Greta Hicks, CPA | Column Editor
Proof of Payment is the First Step Revenue Procedure 92-71 describes the information needed to be shown on bank and credit card statements for them to be treated as proof of payment of a Sec. 162 expense. Statements that provide detailed information, according to Rev. Proc. 92-71, do meet the documentation or substantiation test for Code Sec. 162, even without cancelled checks or credit card receipts. Recent audits reflect the agent/ auditor is making full disallowance for lack of substantiation when only statements are provided. The statements by themselves will not support a Sec. 274 entertainment, travel, gift, or transportation expense deduction. Sec. 274(d) reads: “unless the taxpayer substantiates by adequate records or by sufficient evidence corroborating the taxpayer’s own statement (A) the amount of such expense or other item, (B) the time and place of the travel, entertainment, amusement, recreation, or use of the facility or property, or the date and description of the gift, (C) the business purpose of the expense or other item, and (D) the business relationship to the taxpayer of persons entertained, using the facility or property, or receiving the gift,” the expense is not properly documented. P.L. 99-44 deleted the contemporaneous requirement in Sec. 274(d), which reads in part: “An Act to amend the Internal Revenue Code of 1954 to repeal the contemporaneous recordkeeping requirements…” Current tests for Sec. 274 requires “adequate records or other evidence corroborating the taxpayer’s own statement…” I.T. Reg §1.274-5T(c)(1) goes further: “A taxpayer must substantiate every element of an expenditure by adequate records supported by documentary evidence, or by sufficient evidence corroborating the taxpayer’s statement. The probative value of written evidence is greater than oral evidence, as is the value of written evidence that is recorded ‘at or near’ the time of the expenditure.” Documentation for travel expense is covered under I.T. Regs. 1.274-5T(c)(2)(i) and (ii), “Documentary evidence, such as receipts, paid bills, or similar evidence sufficient to support an expenditure, is required for (1) Any expenditure for lodging while traveling away from home, and (2) Any other expenditure of $75 or more except, for transportation charges, documentary evidence will not be required if not readily available.” I.T. Regs § 1.162-17(d)(3) states, “Where records are incomplete or documentary proof is unavailable, it may be possible to establish the amount of the expenditures by approximations based upon reliable secondary sources of information and collateral evidence.”
What about the Cohan Rule? Is it possible to succeed by arguing that “it is reasonable to expect” certain types of expenses? Cohan is alive and well when it comes to Sec. 162, but not for Sec. 274. In Albert H. Payne, TC Memo 1986-93, the Tax Court approximated various deductions (including telephone charges and overnight travel expenses). In David W. Bauer v. Commissioner, TC Memo 2012-156, the Tax Court held that an independent contractor who provided moving services was, after a good faith attempt, entitled to deduct an estimated amount of contract labor expenses. The same sentiment is covered in I.T. Regs §1.274-5T(c) (5), “Where the taxpayer establishes that the failure to produce adequate records is due to the loss of such records through circumstances beyond the taxpayer’s control, such as destruction by fire, flood, earthquake, or other casualty, the taxpayer has the right to substantiate a deduction by reasonable reconstruction of his expenditures or use.” As tax advisors and return preparers, we have the challenge to educate our clients that: • Bank statements or credit card statements are proof of payment ONLY. • Additional documentation is required for Sec. 274 type expenses. And to educate IRS employees that: • Sec. 274 does not require records to be contemporaneous. • Reconstructed records or approximations are adequate. • Cohan can apply when there is a reasonable basis for determining the amount of the non-Sec. 274 expenses. If the agent/auditor does not follow IRS National Office Guidelines or court decisions, go to Appeals and propose a settlement. Most agents/auditors are trained to be very conservative in their decisions. Appeals goal is to settle cases. Give them a reason and a basis on which to settle in favor of the taxpayer. ■
Greta Hicks, CPA, is a consultant on IRS problems, seminar discussion leader, author of continuing education courses and web content provider. She can be reached at email@example.com or www.gretahicks.com.
| JANUARY/FEBRUARY 2014
Business Perspectives By Mano Mahadeva, CPA, MBA | Column Editor
Disrupt Yourself! Our roles as finance professionals have changed dramatically over the last few years. Finance, which typically encompasses a company’s traditional information management function, such as accounting, reporting, treasury, tax and budgets, continues to evolve, and has become a key business partner at the heart of the organization, with a focus on business insight and finance efficiency. As our roles evolve, we must professionally evolve as well, to adapt to the new environment. As businesses change, so must we. As leaders, we need to re-evaluate ourselves constantly to improve. We need to do so to stay relevant at work and to be resilient in the rapidly changing employment environment. If we do not, we chance obsolescence, ineffectiveness and possibly career extinction. With the new year, our professional evolution should be a MUST resolution – and a stimulating one at that! Expanding our expertise to face the new world requires a self-imposed, customized, personal development plan with the appropriate time to see it through. This should be above and beyond what your employer offers in training and development, as those offerings may be very broad in nature and may not fit your specific needs. Below are topics of focus as you consider your resolution/s. The Blind Spot – Most professionals try to stay within their comfort work zone, since that is what they are comfortable doing. Why not work in an area of “discomfort?” The best advice I received was from a former COO who suggested I get into operations in order to excel in finance. At the time, I did not understand his rationale, but I did make the move. This change helped me identify the key business metrics that drove our business and gave me an understanding
of what made them change. It also gave me an opportunity to explain variances beyond merely a simple percent change. And it made both the operators and me communicate and understand what each needed to have a successful implementation. It truly helps to walk in others’ shoes. Knowledge – Education and accreditations can help you keep up with the latest technologies and improve your knowledge, and make certain that what you do adds value to your capabilities and marketability. The knowledge obtained through education helps change the way you think, and helps re-frame solutions. Good decisions come from knowledge, not numbers, and in the real world, it is about making critical halftime adjustments that help your company stay in the game. A habit of voraciously reading quality journals, periodicals, papers, sciences, business books and summaries also helps us gain new insights and perspectives to shake up our familiar and inert ways. Regardless of how it was obtained, a nugget of critical information is worth its weight in gold. Oral and Written Communication – Effective communication and presentation skills will help ensure that you get what you want, professionally and personally. But for many people, it is one of the most difficult aspects of their job. Nervousness, an overreliance on slides, a lack of focus and excessive detail are some common
problems, all of which can be corrected with training and practice. When presenting, be focused; don’t try to be perfect! If you need a slide deck, then prepare a few and use it only as a guide; try to maintain a balance between having too much or too little data. It is critical that you have a great grasp of your topic and that you know every key detail – this is about your credibility. Presenting well – whether writing or speaking – is all about practice, practice, and more practice. Why not record a dry run or two, then play it back to look for areas of improvement? “Mind Stretcher” Hobby – Something I have found to be of immense use in business strategy and mental agility is the game of chess. If you have not tried it, you should! It is a game that helps you in improving your emotional and mental skills. It is a game that makes you move quickly when situated in a complex state, faced with unexpected change. Successful companies use chess strategies, such as attacking, defending, tactically deploying resources and maintaining a competitive advantage. The game is about making moves when you don’t know what to do! Success is a mindset; it is the deep burning desire to excel – in this case, for we professionals to be ready and willing to adapt to changes in the ecosystem. The good news is that we have the capacity and the capability to adapt, but how we disrupt ourselves is a skill which needs to be cultivated. ■
Mano Mahadeva, CPA, is Chief Financial Officer with Solis Health in Addison, Texas. He serves on both the Editorial Board and the Business and Industry Issues Committee for TSCPA. Mahadeva can be reached at firstname.lastname@example.org.
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Accounting and Auditing By Dan Chenoweth, MBA, CPA, Executive Education, Inc. | Guest Columnist
Caught in the Middle How Financial Managers Can Add Value to the Due Diligence Process Financial managers are sometimes caught in the middle of a merger, acquisition or alliance (M/A/A). Suppose your management team has decided a potential M/A/A is a good strategic fit. It is now your turn to conduct financial due diligence to determine a reasonable market value. You must also project future combined results and track actual results against these projections after the company completes the deal. As most business people know, many M/A/As fail to deliver expected results. However, most people don’t know those shortcomings often stem from corporate culture clashes. Companies often fail to address such problems until after the merger takes place, often too late to salvage the M/A/A. When projections aren’t met, blame often falls squarely on the financial manager’s shoulders. It is our job to explain why the numbers aren’t there! “Culture clash” is usually an inherent aspect of the M/A/A process. The bottom line is simple: if the financial manager proactively assesses the risk cultural issues pose to the alliance’s success and helps develop countermeasures, there will be a higher probability the alliance succeeds. Additionally, you will enhance the entire due diligence process and accounting’s reputation. Consider these issues during due diligence:
• What are both organization’s cultures? • How might a “culture clash” impact the deal? • How can you assess corporate culture while simultaneously conducting financial due diligence?
No longer can a financial manager just look at a prospective M/A/A’s financial information without at least laying the framework for discussing the more intangible cultural issues that can mean the difference between success or failure. By taking a more holistic approach, you will add even more value to the due diligence process and further enhance your personal credibility. ■
TSCPA offers continuing professional education on the topic of mergers and acquisitions. To learn more, visit the CPE section of TSCPA’s website at tscpa.org. 8
Dan Chenoweth, MBA, CPA, is a discussion leader with Executive Education, Inc. and a former Colorado Society of CPAs board member.
| JANUARY/FEBRUARY 2014
Emerging Issues By James F. Reeves, CPA | Column Editor
Accounting Education 2020: A Stakeholder’s Perspective Part 2 in a 3-Part Series Few people would argue that the current higher education model is indefinitely sustainable on its current trajectory. While the basic model for instruction has been slow to change, the cost of tuition has risen 3.5 times the cost of living over the last 20 years, forcing students and parents to triangulate on the chasm between the cost of education, what they can afford and are willing to pay, and the ultimate return on investment. Part of the solution inevitably will be virtual courses and perhaps even virtual degrees. This is probably what Gov. Rick Perry had in mind when he challenged Texas universities to develop a bachelor’s degree program costing no more than $10,000. New delivery models for higher education have already commenced. One approach, commonly known as blended learning, combines multiple media, including online and live programs, to tailor the learning experience to individual student needs, allowing students to learn at their own paces. University of Texas System Chancellor Francisco Cigarroa recently presented his vision for the U.T. system, where universities leverage technology to facilitate language learning, writing skills, research, and communication. He refers to a report published by Education Secretary Arne Duncan, citing evidence that teachers are more effective with a blended learning approach, incorporating digital content and online learning systems into everyday classes. It wasn’t too long ago that online courses were experimental; today, they are becoming increasingly common, often generating tens of millions of dollars of tuition revenue for their universities. In addition to online courses leading to a traditional degree program, even newer higher education models are emerging. Many top-tier universities have begun offering online courses to anyone who chooses to enroll. For the most part, these courses are moderately priced, or even free, and not offered as part of a degree program. They often showcase prominent professors and enroll tens or even hundreds of thousands of participants from around the world who sign up for a course for the sole purpose of learning. The universities get a public relations benefit and a recruiting tool; the professors enhance their reputations on a global scale; and the students get the opportunity to learn from some of the world’s most renowned professors and enhance their skills. The courses include video clips of short lectures, slides, interactive Today’sCPA
| JANUARY/FEBRUARY 2014
quizzes, auto-graded exercises, discussion forums where students can vote relevant questions up or down and provide student-to-student help, and typically lead to a certificate of completion. Many of the students are professionals trying to expand their skills, according to a recent article in The Atlantic, but participants also include teenagers, college students, and retirees. They not only like the price tag, but also the instant feedback and the fact they can learn on their own timetable. This new format has already garnered a new moniker – MOOC (pronounced “mook”) or massive online open classroom. The University of Texas launched its first four MOOCs last fall, but is also on the leading edge of a variation of the continued on next page
Emerging Issues continued from page 9
MOOC known as a synchronous massive online course, or SMOC, which is a course offered for credit in a live streaming format to both UT students and non-students who participate in the courses twice a week in real time. Students take online quizzes before each class, then move back and forth between presentations by professors and online chat room discussions where professors can participate. The cost for non-UT students is $550, compared to about $900 for a traditional course for in-state students and $3,000 for out-of-state students. Georgia Tech is taking online learning to yet another level. Beginning this spring, Georgia Tech is offering a master’s degree in computer science in a MOOC format for about $6,600, compared to the $45,000 on-campus price, according to The New York Times. It is able to make this work with a significant investment by AT&T, which will use the program for employee training and to spot potential new hires among the almost 2,400 applicants. Other schools are experimenting with new delivery models as well. Arizona State University
is basing a variable tuition model on varying levels of faculty involvement. The Florida Legislature has directed the University of Florida to launch online bachelor’s degree programs for $4,700, about 75 percent of on-campus in-state tuition. No doubt, the financial models are still evolving, and nobody is suggesting online learning will totally replace the classroom. But by all accounts, the most effective learning environment is a blended learning environment whereby the online component helps create knowledge and forces the institutions, students, and professors to focus on the higher value aspects of the learning process, including tutoring, conversing, and group projects. David Brooks recently observed in a New York Times column, “What happened to the newspaper and magazine business is about to happen to higher education, a rescrambling around the web.” That’s probably pretty accurate – a rescrambling of an industry, and this one should be of profound interest to CPAs. ■
GR WTH It’s what CGMA stands for. Officially, of course, it’s Chartered Global Management Accountant. A new designation representing accomplished professionals that drive and deliver business success, worldwide. Find out more at cgma.org
Copyright © 2012 American Institute of CPAs. All rights reserved.
James F. Reeves, CPA, is Senior Vice President, New Product Development at the Tax and Accounting business of Thomson Reuters. Contact him at email@example.com, or visit his blog at http://jamesfreeves.blogspot.com.
1/26/12 4:01 PM
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Chapters By Rhonda Ledbetter | TSCPA Chapter Relations Representative
Chapters and the Responsibility of Individuals TSCPA is made up of thousands of individuals who have all made the decision to be responsible for taking care of the profession. TSCPA is responsible for connecting, protecting and advancing you. The chapters provide members with the perfect opportunity to fulfill their responsibility to their communities. Individuals come together to help charitable and civic organizations, and to share their knowledge of financial matters.
Members in action at the Austin, Brazos Valley, Corpus Christi, Dallas, and Fort Worth chapters.
| JANUARY/FEBRUARY 2014
Spotlight on CPAs By Anne McDonald Davis, ABC
San Antonio Native Joins Family Business, Reaches out to Local Students
From top to bottom: Kim Nourie with her father, Charles. Her rescue dog, Izzy. Nourie in Africa.
From childhood to the present, Kim Nourie, CPA-San Antonio, pondered disparate choices. “My initial aspiration was to be a nun,” laughs Nourie. “Next, a race car driver.” Much later in life, after graduating from Baylor with her accounting degree, she aimed her career at “big.” Big bustling cities, big public practice firms, big business. But after a hectic career trek in Dallas, Los Angeles, and Chicago, Nourie began to long for a different kind of life. She recalls: “One night I was talking to a dear friend of mine who needed career counseling and my advice to her was: ‘You are not happy with what you are doing and you know you want to move across the country back to your hometown. What’s stopping you? The worst thing that could happen is you don’t like the new profession that you’ve chosen and you don’t like living there anymore. So then, go and get your old job back and return to your old life. What do you have to lose?” After Nourie hung up the phone, it occurred to her to take her own advice. For years, she and her father had discussed working together, doing financial planning and investment management. “I thought, you know, there’s no time like the present,” she muses. “I decided, if I don’t do it now, when will I? … So that’s how I left corporate America.” In retrospect, the San Antonio homecoming sounds very warm and happy; however, Nourie acknowledges that it was a leap of faith. She recollects: “I was making a very nice income and all of a sudden I went from that to where I could get a job at McDonald’s and make more money flipping burgers. When you’ve reached that point in life, it is a little scary … but it is also very liberating, because there’s only one place to go from there. I’m going to go up. I’m going to go up.”
And up she went, although the transition from a clearly defined corporate culture was tricky, going from an “all business” environment to an “all family” environment overnight (her mother also worked in the business). But she says it was “a neat opportunity.” She chuckles: “It’s interesting, seeing your parents from a professional standpoint because as a child, you’ve always just known them as Mom and Dad. Suddenly you go to work and it’s like, OK, you set Mom and Dad aside and now this is Mary and this is Charles. A lot of times, I would even reference them by first names at work to reinforce that distinction.” In time, Nourie concluded that “this was the right thing for me. I was in my mid-30s and the way that I’ve explained to people is: the life that I was living, while it was exciting and one that looked very glamorous from the outside, I think the tail was wagging the dog. I ended up realizing that I could take time to do things that I enjoyed and that could also be good for my career and my life. In the past, when I was in working mode, there was no time for anything but work.” JUNIOR DUEL One of the activities that Nourie is now able to fit into her life is volunteering for the Junior Duel program at area schools. A high school financial planning competition based on an Arizona program, Nourie’s hometown version was crafted by the San Antonio CPA Society and is called “Junior Duel in Ol’ San Antonio.” In its sixth year locally, the mission is for students to enter their young adult years with a strong level of understanding of personal finances. In the fall semester, teachers are supplied with curriculum (currently the National Endowment for Financial Education curriculum is used) designed to educate students about personal Today’sCPA
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financial management basics. In the spring semester, participants are then provided a written case study and teams are charged with coming up with the best short-term, intermediate and longterm goals for their fictional family. The top teams go on to increasing levels of competition. “It’s very exciting,” enthuses Nourie. “The last two years we’ve had our finals at the Federal Reserve Bank, the San Antonio branch, and this year we are working with the Fed to further our partnership together. They have a number of literacy programs in some of the area high schools; we’re hoping with their help, we will be able to grow the program.” The Austin chapter went live with their version of Junior Duel last year. Nourie says the dream is to ultimately have it spread throughout the state and become The Texas Duel. “And then wouldn’t it be wonderful to even bring it to a national level at some point?” she opines. A somewhat unexpected bonus is that parents are apparently getting a personal financial education alongside their kids. Nourie says: “I have had so many parents come up to me after the finals and express their gratitude over things that they’ve learned … as well as being amazed at their children being able to propose financial sacrifices in order for the family to take care of most important needs first! The kids really learn the difference between what is a ‘want’ and what is a ‘need.’ It’s exciting to see the full impact of the program.” Nourie jokes that when she first volunteered as a judge for one of the program’s competitions, it was a cold February morning with some sleet and she was not feeling happy about driving all the way across town. “And … it was amazing,” she smiles. “Now I think, how did I get so lucky to be a part of this? I was so blown away by what these kids had learned and how they were applying what they learned. Then I had the opportunity to chair the program last year and this year so now I’m fully involved. It is a very big commitment, but it’s amazing. One young lady who participated in the program a few years ago recently called and has asked me to mentor her. She Today’sCPA
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is considering financial planning as a profession! When you end up getting feedback like that, it helps to energize you and keep you going.” NOT CHEESY, NOT AT ALL For Nourie, her favorite aspect of her work as a financial planner and her volunteerism as a financial educator is that those allow her the opportunity to make a difference in people’s lives. “It sounds cheesy, but it’s true,” she shrugs. She says that even when a consultation doesn’t end up with a new client relationship, great things can still happen. She explains: “I had one of my best moments just this past year with a couple who were interested in financial planning. We had a very impactful meeting with them expressing ‘here is our financial situation and here’s where we are’ … and me explaining how our firm works. It turns out that our services really were beyond what they were able to pay, but about six months after I met with them, I ran into the wife and she pulled me aside and said ‘I am so happy to see you because I want to let you know all the things that my husband and I have done since we met with you. We sold our house and downsized. We paid off all of our debts. It’s not been an easy road, but it’s great where we are in our life now compared to where we were.’ And then she looked at me and said ‘I want you to know that you have a gift.’ … Of all the things that I’ve heard, that one stuck with me. And I didn’t even have them as clients!” MORE NEW ROADS TO TRAVEL In addition to Junior Duel, Nourie volunteers for the Texas Society of CPAs; is a lay leader at her church; is on the board of St. Peter and St. Joseph’s Children’s Home; and is on the board of an animal rescue organization. She adds: “And then this past year, I’ve gotten involved with an organization called Impact San Antonio. All the voting members are women and you basically each make a $1,000 contribution every year and 100 percent of that goes to fund a grant for a nonprofit. This year, we were able to award $308,000 in grants at our Grant Night, which just was amazing, to see the
Kim Nourie with her nephew.
power of women coming together to try to make a difference in their community. “Then for fun, I started taking violin lessons a year ago because I had decided I wanted to learn how to play the violin.” Wait … huh?! That’s right, the violin. “Now I sit and wait for my lesson with eight-year-olds,” she grins. “It’s very humbling to be brand new, learning how to read music and learning how to make a stringed instrument sound pretty. But it has also been fun to do; I’ve loved it. For Christmas a couple of years ago, my parents refurbished a violin for me – it turns out that my father’s parents who were deceased before I was born were both violin players and my father had one of their violins. How special is that – being able to play on a grandparent’s violin.” Even learning to play the violin is part and parcel of the kind of change Nourie decided to make in her life. She acknowledges: “I feel like at one point, I kind of quit taking time to learn and grow, and found myself not in a really happy place. And since I made a major career change back in 1999 and revamped my life, it’s just a whole different world. I have learned that giving back is the key, making sure you believe in something – causes that are greater than yourself. “Oh, and never underestimate the value of a warm smile,” she concludes. ■ 13
What’s New On the TSCPA Website Go to tscpa.org to learn more about … TSCPA Private Health Insurance Exchange. TSCPA partnered with Pearl Insurance’s Pearl Private Health Care Exchange to bring members the new TSCPA Health Insurance Exchange. Members will be able to choose from different coverage levels and benefit choices to find a plan that’s right for you. For more information, go to the home page on tscpa.org and look under Keeping Current. Radiate360 Digital Marketing Tool. TSCPA partnered with Radiate360 to offer members an easy-to-use digital marketing solution. The all-in-one online platform is a resource for the Texas CPA individual or organization looking to expand their reach and connect with clients. Radiate360 is available at a reduced cost to all TSCPA members. For more information, go to the home page on tscpa.org and look under Keeping Current.
Practice Management Institute is a Succession Planning Resource TSCPA assists members with their succession planning issues by offering the Practice Management Institute. Developed in partnership with the Succession Institute, LLC, the Practice Management Institute provides TSCPA members with free material and content on succession planning. There are also CPE self-study course offerings available at a discounted rate for those who would like to receive CPE credit. To learn more and utilize this members-only resource, please go to the CPE section of the TSCPA website at tscpa. org, scroll down and select Practice Management under Tools and Information.
During your participation in professional events and activities in the next few months, consider those members you might want to nominate for TSCPA awards. TSCPA’s Awards Committee is seeking nominations for Meritorious Service to the Profession, Distinguished Public Service, Outstanding Chairman, Honorary Fellow, Honorary Member, and Young CPA of the Year. Nominations are due April 25, 2014. All criteria details are available online. For more information, go to TSCPA’s website at www. tscpa.org/eweb/DynamicPage. aspx?webcode=ABTawards or contact Melinda Bentley at firstname.lastname@example.org; phone 800428-0272, ext. 279 or 972-6878579 in Dallas.
View the Video for TSCPA’s ACAN Program The Accountants Confidential Assistance Network (ACAN) is a program dedicated to helping Texas CPAs, CPA candidates and accounting students who are addressing alcohol, chemical dependency or mental health issues. The program provides a 24-hour hotline – 1-866-766-ACAN – or you can also contact Craig Nauta at cnauta@tscpa. net. TSCPA created a video about the ACAN program. The overall theme of the video is that you are not alone if you are addressing these issues. To view the video, go to the ACAN area of TSCPA’s website, which can be accessed under Resource Center, and then scrolling down and clicking on Accountants Confidential Assistance Network.
Nominations for TSCPA Awards
The following people have had their membership in TSCPA suspended by the Executive Board for non-compliance with TSCPA Bylaws Article III, Section (4A)(1) for non-compliance with the Texas State Board of Public Accountancy’s continuing professional education requirements. Suspended for a period of three years – • Matthew B. Bartholomew, CPA, The Woodlands; • Bruce E. Koenig, CPA, Southlake.
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TSCPA Member Recruitment Campaign: Responsibility of Individuals
New TSCPA Member Benefit: Improve Your Online Presence With Radiate360 Digital Marketing Tool TSCPA has partnered with Radiate360 to offer members an innovative way to widen their reach and connect with clients online with an allinclusive platform. If you are looking to expand your individual practice or your organization’s online presence, consider this easy-to-use marketing tool available to TSCPA members. With Radiate360, you can grow your business by: • Creating a mobile-optimized website and build your online presence. Present your organization’s products and services in a professional and engaging manner. • Managing your business reputation online. • Updating your business listings in hundreds of Internet-based directories. • Communicating with old and new clients in minutes a day, on Facebook, LinkedIn, Google+, Twitter, and other social networks. Radiate360 also offers analytic tools to measure your website traffic, social media reach and campaign success. Members receive a discount for the services, so take advantage of this excellent resource provided by TSCPA. For more information, a demo, or to set up a meeting to learn more, visit: www.radiatemedia. com/tscpa, or contact Robert Hernandez at 866825-9005 or email@example.com.
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TSCPA’s member recruitment and retention campaign, the Responsibility of Individuals, was developed in an effort to show all Texas CPAs the common responsibility that you share of taking care of the profession. Just as you’ve made the decision to be responsible, TSCPA is responsible for connecting, protecting and advancing you. Strength is in numbers and TSCPA can’t exist without you. People, businesses and legislators listen more to the collective voice of 27,000 than to your individual voice. Encourage your nonmember colleagues to join your professional community and contribute to making TSCPA more effective for all Texas CPAs. To learn more, please visit the website at www. tscparoi.org.
CGMA Designation for Management Accounting Members The American Institute of CPAs (AICPA) and the Chartered Institute of Management Accountants (CIMA) created the Chartered Global Management Accountant (CGMA) designation as a tool for members in management accounting. The CGMA is a global designation that recognizes U.S. CPAs and CIMA members who work in a range of roles in businesses, industries and governments. The website at www.cgma.org offers access to a global online community of peers, research information, thought leadership papers, career and business tools, CGMA Magazine and Newsletter, and other resources to help you stay current on important professional issues. The designation is available to qualifying AICPA members, and TSCPA members who are also AICPA members receive a discount. For additional information, please visit their website at cgma.org.
Updates on “Form SD - Specialized Disclosures for Conflict Minerals” Article
The following people have had their membership in TSCPA expelled by the Executive Board under TSCPA Bylaws Article III, Section (4B). This action was a result of the revocation of their CPA certificate by the Texas State Board of Public Accountancy. • Richard A. Baum, Bryan; • Keith A. Jones, Lorena.
In the November/December 2013 issue, Today’s CPA magazine included an article titled “Form SD – Specialized Disclosures for Conflict Minerals.” Since publication, there have been updates on issues related to the conflict minerals rule. As covered in the article, a legal challenge had been filed with the Court of Appeals regarding the legality of the provisions of the Dodd-Frank Act and conflict minerals. On July 23, 2013, the federal court upheld the SEC’s conflict minerals promulgation. In a 63-page ruling, Judge Robert Wilkins of the United States District Court for the District of Columbia wrote that the claims of plaintiffs “lack merit.” The plaintiffs appealed to the D.C. Circuit and the appeal process was completed in midNovember 2013 with oral arguments to follow in early 2014. There are no indications as to whether the appeal will be successful or whether the appeal decision will come before the first filing deadline of May 31, 2014. As such, companies should move forward with complying with the conflict minerals rule. As of press time, the European Union (EU) Commission planned to propose conflict minerals legislation by the end of 2013. These regulations would be in addition to existing U.S. regulations affecting companies doing business in the United States, likely increasing the burden on EU companies. Recent information indicates that the EU may consider regulations that would require a customs-based conflict minerals declaration for everything brought into the EU.
Statement of Ownership
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Society Feature By Dr. Charles W. Stanley
Expanding Your CPA Practice – Adding Non-CPA Owners Jim Browning and Matt Simons are partners in a Texas CPA firm. For the past several years, they have built their business operating in the client practice of public accounting. Most of the services their firm has offered have been audits, tax, compilations and reviews, and occasional bookkeeping. Recently, they have been considering expanding these services based on requests from existing and potential clients, and seeing what some of their competitors are offering. The clients are asking for services such as personal financial planning and even legal issues that have come from some of their audit and tax clients. Today, CPAs are going beyond the traditional services of audit and tax. Jim and Matt realize that they do not have the skills necessary to provide such services in a competent manner. Therefore, they have begun discussions with a couple of non-CPAs who have the necessary skills that would allow their firm to provide the new services. One of the individuals is an attorney with a history of working in corporate and family law with a large legal firm. The other individual has worked for an investment firm and is well-versed in life planning service. In the discussions with these two individuals, they realize that bringing on the two individuals would greatly expand their firm’s services. However, both individuals want an equal share of ownership in the accounting firm even though neither is a CPA. They would have an equal vote in all firm decisions as well. Jim and Matt would really like to bring both individuals aboard, but are concerned about what will happen if they give equal partnership shares to these non-CPAs. PRACTICING PUBLIC ACCOUNTING IN TEXAS CPAs in today’s business environment who practice in Texas might find themselves in the situation that Jim and Matt face. As the business environment continues to move forward, Texas CPAs are continually discovering that CPAs are doing more than audit and tax. continued on next page
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Society Feature continued from page 17
If you’re a licensed CPA in Texas by the Texas State Board of Public Accountancy (TSBPA), the odds are very good that you will fall into one of the two categories of accounting practice. Currently, the practice of public accounting falls into the following categories: • The client practice of public accounting and • The industry and government practice of public accounting. If you work as an employee in industry or government, you are not likely to be offering accounting services to outside clients that are offered in the traditional public accounting practice. However, if you are in the client practice, then your firm is offering audit, tax and other services to clients. It’s in the client practice that ownership and registration of the firm as a part of the client practice that becomes an issue. OWNING A CPA FIRM IN CLIENT PRACTICE IN TEXAS Historically, ownership of a CPA firm in the client practice of public accounting was not an issue. If you wanted your firm to be in the client practice of public accounting, the firm had to be owned 100 percent by licensed CPAs. Non-CPAs were not allowed to be owners within the accounting firm. Of course, that did not mean that Texas CPA firms did not have individuals working in their firm who were non-CPAs. Many firms had attorneys, insurance agents, investment analysts and so on as members of their firm. These nonCPAs provided a number of services for the firm, but were not allowed to be owners or partners. In such situations, these individuals were often referred to as “principals” within the firm. Often, they received salaries and bonuses that were commensurate with the earning levels of the CPA partners. They simply were not allowed any ownership or voting rights that a partner would have. These firms have had non-CPA “owners” for decades and there does not appear to have been any demonstrated harm to the public. Not allowing non-CPAs to be partners or owners within a CPA firm has not been a popular rule for many states. Recently, the American Institute of CPAs (AICPA) issued as a part of its state regulatory and legislative affairs summary a statement that the position of AICPA is that it does not support 100 percent ownership by CPAs, but rather an ownership structure that is a simple majority of CPAs. They argue that non-CPAs are needed to perform related professional services and provide specialized expertise on complex audits. Most state boards have supported the simple majority concept. Texas has supported this position in recent years and Texas joins 47 other jurisdictions that allow for a simple majority ownership with Connecticut the most recent state to join the list. Only Delaware, Hawaii, New York, the 18
Commonwealth of the Northern Mariana Islands and the U.S. Virgin Islands still have requirements that a CPA firm be 100 percent CPA-owned. South Carolina allows for non-CPA ownership, but sets a higher bar than simple majority for CPA ownership (two-thirds).1 NON-CPA OWNERSHIP Given that Texas does allow non-CPA owners in the accounting firm, how should Jim and Matt proceed? If the two new prospective non-CPAs owners insist on an equal share of the partnership, then Jim and Matt would not have a simple majority since their ownership share would now be only 50 percent. The rule says that Jim and Matt, as licensed Texas CPAs, would need to have a simple majority. That means that they must own more than 50 percent of the firm to be a licensed firm in the practice of public accounting. Therefore, if they wish their firm to continue in the client practice of public accounting, they must have slightly more than 50 percent of the ownership; for example, 50.1 percent. Under Rule 513.10, their firm would be eligible for a firm license in the client practice if they have the majority ownership. This rule states that with a majority ownership, the financial interests and voting rights would belong to an individual(s) who hold certificates issued by TSBPA or licensed as a CPA in another state. Majority ownership would also insure that all attest services performed in Texas are under the supervision of an individual(s) who holds a certificate issued by Texas or by another state.2 Financial interests include, but are not limited to stock, capital accounts, capital contributions, and equity interests of any kind. These interests may also include contractual rights and obligations similar to those of partners, shareholders or other owners of an equity interest in a legal entity. Voting rights include, but are not limited to any right to vote on the ownership, business, partners, shareholders, management, profits, losses and/or equity ownership.3 Therefore, if Matt and Jim want to continue in the client practice of public accounting and to obtain a firm license, their new partners will have to accept less than an equal partnership interest. QUALIFICATIONS FOR NON-CPA OWNERS OF FIRM LICENSE HOLDERS Let’s assume that Matt and Jim convince the non-CPAs to accept less than a 50 percent share of the partnership so that the firm has a simple majority ownership by licensed Texas CPAs. This allows the firm to obtain a firm license as noted above. However, even though the non-CPA owners do not have an equal share of the partnership, they do have to comply with many of the same obligations that licensed CPAs are required to follow. Rule 513.11 stipulates the qualifications for non-CPA owners of firm license holders. Today’sCPA
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A firm that includes non-CPA owners may not obtain or qualify for a firm license unless every non-CPA owner of the firm is, as follows: • An individual, • Actively providing personal services in the nature of management of some portion of the firm’s business interests or performing services for clients of the firm or affiliated entity, • Not a suspended or revoked license or certificate holder excluding those licensees who have been administratively suspended or revoked. In addition to the above requirements, the non-CPA owners have ethical requirements. Each of the non-CPA owners who are residents of the state of Texas must also do the following: • Pass an examination on the rules of professional conduct as determined by board rule, • Comply with the rules of professional conduct, • Maintain professional continuing education applicable to license holders, including the board-approved ethics course as required by board rule, • Hold a baccalaureate or graduate degree conferred by a college or university, or equivalent education as determined by the board, • Maintain any professional designation held by the individual in good standing with the appropriate organization or regulatory body that is identified or used in an advertisement, letterhead, business card, or other firm-related communication.4 OPTIONS IF SIMPLE MAJORITY NOT SATISFIED What if the two prospective partners do not agree to the requirement that a majority of the ownership be CPAs and they have 50 percent of the equity of the new firm? Does this situation mean that Jim and Matt cannot provide services to clients? The answer is no in terms of providing accounting services. However, without majority ownership by CPAs, the firm cannot obtain a firm license and hold the firm out as in the client practice of public accounting. Without the firm license, the firm may not provide or offer to provide attest services or use the title “CPA,” “CPAs,” “CPA Firm,” “Certified Public Accountants,” or “Auditing Firm” or any variation of those titles.5 Therefore, if Jim and Matt wish to continue to provide any type of attest services to their clients, their firm must be a licensed firm which, as noted, means majority ownership. If the firm is an unlicensed firm, each advertisement or written promotional statement that refers to a CPA’s
designation and his/her association with an unlicensed entity in the client practice of public accounting must include the disclaimer: “This is not a CPA firm.” (The bold is the author’s addition to emphasize the need for the disclaimer.) The disclaimer must be included in conspicuous proximity to the name of the unlicensed entity and be printed in type not less bold than that contained in the body of the advertisement or written statement. If the advertisement is in audio format only, the disclaimer shall be clearly declared at the conclusion of each such presentation. The disclaimer requirements do not apply to a person performing services as a licensed attorney of this state while in the practice of law or as an employee of a licensed attorney. It also does not apply to a person performing services as an employee, officer, or director of a federally-insured depository institution when lawfully acting within the scope of legally permitted activities of the trust department.6 HOW TO PROCEED So, we are back to our original question as to how Matt and Jim should proceed. The rules regarding non-CPA ownership are clear. If Matt and Jim wish to continue as a licensed firm in the client practice of public accounting, the two new non-CPAs partners must accept that Matt and Jim maintain majority ownership of the firm. In addition, the non-CPA owners will have to comply with many of the rules, such as the ethics rules that would be applicable to Matt and Jim. If Matt and Jim are comfortable with no longer being able to provide attest services to clients, they will become an unlicensed firm and will have to add the disclaimer to their advertisements, letterheads, business cards, and any other written communications. In addition, they cannot use the designations listed in regard to the firm. Therefore, Jim and Matt will need to meet with their prospective new partners to consider both the advantages and disadvantages that could result from the changes in the ownership structure of their firm. ■ FOOTNOTES 1. Excerpted from the AICPA State Regulatory and Legislative Affairs Team Legislative Summary, December 2012 2. Texas Rule 513.10 3. Ibid. 4. Texas Rule 513.11 5. Texas Rule 501.81 6. Ibid.
Dr. Charles W. Stanley is Associate Professor of Accounting at Baylor University. He can be reached at Charles_Stanley@baylor.edu.
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Capitol Interest By Bob Owen, CPA | TSCPA Managing Director, Regulation and Legislation
Random Thoughts from the Capitol There’s not much to say about the political world. The filing deadline is long past and there were only two surprises, Rep. Steve Stockman filing to oppose Sen. John Cornyn in the Republican primary and Tom Pauken’s not filing, deciding not to oppose Greg Abbott for governor in the Republican primary. So I thought we would review those few brave CPAs running for public office. Sen. Glenn Hegar (R-Katy), Rep. Harvey Hilderbran (R-Kerrville) and former Republican gubernatorial candidate Debra Medina all wanting to be our next state comptroller. CPAs running for re-election to the Texas House are Reps. Angie Chen Button (R-Garland), who is also married to a CPA, John Otto (R-Dayton), Charles Perry (R-Lubbock), Scott Sanford (R-McKinney) and Phil Stephenson (R-Wharton). Rep. John Frullo (R-Lubbock) is a former CPA with an inactive license from another state and he is also up for re-election. Long-time incumbents Rep. Jeanie Morrison (R-Victoria) and Rep. Linda Harper-Brown (R-Irving) are both married to CPAs. Button, Otto, Perry and Harper-Brown all face Republican primary opposition. Stephenson faces a general election opponent. Frullo, Morrison and Sanford face no opposition. David Porter is the CPA serving as a Texas railroad commissioner (RRC). Before being elected to the RRC in 2010, Porter was a practicing CPA in Midland. CPAS AS CANDIDATES More CPAs are seeking elected office in 2014. As of the filing deadline, there are at least eight CPAs or former CPAs running for public office in the 2014 Texas elections, and we might have missed some running on the local level. For the first time in history, or at least my memory of history, there are two CPAs running for state comptroller. No fewer than five CPAs are standing for re-election to the Texas House of Representatives. If you count one inactive CPA and the spouses of two other CPAs, there’s almost enough for a CPA caucus in the Texas House. Another CPA is serving a six-year term as railroad commissioner, but will not be up for re-election in 2014. Who are these CPAs who take the title “public” more seriously than the rest of us? Raul Torres (R-Corpus Christi) and Mike Collier (D-Houston) are the two history-making CPAs running for state comptroller. Torres, an individual practitioner, served one term as a state representative before being paired with another incumbent during redistricting and then running unsuccessfully for the state Senate in 2012. Collier is a former partner with PricewaterhouseCoopers and, most recently, the CFO of an independent energy company. While Collier faces no opposition for the Democratic nomination, Torres faces formidable foes with
STATE TAX ADMINISTRATIVE LAW JUDGES We normally don’t think much about the Sunset Advisory Commission (SAC) except when they are reviewing the Public Accountancy Act; fortunately, that won’t happen until 2019. SAC was created by the Texas Legislature in 1977 to “identify and eliminate waste, duplication, and inefficiency in government agencies.” All state agencies have a 12-year life span unless renewed by the state Legislature. SAC has the responsibility to recommend whether or not an agency will be renewed, as well as suggest changes to the law to make an agency more efficient. Legislation transferring state tax administrative law judges from the state comptroller’s office to the State Office of Administrative Hearings (SOAH) was passed shortly after Susan Combs became comptroller, with her support. That legislation is up for review by SAC and must be re-enacted by legislators during the 2015 session or the judges will once again be working for the comptroller. Even though the judges are resident at SOAH, their rulings are still subject to concurrence by the comptroller; the comptroller has the final say. While the comptroller does not routinely overrule the judges’ opinions, it has happened often enough that some taxpayers believe this option should be removed. Almost all state agencies that use SOAH for administrative hearings reserve the right to overturn those decisions; it’s well engrained in the state’s
Bob Owen, CPA, is TSCPA’s managing director of regulation and legislation. Contact him at firstname.lastname@example.org.
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Administrative Procedures Act. Are tax cases different? That’s something SAC may consider. Some states have established tax tribunals to hear state tax cases. These are generally a separate judicial body, independent from the state tax collection function. As SAC does the review of the administrative tax judge laws, someone is likely to make the tribunal suggestion. There was a bill offered during the last legislative session to establish a tax tribunal in Texas, but it did not make it out of legislative committees. STATE BUDGET OUTLOOK The Texas revenue picture continues to improve. Combs recently released a revised official revenue estimate for the 201415 biennium projecting a surplus of $2.58 billion. That is $1.7 billion more than earlier estimates. What will legislators do with the surplus? Suggestions include funding the admitted shortfall in
Medicaid expenditures, applying the surplus to the next biennium or increasing education spending during the current budget cycle. There’s a twist. The state will have more revenue than it can legally spend due to the constitutional limit on state spending – generally referred to as the budget cap. While it only takes a majority vote by legislators to exceed the budget cap, that’s a vote many legislators are reluctant to make. To increase education funding, legislators would likely have to take that vote. There is good news for franchise taxpayers. The revised revenue estimate includes the conditional reduction in franchise tax rates enacted last session. That provision reduces franchise tax rates for next year if the comptroller certifies that funds are available to do so. The rates will be reduced if the comptroller’s estimate becomes reality. Some pundits point out that the comptroller has traditionally been conservative with her estimates and suggest that the state’s revenues might be even higher than projected. ■
NEW APPOINTMENTS TO THE TEXAS STATE BOARD OF PUBLIC ACCOUNTANCY We usually concentrate on legislative issues, but we shouldn’t forget that we have regulators as well as legislators. The Texas State Board of Public Accountancy (TSBPA) is the agency responsible for keeping CPAs on the straight and narrow. This group of volunteer board members does an excellent job of enforcing the Public Accountancy Act and protecting the public. Part of that public protection is to be sure that professional services are provided by qualified CPAs. Gov. Rick Perry has appointed Tomas G. Prothro, CPA, of Tyler as the presiding officer of TSBPA. Prothro has served on the board for four years prior to his appointment as presiding officer. Prothro replaces A. Carlos Barrera, CPA, of Brownsville, who served on the board for six years, two as the presiding officer. Perry also reappointed Steve D. Pena, CPA, to a new six-year board term. Pena has served on the board since 2008. Perry made two new CPA appointments to the board: Donna J. Hugly, Addison, and Robert (Bob) M. McAdams, San Antonio. All of the CPAs appointed are members of TSCPA and AICPA. Prothro is a graduate of the University of Texas at Austin and president of Prothro, Wilhelmi, & Co., Certified Public Accountants. Prothro earned the Chartered Advisor in Philanthropy (CAP) professional designation from the American College of Financial Services this year. Donna Hugly is a partner in the CPA firm of Sanford, Baumeister, and Frazier, LLP. She is a graduate of Texas A&M University and is a former member of the governing council of AICPA. She is a past chair of the Dallas CPA Society and has served on TSCPA’s board. Bob McAdams was the managing partner of the San Antonio CPA firm Carniero, Chumney for many years. That firm recently merged with BDO USA LLP. McAdams has recently retired, but remains involved as a consultant to the firm. McAdams has also served as a volunteer on the board’s Peer Review Committee for several years before his appointment. He served as TSCPA chairman in 1999-2000. He is a graduate of St. Mary’s University. Steve Pena practiced as a partner in the Round Rock firm of Pena Swayze & Co. for 33 years before the firm merged with the Austin firm of Maxwell Locke & Ritter LLP in 2011. He previously chaired the Brazos River Authority, served on the Today’sCPA
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Round Rock City Council and as chairman of the Accounting Advisory Committee of Austin Community College. He is a graduate of the University of Texas at Austin. Perry also appointed three new public members to the board: Susan Fletcher, Frisco; William (Bill) Lawrence, Highland Village; and Phil Worley, Hebbronville. Susan Fletcher is a freelance graphic artist, writer and community volunteer. She is chair of the Collin County Healthcare Advisory Board, strategic events chair of the Texas Faith and Freedom Coalition and a member of the Frisco Bible Church Missions Board. She is a graduate of the University of North Texas. Fletcher is also a candidate for Collin County commissioner. Bill Lawrence is owner and CEO of B. Lawrence Consulting L.L.C. and former mayor of the City of Highland Village. He has a bachelor’s degree from Tuskegee University, an MPA from St. Mary’s, and a law degree from Indiana University. He is a past member of the Texas Commission on Judicial Conduct, former board chair of the Medical Center of Lewisville and former treasurer of the Lewisville Education Foundation. Phil Worley is former dean of arts and humanities at Laredo Community College, as well as a former teacher and coach in the Webb and Jim Hogg County Independent School districts. He is a board member of the Texas Medical Board District Four Review Committee and a past board member of the Texas Guaranteed Student Loan Corporation. Worley received a bachelor’s degree from Texas State University and a master’s degree in sociology and political science from Laredo State University. The other continuing members of the board are CPAs J. Coalter Baker, Austin; John R. Broaddus, El Paso; Rocky L. Duckworth, Houston; Everett (Ray) Ferguson, Abilene; James C. Flagg, Ph.D., Brenham; and Maribess Miller, Dallas. All are members of TSCPA. The continuing public members of the board are Jonathan B. Cluck, Esq., Fair Oaks Ranch, and Jon R. Keeney, Highland Village. The board regulates CPAs and administers the CPA examination in Texas. If you know any of these board members, be sure to express your appreciation for their service. They serve six-year terms with extensive time commitments to serve on the board. 21
Feature By Aaron Borden, JD, CPA
LARGE Employer Status Under the Affordable Care Act
Even though Notice 2013-45 delayed employer penalties under the Affordable Care Act until 2015, employers and their advisers should be planning for the law now because employment decisions in 2014 will determine if the employer is an applicable large employer subject to penalties in 2015. Employers could be subject to a penalty under Code Section 4980H in 2015 if at least one of their employees receives a tax credit or cost-sharing subsidy for purchasing health insurance through a health insurance exchange; however, the penalty is only imposed on “applicable large employers.” The Code defines an applicable large employer as an employer who employed an average of at least 50 full-time employees, including full-time equivalents, during the preceding calendar year. 22
It is important to note that the applicable large employer status is determined by the employer’s prior year employment. Employment in 2014 will determine whether an employer is an applicable large employer in 2015. Thus, employers near the 50-employee threshold need to make adjustments in 2014 if they want to avoid applicable large employer status and the associated penalties in 2015. THE APPLICABLE LARGE EMPLOYER DETERMINATION IS A FIVE-STEP PROCESS From Code Section 4980H, Prop. Treas. Reg. Section 54.4980H-1, -2, and -3, a five-step process can be developed for determining if an employer is an applicable large employer. First, determine if the employer is a member of a group of employers that must be considered as a single employer. Second, determine which employees are included in the calculation of the average number of employees. Third, determine the hours of service for each employee. Fourth, calculate the average number of employees, and finally determine if the employer is an exempted seasonal employer. Today’sCPA
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of duties, vacation, holiday, illness, incapacity, layoff, jury duty or leave of absence. For hourly employees, the employer must determine actual hours of service from their employment records. For employees who are not paid on an hourly basis, the proposed regulations allow an employer to use a days-worked or weeks-worked equivalency as an alternative to the actual hours of service. The days-worked equivalency credits the employee with eight hours of service for each day that the employee had at least one hour of service. The weeks-worked equivalency credits the employee with 40 hours of service for each week in which the employee has at least one hour of service. However, the employer cannot use the days-worked or weeks-worked equivalency if it substantially understates an employee’s hours of service. Work performed outside the United States is not included in an employee’s hours of service. Example of an employer not permitted to use the days-worked equivalency: Employer has salaried employees who work three 12-hour days per week. Employer must use actual hours of service to determine employment status because the employees would be part-time employees with 24 hours of service per week using the days-worked equivalency, which substantially understates the actual 36 hours worked per week.
STEP 1: DETERMINE IF THE EMPLOYER IS A MEMBER OF A GROUP OF EMPLOYERS THAT IS CONSIDERED A SINGLE EMPLOYER The employer is a member of a group that must be considered a single employer for purposes of determining applicable large employer status if the group would be a single employer under sections 414(b), (c), (m) & (o) of the Code (the employer is a member of a controlled group of corporations, a member of a group of businesses under common control, or a member of an affiliated group). All employees of all members of the group of employers are included in a single calculation of average number of employees to determine if the group is an applicable large employer. STEP 2: DETERMINE WHICH EMPLOYEES ARE INCLUDED IN THE CALCULATION OF THE AVERAGE NUMBER OF EMPLOYEES For purposes of determining applicable large employer status, the common law definition of an employee, as defined in Reg. § 31.3121(d)-1(c), is used to determine employees. The primary factor indicating an employer – employee relationship being the employer’s right to direct the work to be performed and the method in which it is to be accomplished. All full-time and part-time employees employed during the prior calendar year are included in the calculation, including those who are no longer employed by the employer. Independent contractors and leased employees are not included in the calculation. In addition, sole proprietors, 2 percent or more shareholders in an S corporation, and partners in a partnership are not employees for purposes of determining an employer’s status as an applicable large employer.
STEP 4: CALCULATE THE AVERAGE NUMBER OF EMPLOYEES First determine the employer’s number of full-time employees during each calendar month of the previous calendar year. Employees are full-time if they averaged at least 30 hours of service per week during the month, and 130 hours of service in a calendar month is treated as the equivalent of 30 hours of service per week. Then, determine the number of full-time-equivalent employees during each calendar month of the previous calendar year. Full-time-equivalent employees for a calendar month are determined by dividing the total hours of service of all parttime employees during the month (but not more than 120 hours
STEP 3: DETERMINE THE NUMBER OF HOURS OF SERVICE FOR EACH EMPLOYEE DURING EACH CALENDAR MONTH OF THE PRECEDING YEAR An hour of service is defined as each hour for which an employee is paid or entitled to payment for the performance Figure 1: Example of the number of employees calculation: Hours worked: Jan.
Calculation of total employees per month: Jan.
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Applicable Large Employer Status Under the Affordable Care Act continued from page 23
for any one employee) by 120. If the resulting number is a fractional number, the number is not rounded to the nearest whole number at this step. The number of full-time-equivalent employees for each month is added to the number of full-time employees for each month to determine the total number of employees for each month. Determine the average number of employees for the preceding year by dividing the sum of the total number of employees for all 12 months in the calendar year by 12. If the resulting number is a fractional number, it is rounded down to the nearest whole number. If the number is 50 or more, the employer is an applicable large employer. STEP 5: DETERMINE IF THE EMPLOYER IS AN EXEMPTED SEASONAL EMPLOYER There is an exemption for employers who exceed the 50-employee threshold due to seasonal employees. An employer is not considered an applicable large employer if the employerâ€™s workforce exceeds 50 full-time and full-timeequivalent employees for 120 days (or four calendar months) or less and the excess employees during the 120-day period were seasonal workers. The 120 days or four calendar months need not be consecutive. In addition, the seasonal employees can work more than 120 days so long as the employer does not exceed 50 employees for more than 120 days or four calendar months. (Note the discrepancy between the general rule and the exemption: the exemption applies to employers who do not exceed 50 employees for more than 120 days, whereas an employer must have less than 50 employees to satisfy the general rule.) See Figure 1 on page 23 for examples of the number of employees calculation. Hours worked: (Note: In each month the employees had a total of 550 hours of service, the calculation of the total number of employees ranged from 2.971 to 4.583. Also, each highlighted cell exceeds the 120-hour cap for calculation of full-time equivalents, but does not meet the 130 threshold for full-time employee; thus, 120 hours is used in the calculation of full-time equivalents.) Calculate average for preceding year: (4+4+4+3.083+3.583+3.917+4.083+4.25+4.583+4.283+3 .75+2.917)/12=3.871=3 full-time employees for purposes of determining if the employer is an applicable large employer. (Note: Use the decimal number determined each month in calculating the average for the year, but always round the average for the year down.) EXAMPLE 1: THE IMPACT OF FULL-TIME VERSUS PART-TIME EMPLOYEES ON THE CALCULATION OF TOTAL EMPLOYEES Employer has 19 full-time employees working 130 hours per month and 60 part-time employees working 65 hours per month for every month in 2014. The employer would be an applicable large employer in 2015 (19 full-time employees each 24
month and 32.5 full-time equivalents per month = 51 full-time employees). As an alternative, the employer could employ 30 full-time employees working 130 hours per month rather than the 60 part-time employees. The employer would not be an applicable large employer in 2015 because the employer did not have 50 or more employees on average in the preceding year. EXAMPLE 2: THE IMPACT OF INCREASING HOURS WORKED PER FULL-TIME EMPLOYEE VERSUS ADDITIONAL EMPLOYEES Employer has 60 full-time employees working 130 hours per month during every month in 2014. The employer would be an applicable large employer in 2015. As an alternative, the employer could employee 49 full-time employees working 160 hours per month during every month in 2014. The employer would not be an applicable large employer in 2015 because the employer does not have 50 or more employees on average in the preceding year. EXAMPLE 3: SEASONAL EMPLOYER WITH 50 FULL-TIME EMPLOYEES Employer operates a chain of water parks. Employer has 50 full-time employees during every month of 2014. In addition, from May 15 until September 10 of 2014, employer has an additional 200 full-time seasonal employees and 1500 parttime seasonal employees working an average of 100 hours per month. Employer is within the exemption for seasonal employers and is not an applicable large employer for 2015. EXAMPLE 4: SEASONAL EMPLOYER WITH SEASONAL EMPLOYEES THAT WORK MORE THAN 120 DAYS Employer operates a ski resort. Employer has five full-time employees during every month of 2014. In addition, employer has 120 seasonal employees from Nov. 1 through April 30 of each year. In 2014, the 120 seasonal employees were full-time during the months of January, February, March and December. During the months of November and April, the seasonal employees were part-time and had a total of 4800 hours of service in November and 5400 hours in April. Employer is within the exemption for seasonal employers and is not an applicable large employer for 2015. PLANNING OPPORTUNITIES FOR AVOIDING APPLICABLE LARGE EMPLOYER STATUS As illustrated by the five-step process and the above examples, employers near the 50-employee cut-off can make adjustments in 2014 to avoid being an applicable large employer in 2015. As seen in the first and second example, employers can increase the allocation of hours of service to full-time employees to reduce the number of total employees for purposes of making the applicable large employer determination. As seen in examples 3 and 4, an employer can utilize seasonal employees to significantly exceed the Todayâ€™sCPA
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50-employee threshold so long as it does not do so for more than 120 days. In addition, employers should consider outsourcing some functions to independent contractors, or adding additional S corporation shareholders or partnership partners if either of those strategies is appropriate for their situation. OFFERING HEALTH INSURANCE COVERAGE AS AN ALTERNATIVE Employers can also avoid penalties in 2015 by offering health insurance that is affordable and provides minimum essential coverage to at least 95 percent of full-time employees in 2015. Even if the employer is an applicable large employer and the employer has an employee who receives a tax credit or costsharing subsidy in 2015, the employer will not be subject to the penalty under Section 4980H of the Code if the employer offered the employee and his/her dependents the opportunity to enroll in coverage that provided minimum essential coverage and was either affordable or meets one of the affordability safe harbors in Prop. Treas. Reg. § 54.4980H-5. The coverage is affordable if the employee’s cost for the lowest cost employee-only coverage does not exceed 9.5
percent of the employee’s household income. The coverage provides essential minimum coverage if it covers 60 percent of the covered expenses as determined by actuarial standards. Thus, an employer, as an alternative to avoiding applicable large employer status, can avoid penalties in 2015 by offering employees and their dependents the opportunity to enroll in affordable coverage that provides minimum essential coverage. AVOIDING PENALTIES If an employer cannot, or does not, avoid applicable large employer status and chooses not to offer its full-time employees the opportunity to enroll in minimum essential coverage, it can also avoid penalties in 2015 by employing 30 or fewer fulltime employees in each calendar month of 2015. The penalty imposed on applicable large employers is calculated based on full-time employees and does not include full-time-equivalent employees, and Code Section 4980H(c)(2)(D)(i) excludes the first 30 full-time employees from the calculation of the penalty. Thus, the employer in Example 1 above would not be liable for a penalty in 2015, even though it is an applicable large employer, so long as it does not employ more than 30 full-time employees in any calendar month in 2015. ■
Aaron Borden, JD, CPA, is a tax and white-collar attorney with Meadows Collier in Dallas, Texas.
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Call A Texas CPA Today! North Texas The Holmes Group Toll-Free 1-800-397-0249 email@example.com Central & West Texas Bill Anecelle Toll-Free 1-866-809-8705 firstname.lastname@example.org Southeast Texas Gary & Wade Holmes Toll-Free 1-888-847-1040 email@example.com www.AccountingPracticeSales.com
Feature By Alan Reinstein, DBA, CPA and James O. Ward, MBA, CPA
Accounting for Modifications to Loans Included Within Acquired Loan Pools Some Implications for Bankers and CPAs As a result of the economic turmoil in recent years, many banks and other financial institutions have offered increased numbers of loan modifications to prevent mortgage foreclosures. For example, they have lowered interest rates, extended loan terms and reduced principal balances owed, finding that such modifications involve modest interest-rate reductions and increasing loan balances (Collins and Reid, 2010).
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Concurrently, bankers and other lenders have continued to purchase or otherwise accumulate pools of mortgages and other loan packages for their own or syndication purposes, including purchased credit impaired (PCI) loans. A question arises on how to account for such pools when individual PCI loans in such portfolios lose much of their value due to specific or general economic circumstances (e.g., a specific company facing bankruptcy or an overall economic decline in one city’s housing market). So, should banks remove or revalue these specific impaired assets from these pools? Until recently, due to conflicting guidance within standards, some banks removed or significantly revalued individual assets within pools to remeasure these portfolios closer to their true market, while others did not do so to maintain the financial integrity of the complete set of assets in such portfolios. The purpose of this article is to help CPAs working for or auditing banks or other financial institutions to understand and comply with the Financial Accounting Standards Board (FASB) update. FASB GUIDANCE ON TROUBLED LOANS In order to derive more consistent financial reporting, FASB established a uniform standard on how banks and similar institutions account for loan portfolios that include “troubled” loans, to resolve whether a bank or similar entity should remove loans that were part of PCI loan pools accounted for as a single asset upon troubled debt restructuring loan modifications. Accounting Standards Update [ASU] 2010-18, (Receivables, Topic 310), Effect of a Loan Modification When the Loan Is Part of a Pool That Is Accounted for as a Single Asset – a consensus of the FASB Emerging Issues Task Force, prohibits banks and other entities from removing individual loans from established pools of loan assets unless they sell, foreclose or otherwise receive assets in satisfaction of the loans or write off these loans. Thus, modifications of loans that are part of a pool accounted for under Today’sCPA
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ASC 310-30 should not result in removal of the loan from the pool, regardless of whether impairment of an individual loan exists. The standard clarifies that banks should account for acquired loans that have evidence of credit deterioration upon acquisition along with other loans having common risk characteristics in the aggregate as a pool. Previously, the provisions of Accounting Standards Codification [ASC] 310-30, Accounting for Certain Loans or Debt Securities Acquired in a Transfer, required keeping such loan portfolio pools intact but offered no guidance on whether troubled debt restructuring (TDR) should remove individual assets from these pools. Under ASC 310-40 (FAS 15), Troubled Debt Restructurings by Creditors, a loan modified in a TDR is presumed to be impaired and was to be accounted for under ASC 310-1035 (FAS 114), Accounting by Creditors for Impairment of a Loan. Therefore, some entities accounted for individual loans within pools as TDRs and removed them from the pool, while others continued to keep the pool intact. Many modifications of acquired loans fell under the scope of the ASC Subtopic 310-30 (formerly SOP 03-3), Receivables – Loans and Debt Securities Acquired with Deteriorated Credit Quality, including acquired loans with evidence of credit deterioration upon acquisition – with those with common risk characteristics aggregately accounted for in a pool. Bankers should now treat the pool, rather than the loan itself, as the unit of accounting. But diversity in practice arose on whether to remove loans that were part of pools of loans accounted for as a single asset upon a modification that would constitute a troubled debt restructuring. To minimize such diversity, FASB required (for interim and annual periods ending on or after July 15, 2010) that such loan modifications not result in removing individual loans from a pool, even for TDRs. Entities should assess whether the pool of assets in which the loan is included is impaired if expected cash flows for the pool change. This guidance does
not affect the accounting for loans not accounted for within pools. Loans accounted for individually continue to be accounted for under the TDR guidance. However, the guidance in ASC 310-40-15-4 through 15-12 (formerly FASB Statement 15, Accounting by Debtors and Creditors for Troubled Debt Restructurings) continues to apply to acquired loans within the scope of ASC 310-30 that a creditor accounts for individually. PROVISIONS OF THE STANDARD The standard establishes criteria for maintaining the integrity of a pool. First, ASC 310-30-10-1 clarifies that after a bank establishes mortgages and other assets in specific loan pools, it should generally maintain all of the assets in these pools, regardless of whether individual assets within such pools experience financial deterioration. However, it can remove such loans from these pools at their carrying amounts only if such assets are sold, foreclosed or otherwise satisfied through receipt of assets or are written off. Moreover, banks refinancing or restructuring loans will not cause the removal of the loans from the pools. The standard notes that a debt restructuring becomes “troubled” when the creditor grants a concession to the debtor that it would not otherwise consider, usually for economic or legal reasons related to the debtor’s financial difficulties. Further, ASC 310-40-15-11 provides a list of events that do not constitute a troubled debt restructuring, including (a) changes in lease or employmentrelated agreements, (b) modifications of loans within pools accounted for under ASC 310-30-15-6, (c) changes in expected cash flows from a pool of loans accounted for under ASC 310-30, (d) debtors not paying trade accounts receivables, and (e) creditors’ delays in taking legal action to collect overdue amounts unless each of these cases involves an agreement between both the debtor and creditor to restructure either of these. continued on next page
Accounting for Modifications Continued from page 27
The standard adds that this modification of purchased creditimpaired loans in a pool criteria decision applies to all loans with evidence of deterioration of credit quality where probable evidence indicates that the investor will be unable to collect all contractually required payments receivable, except for loans measured at fair value, mortgage loans classified as held for sale, capital leases (as defined by FASB Topic 840), and loans acquired in a business combination accounted for at historical cost. Loans that are not performing per the loan contract, but are performing based on cash flow and accretable yield (i.e., excess of a loan’s cash flows expected to be collected over the investor’s initial investment in the loan) should not be considered as impaired assets. Thus, banks should ascertain such asset impairment by examining such factors as differences between the loan’s expected future cash flows and its contractual amount, and a loan’s contractually required payments receivable in excess of the amount of its cash flows expected to be collected. To allow banks to “clean up” their balance sheets of overstated loans, upon adoption of the ASU they were given a one-time election to prospectively terminate accounting for loans in a pool, using a pool-bypool basis (e.g., treating individual loans as a unit of account). However, impairment would occur if the entire pool (not only one asset) were impaired. REFERENCES Collins, J.M. and C.K. Reid, “Who Receives a Mortgage Modification? Race and Income Differentials in Loan Workouts,” a December 2010 Federal Reserve Bank of San Francisco Working Paper, www.frbsf.org/publications/ community/wpapers/2010/whoreceives-mortgage-modification.html 28
EXAMPLES OF APPLYING THE CRITERIA Public filings by many banks reflect the adoption of the ASU. For example, Bank of America disclosed the following in its Dec. 31, 2010, Form 10K: [A]dopted, on a prospective basis, new FASB accounting guidance stating that troubled debt restructuring (TDR) accounting cannot be applied to individual loans within purchased credit-impaired (PCI) loan pools. The adoption of this guidance did not have a material impact on the Corporation’s consolidated financial…Beginning on January 1, 2010, loans modified in a TDR remain within the PCI loan pools. Prior to January 1, 2010, TDRs were removed from the PCI loan pools. Citigroup Inc. noted the following in the summary of significant accounting policies of its Dec. 31, 2010 Form 10K: Effect of a Loan Modification When the Loan Is Part of a Pool Accounted for as a Single Asset (ASU No. 2010-18) In April 2010, FASB issued ASU No. 2010-18, Effect of a Loan Modification When the Loan is Part of a Pool Accounted for as a Single Asset. As a result of the amendments in this ASU, modifications of loans that are accounted for within a pool do not result in the removal of those loans from the pool, even if the modification of those loans would otherwise be considered a troubled debt restructuring. An entity will continue to be required to consider whether the pool of assets in which the loan is included is impaired if expected cash flows for the pool change. The ASU was effective for reporting periods ending on or after July 15, 2010. The ASU had no material effect on the Company’s financial statements.
J P Morgan Chase & Co disclosed the following within its management discussion and analysis section of its Dec. 31, 2010 Form 10K: Accounting for troubled debt restructurings of purchased creditimpaired loans that are part of a pool In April 2010, FASB issued guidance that amends the accounting for troubled debt restructurings (TDRs) of PCI loans accounted for within a pool. The guidance clarifies that modified PCI loans should not be removed from a pool even if the modification would otherwise be considered a TDR. Additionally, the guidance clarifies that the impact of modifications should be included in evaluating whether a pool of loans is impaired. The guidance was effective for the Firm beginning in the third quarter of 2010, and is to be applied prospectively. The guidance is consistent with the Firm’s previously existing accounting practice and, therefore, had no impact on the Firm’s Consolidated Balance Sheets or results of operations. NEEDED CLARITY ASU 2010-18 provides needed clarity on how banks and other financial institutions account for impairment of individual loans within pools of purchased credit impaired loans. Having eliminated the diversity in prior practice, financial statement users will now find greater usefulness for financial statements. With modifications of purchased credit impaired loans frequent, financial statement users should have greater confidence in the comparability of their financial statements with those of other firms and understand why individual loan impairments accounted for in pools need not result in adjustment to the financial statements. ■
Alan Reinstein, DBA, CPA, is George R. Husband Professor of Accounting in the
School of Business at Wayne State University in Detroit, Mich. He can be reached at firstname.lastname@example.org. James O. Ward, MBA, CPA, is a senior manager at Deloitte & Touche, LLP, in Detroit, Mich. He can be reached at email@example.com.
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Feature By Gilbert Zamora, CPA, and Allen M. Liebnick, CPA, CFF
Contractors and Texas Sales and Use Tax The cover of the November issue of Texas Monthly magazine (the national magazine of Texas) states in bold print, “The Greatest Texas Oil Boom Ever is Happening Right Now.” Construction in Texas, while down from its peak in 2008, is making a strong comeback thanks in part to the shale boom in the Barnett Shale, Eagle Ford Shale and more recently, in the Permian Basin. Texas is certainly faring better than most other states. WHO IS A CONTRACTOR? In Texas, a “contractor” is anyone who makes improvements to real property and who, in making the improvements, incorporates tangible personal property into the property being improved. The definition does not depend on whether the property is residential or commercial. WHAT IS TANGIBLE PERSONAL PROPERTY? Tangible personal property is something that can be seen, weighed, felt, or touched or that is otherwise perceptible to the senses. Examples of tangible personal property include more than just materials, supplies and equipment. By statute, the term includes computers, software, desks, portable buildings, and electricity. While this is good news for Texas contractors, subcontractors and suppliers, it has led to more competition from outof-state contractors bidding on the rising number of construction jobs in Texas. Texas-based contractors are often operating at a competitive disadvantage to the out-ofstate contractors, because the out-of-state contractors may not understand, or may choose not to comply with, Texas sales tax laws. This could result in out-of-state contractors offering lower bids that do not include Texas sales tax on labor and/or material, with ultimate potential liability to the contractor’s customer. Due to the uptick in construction projects occurring throughout the state, the likelihood of the Texas comptroller auditing the subcontractors and suppliers Today’sCPA
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is an ever-increasing possibility. The Texas comptroller aggressively pursues contractor audits, often resulting in large tax assessments against the contractors and/or the contractor’s customer that could have been avoided or minimized if the contractor or the customer had a working knowledge of the intricacies of Texas’ sales and use tax laws. This article discusses Texas’ sales tax treatment of contracts and services to construct, repair, remodel and restore realty. It also addresses some important terms and contract types that determine which party – the contractor or the contractor’s customer – incurs the tax. First, we’ll review some important terms: contractor, tangible personal property, and real property.
WHAT IS REAL PROPERTY? The determination of whether an item is real property is based on the three-part test delineated in Hutchins v. Masterson & Street, 46 Tex. 551, 554 (1887) that considers: 1) whether the property has been annexed to realty; 2) whether there was fitness or adaptation to the purposes of the realty; and 3) the intent of the party annexing the property to the realty. Whether an item constitutes an improvement to realty depends on the extent to which it is affixed and whether it can be removed without substantial damage to the property. Contractors make improvements to realty when they erect, construct, alter, or repair any permanent improvement on – continued on next page
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converting an existing warehouse into new office space is treated as nonresidential remodeling, because it does not create new usable square footage.2 Separately stated charges for labor on the first project are nontaxable, while separately stated labor charges on the second project are taxed.
or under the surface of – real property. In doing so, the contractor often furnishes and installs tangible personal property that becomes a part of a permanent improvement. Tangible personal property becomes real property if it is embedded in or permanently affixed to realty, and if the installed property is necessary to the intended usefulness of the building or other structure. Contractors also improve realty when they alter the surface of the land. 30
Contractors perform new construction when they make a new improvement to real property, including the initial finishout work on a previously constructed improvement that has never been used for its intended purpose. The addition of new usable square footage to an existing structure also qualifies as new construction. For example, adding a second floor to an existing building creates new usable square footage, and is therefore new construction.1 However,
NEW CONSTRUCTION – LUMP-SUM VS. SEPARATED CONTRACTS State law taxes materials incorporated into realty under a contract for new construction unless an exemption applies. However, who owes the tax on the materials – the contractor or the contractor’s customer – depends upon whether the work is performed under a lump-sum or separated contract. The law classifies a contract as a separated contract only when the contractor separately states the labor charges from all other charges (such as materials). Texas law requires the labor charge to include all labor associated with the contract, which may include fabrication labor as well as installation labor. Texas law also treats cost-plus contracts as separated contracts. Under a separated contract, the contractor is the seller – not the consumer – of the incorporated materials, and therefore the contractor must collect sales tax on the materials from the buyer. The contractor should assess and collect local sales tax based upon the job site location. The contractor may accept a valid directpay or exemption certificate from the purchaser in lieu of collecting tax on the incorporated materials. The law generally classifies all other contracts as lump-sum. In a typical lumpsum contract, the contractor imposes a single charge for labor and incorporated materials. The law treats the contractor as the consumer of the incorporated materials. Therefore, the contractor is responsible for paying sales tax on the materials. The contractor may not charge and collect the sales tax from its customer. If the contractor’s customer plans to claim the manufacturing exemption for installed equipment or materials, the contractor should avoid using a lumpToday’sCPA
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sum contract. Since the law treats the contractor (not the manufacturer) as the consumer of the property under a lump-sum contract, the manufacturer would lose the exemption for equipment or materials that may otherwise qualify. By law, a contractor cannot qualify as a manufacturer. Similarly, the contractor may not accept a direct-pay exemption certificate for non-taxable new construction performed under a lump-sum contract, because the law treats the customer as purchasing real estate for a lump sum. Real estate is not subject to Texas sales or use tax. Contractors that fabricate the materials or equipment that they install, such as HVAC contractors that fabricate ductwork, often improperly believe they are working under a separated contract. They separately state the charge for installation labor and materials, and collect tax on the materials charge. However, if the charge for materials includes the contractor’s fabrication labor, the comptroller will classify the contract as lump sum. Comptroller Rule 3.291 states: Contracts to improve realty that do not break out all charges for labor, including fabrication labor are considered lumpsum contracts. For example, a contractor who fabricates and incorporates cabinets into realty under a contract that includes the fabrication labor in the agreed contract price of materials is a lump-sum contractor. If the fabricating contractor has been charging sales tax on its separately-stated charge for materials, the comptroller will generally assert that the contractor has been collecting the tax in error. The contractor will be required to pay, out of its own pocket, sales tax on the cost of materials. The comptroller will not reduce this amount by any portion of the sales tax the contractor collected in error, unless the contractor refunds the payments to its customers or obtains an assignment from its customers. READY-MIX CONCRETE CONTRACTORS Different rules now apply to ready-mix concrete contractors. The Legislature changed the statute in the 2007 regular session. “Ready-mix concrete contractors” are now a subset of contractors. A ready-mix Today’sCPA
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concrete contractor is “a contractor that manufactures or produces concrete for construction purposes and incorporates the concrete into the property improved.” For example, a contractor that produces, pours and spreads concrete for the slabs and floors of a building and the parking lots surrounding the building is a readymix concrete contractor. The description would also include a contractor that manufactures pre-cast concrete forms, and uses the forms to make items that the contractor then incorporates into realty. The revised statute and the comptroller’s new rules now require a “ready-mix concrete contractor” to separate the charge for the concrete from all other charges, and to invoice the customer for each cubic yard of concrete produced and consumed. This requirement applies regardless of whether the remainder of the contract is lump sum or separated. It also does not matter whether the job involves nontaxable new construction or residential remodeling labor. However, the separate charge for concrete required by the new provision does not convert a lump-sum contract into a separated contract. As a result of this legislation, ready-mix concrete contractors operating under lump-sum contracts now must hold Texas sales and use tax permits. The contractor must collect and remit tax on the greater of the invoice price or the fair market value of the concrete incorporated into the project. A ready-mix concrete contractor performing a project in Texas may issue a resale certificate in lieu of paying sales tax on the sand, gravel, aggregate, and other materials used in mixing the concrete. However, if the contractor’s contract with the customer is lump sum, the contractor must pay tax on all other materials incorporated into the realty, such as rebar, stubbed pipes, conduit and wiring. CONTROLLING DOCUMENTS Which documents determine whether a contract is lump sum or separated? The comptroller follows the following hierarchy: • Contracts • Bids • Invoices If a written contract exists, its terms control the sales tax treatment of the job.
If no written contract exists, the terms of the bid proposal submitted by the contractor and accepted by the owner controls. If no contract or bids exist, the terms on the invoice or invoices issued by the contractor determine responsibility for sales taxes. Contracts often contain language that attempt to shift the responsibility from contractor to the customer or vice-versa. A lump-sum contract that includes a term that states that the customer will reimburse the contractor for sales tax on materials will not eliminate the contractor’s obligation to pay the tax. Similarly, a statement in a separated contract that the contractor is responsible for sales tax does not eliminate the contractor’s responsibility to collect tax from the owner. In some cases, the customer may require the contractor to include sales tax in the price of materials when the contractor bids for the job. In this case, the phrase “Texas sales and use tax included” must be clearly stated on the controlling document. If not, the presumption is that tax is not included on the separated charge for materials. This phrase should not be included in a lump-sum contract. If an auditor finds such a phrase in a lump-sum contract, that auditor may presume that the contractor has collected tax in error from the customer. Another common error under a lumpsum contract arises when the contractor charges the customer for sales taxes on the incorporated materials in order to recover the taxes paid by the contractor. The comptroller will treat these amounts as taxes collected in error. These “taxes” must be refunded to the customer or remitted to the state. They may not be used to offset any additional taxes that the contractor may owe for incorporated materials, unless the customer assigns its right to a refund to the contractor. “TAX INCLUDED” EQUIPMENT/ MATERIAL PURCHASES An issue that frequently occurs in audits involving new construction or remodeling contracts arises from statements in the contracts or invoices that “tax is included.” This statement, if used incorrectly, can lead to significant problems for the continued on next page
Contractors and Texas Sales and Use Tax Continued from page 31
contractor or the owner if either is audited. Comptroller Rule 3.286 (d) (2) states that: The amount of tax due must be separately stated on the bill, contract, or invoice to the purchaser or there must be a written statement to the purchaser that the stated price includes sales or use taxes. Contracts, bills, or invoices that merely state that “all taxes” are included is not specific enough to relieve either party to the transaction of its sales and use tax responsibilities… Out-of-state sellers must identify the tax as Texas sales or use tax. Under this section of Rule 3.286, the seller (i.e., a contractor working under a separated contract) must either separately state the sales tax on taxable items or include a statement that “the stated price includes sales or use taxes.” Additionally, if the seller or contractor is an out-ofstate seller, the tax-included statement should specify that “the stated price includes Texas sales or use taxes.” AMENDING A CONTRACT Sometimes, a contractor and a customer may find that it’s necessary to change the contract type. As long as the project is still in progress, the parties may amend the contract to change the contract type from lump sum to separated, or vice-versa. The amended contract then becomes the controlling document. CHANGE ORDERS A change order does not create an amended contract. Change orders adopt the same character as the original contract regardless of the form of the change order. For example, if a contract is lump sum, but materials and labor are separately stated on a change order, the comptroller will allege that the contract remains lump sum. Conversely, if a contract is separated and the change order is lump sum, the comptroller will consider the lump-sum amount to be for incorporated materials unless the contractor can attribute a portion to labor.3 32
NEW CONSTRUCTION – INCORPORATED MATERIALS, CONSUMABLES AND EQUIPMENT A contractor must pay tax to suppliers for incorporated materials (i.e., lumber, cement, plumbing, electrical supplies, rebar, bricks, etc.) in a lump-sum contract. A contractor operating under a separated contract must have a Texas sales tax permit and may issue a resale certificate to his/her supplier for materials that he/she will incorporate into the realty. Under either type of contract, the contractor must pay tax on equipment purchases and rentals, consumables (i.e., barricade tape, non-reusable concrete forms, disposable rags, masking tape, chalk, etc.) and supplies used for contracts with non-exempt owners. One exception applies: a contractor owes no tax when it purchases equipment, services, or supplies used solely to construct or operate a water or wastewater system certified by the Texas Commission on Environmental Quality as a regional system.4 RESIDENTIAL REAL PROPERTY SERVICES Texas Tax Code § 151.0048 classifies the following as real property services: • Garbage and solid waste removal • Landscaping • Lawn and yard maintenance • Residential or nonresidential building or grounds cleaning, janitorial, or custodial services • Structural pest control services • Surveying of real property All of these services are generally taxable, regardless of whether they are performed on residential or commercial property. However, there is an exception. When a service provider provides these services to a contractor that is constructing a new residential structure, the service is nontaxable. Residential structures include single family homes, nursing homes, apartment buildings and
condominiums. If the builder provides a certification letter or exemption certificate to the service provider, the service provider is treated as a contractor. Then it is as if the service provider is a contractor performing new construction; the same rules apply. For instance, if the service provider bills a lump-sum charge, the provider owes tax on any incorporated materials. If the provider separates the charge between labor and materials, the service provider must collect tax on the separately stated charge for materials. NON-RESIDENTIAL REAL PROPERTY REPAIR, RESTORATION OR REMODELING SERVICES Persons who repair, restore or remodel non-residential property are required to collect sales tax on the total charge for their services. The comptroller defines “repair,” “remodeling” and “restoration” as follows: • Repair – To mend or bring back real property that was broken, damaged, or defective as near as possible to its original working order. • Remodeling – To rebuild, replace, alter, modify, or upgrade existing real property. • Restoration – An activity that is performed to bring back real property that is still operational and functional, but that has faded, declined, or deteriorated, as near as possible to its original condition. Any nontaxable and unrelated service that is separately stated on a bill to the customer may be excluded from the taxable sales price. A service will be considered unrelated if: • It is not the repair, remodeling, or restoration of nonresidential real property, or a service that is otherwise taxable. • The service is a type that is commonly provided on a standalone basis. • The performance of the service is distinct and identifiable. Today’sCPA
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MIXED OR COMBINED SERVICES (5 PERCENT RULE) Contractors should be careful and not violate the mixed services rule. It applies in the case of a contract that has both elements of taxable and nontaxable work. If the contract fails to state a separate charge for the taxable work from the non-taxable work, the entire contract is treated as taxable if it appears that more than 5 percent of the total charge is attributable to the taxable portion of the work. Minor repairs or remodeling performed in connection with new construction are not taxable if the portion of the charge attributed to the repair or remodeling is 5 percent or less of the overall lump-sum charge. However, separately stated charges for repair and remodeling are taxable even if they constitute 5 percent or less of the total contract price. Taxpayers may separate, after the fact, taxable and non-taxable services billed in a lump-sum amount. The taxpayers may then establish the portion of the total charge that relates to the nontaxable new construction. Tax would then be due only on the portion of the charge that relates to the taxable services. REMODEL OF NONRESIDENTIAL REALTY The entire charge for a contract to remodel nonresidential realty is taxable, regardless of whether the charges for labor and materials are separately stated or billed for a lump-sum amount. As required under Rule 3.286 (d) (2), the invoice to the customer should either separately state the sales tax on the total charge or should include the phrase, “the stated price includes sales or use taxes.” MAINTENANCE OF REAL PROPERTY The charges for labor to maintain real property is not taxable. The taxpayer has the burden to prove that a service of real
property is non-taxable maintenance. To qualify as maintenance, the property must be in working order at the time the maintenance is performed and the services must meet the definition of “scheduled and periodic.” The terms “scheduled” and “periodic” are defined as: • Scheduled: work that is “anticipated and designated to occur within a given time period or production level” • Periodic: work that is “ongoing or continual or at least occurring at intervals of time or production which are generally predicable” CONTRACTS WITH EXEMPT ENTITIES A contract to improve, repair or remodel realty is generally exempt if the improved property is for the primary use and benefit of an exempt entity. A written contract or purchase orders issued by certain governmental entities are typically sufficient proof of the exempt status of that entity. A contractor should obtain a properly completed exemption certificate to document the exempt status of other customers. A contractor improving realty for an exempt entity under a lump-sum or separated contract may issue an exemption certificate on the purchase of materials that the contractor will incorporate into the realty. The certificate must identify the contractor as the purchaser, the exempt entity for which the improvements are made, and the project for which the items are being purchased. A contractor improving realty for an exempt entity may also purchase tax-free: • Consumables that are “necessary and essential” for the performance of the contract and are completely consumed at the job site • Otherwise taxable services performed at the job site that are integral to the performance of the contract and
• Otherwise taxable services performed at the job site that the contract requires the contractor to purchase5 A contractor performing a contract for an exempt entity must still pay tax on all equipment purchased, leased or rented, even if used on the job for the exempt entity. The contractor must also pay tax on all accessories, repair and replacement parts used at the job site, office supplies, furniture, and computers. PROPERLY ACCOUNTING FOR SALES TAXES A contractor or service provider can avoid costly mistakes by determining whether a project is taxable before submitting a bid. If it is taxable, the contractor should then determine which party will be responsible for the applicable taxes. With this knowledge, the contractor can appropriately structure the contract as either a separated or lump-sum contract. If the job is exempt from taxation, the contractor or service provider should obtain properly completed documentation to support the exemption, such as resale or exemption certificates, before beginning the project. If all contractors, service providers and project developers followed these guidelines, no contractor would have an unfair advantage over contractors that properly account for sales taxes in their bids or contracts. Additionally, the contractors and project owners would avoid the additional taxes, penalties, interest, and defense costs that inevitably result from not properly paying, collecting or reporting sales tax. ■ FOOTNOTES 1. 2. 3. 4. 5.
See Comptroller Policy Letter # 200112697L See Comptroller Policy Letter # 9503L1338D03 See Comptroller Rule 3.291(b)(5) See Texas Tax Code section 151.355 (5) See Texas Tax Code §151.311
Gilbert Zamora, CPA, is an independent tax professional with 40 years’ experience in state taxes, including 31 years with the
Texas Comptroller’s Department and eight years with the law firm Martens, Todd & Leonard. He is a member of the Texas Society of CPAs and currently serves on TSCPA’s State Taxation Committee and State Tax Conference Committee (2010 Chair). Allen M. Liebnick, CPA, CFF, is president of Overpaid Payables Recovery, Inc. He has been providing accounts payable, sales tax and telecommunications post-audit recovery services for over 18 years. Liebnick is a member of the Texas Society of CPAs, the New York State Society of CPAs and is a life member of the American Institute of CPAs, as well as the 2011 Chair of the Texas Society of CPAs State Tax Conference and the 2013 Vice Chair of the Texas Society of CPAs Business Valuation, Forensic & Litigation Services Conference. Liebnick can be reached at firstname.lastname@example.org.
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Feature By Janie Whiteaker-Poe, CPA, JD, Ph.D.
Tax Implications of the Windsor Opinion and Revenue Ruling 2013-17 for Same-Sex Couples The Supreme Court ruled on June 26, 2013, that the portion of the Defense of Marriage Act (DOMA) that defines marriage as “a legal union between one man and one woman” is unconstitutional. In finding that Section 3 of DOMA violated the Fifth Amendment by depriving individuals of equal liberty, the court pointed to the comprehensive effect of the definition, noting that is “a directive applicable to over 1,000 federal statutes and the whole realm of federal regulations.” Proposition 8 on Nov. 5, 2008, but resumed on June 28, 2013. Iowa and Vermont began allowing same-sex marriages in 2009, followed by New Hampshire and the District of Columbia in 2010. New York legalized same-sex marriages in 2011. Washington and Maine passed acts permitting same-sex marriages in 2012. Six states enacted legislation legalizing same-sex marriages in 2013: Maryland, Rhode Island, Delaware, Minnesota, New Jersey and Hawaii. Illinois passed a measure allowing same-sex marriage in 2013, but it does not become effective until June 1, 2014.
Taxes and tax administration are, of course, included among those statutes and regulations. In response to the Windsor opinion, the IRS issued Rev. Ruling 2013-17, under which “individuals of the same sex will be considered to be lawfully married under the Code as long as they were married in a state whose laws authorize the marriage of two individuals of the same sex, even if they are domiciled in a state that does not recognize the validity of same-sex marriages” (page 10). This article addresses some of the major issues practitioners should be aware of with regard to this Revenue Ruling. WHICH STATES ALLOW SAME-SEX MARRIAGES? There are 16 states that recognize same-sex marriages. Massachusetts was the first state to recognize same-sex marriages, beginning in 2004. California and Connecticut were next, initially recognizing same-sex marriages in 2008. In California, however, same-sex marriages were suspended following the passage of 34
HOW WILL REVENUE RULING 2013-17 IMPACT FEDERAL INCOME TAXES FOR SAME-SEX COUPLES? Application of the new definition of “marriage” and “spouse” under the Revenue Ruling is prospective. Legally married samesex couples filing original returns dated on or after Sept. 16, 2013, must file using either the married filing jointly or married filing separately filing status. Taxpayers who file married filing jointly are also entitled to the higher standard deduction. Non-working same-sex spouses may now contribute to Individual Retirement Accounts as they are allowed to “borrow” earned income from their working spouse. When same sex couples file separately, if one spouse itemizes, the other spouse may not claim the standard deduction. Additionally, state law controls the division of earned income between the spouses and therefore, same-sex couples living in community property states must divide the income on their returns when choosing to file separately. WHEN SHOULD SAME-SEX COUPLES FILE AMENDED RETURNS FOR PAST TAX YEARS? Although Revenue Ruling 2013-17 is prospective, same-sex couples may file amended returns for tax years that remain open. In general, the statute of limitations for tax matters is three years. Thus, same-sex couples may file amended returns for tax years 2010, 2011 and 2012. As highlighted by Greta Hicks, CPA, in the Tax Topics column of the November/December 2013 issue of this Today’sCPA
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publication, practitioners should refer to Statement on Standards for Tax Service No. 6.5 when preparing tax returns for clients in same-sex marriages. Statement No. 6.5 states: If a member is requested to prepare the current year’s return and the taxpayer has not taken appropriate action to correct an error in a prior year’s return, the member should consider withdrawing from preparing the return and whether to continue a professional or employment relationship with the taxpayer.1 Application of this standard may require same-sex couples who were legally married in an open tax year to file amended returns with respect to those years. Most same-sex couples will likely want to file amended returns for open tax years, because they may be entitled to a refund. Prior to Windsor and Revenue Ruling 2013-17, partners in same-sex marriages were required to file as single taxpayers. The only filing status with a more aggressive tax rate structure than single is married filing separately. Thus, most same-sex couples will be entitled to a refund based on the less aggressive tax rate structure provided for couples who file jointly. In addition, many companies now offer benefits to spouses of employees in same-sex marriages. Prior to Windsor and Revenue Ruling 201317, those benefits represented gross income to the employee. Taxpayers are entitled to a refund of income taxes paid on benefits that would have been excluded from income if the employee had a different-sex spouse. The taxpayer will also be entitled to a refund of employment taxes paid on the benefits. WHAT ARE THE OTHER TAX IMPLICATIONS OF THE WINDSOR RULING? The Windsor ruling also affected transfer taxes. In fact, the case dealt directly with estate taxes. A same-sex New York couple married in Ontario in 2007. The estate was found to owe taxes upon the death of one of the spouses in 2009. The decedent left her entire estate to her surviving spouse. The estate tax allows an unlimited marital deduction between spouses. However, under DOMA, the federal government did not recognize the couple as married and therefore, the marital deduction was not permitted. In finding that Section 3 of DOMA was unconstitutional, the Supreme Court upheld the findings of the lower courts and ordered the IRS to refund the taxes paid. As with the estate tax, the gift tax allows an unlimited deduction for gifts to a spouse. Now that the definition of marriage includes same-sex couples under Revenue Ruling 201317, the marital deduction will be available for these taxpayers for both estate and gift tax purposes. DOES REVENUE RULING 2013-17 APPLY TO CIVIL UNIONS AND REGISTERED DOMESTIC PARTNERSHIPS? Civil unions and registered partnerships are not equivalent to same-sex marriages. Civil unions and registered partnerships are legal entities in four states: Colorado, Nevada, Oregon and Wisconsin. Registered domestic partners do not qualify for either the married filing jointly or married filing separately filing
UPCOMING CPE PROGRAMS The following CPE programs will cover tax implications of the Defense of Marriage Act. INDIVIDUAL INCOME TAX UPDATE January 22, Fort Worth January 24, Dallas January 31, Houston INCOME TAX, ESTATE TAX AND FINANCIAL PLANNING IDEAS OF 2013 January 13, Houston January 15, Dallas SHORTCUTS TO TAX CUTS: INDIVIDUAL TAX SOCIAL SECURITY AND RETIREMENT PLANNING TOOLS AND STRATEGIES January 30, San Antonio To register, please call the CPE InfoLine at 800-4280272 or 972-687-8500 in Dallas. Search for courses, read descriptions, register and pay, all on the TSCPA website. Go to the CPE section at tscpa.org. status. Since domestic partners file as single taxpayers, it does not matter if one itemizes and the other claims the standard deduction. Domestic partners qualify for the adoption credit when adopting their partner’s child. Couples in same-sex marriages are not entitled to the adoption credit in those circumstances. When domestic partners live in a community property state, they must allocate earned income between the partners for federal tax purposes. WHAT ARE THE TAX CONSEQUENCES WHEN SAMESEX COUPLES DIVORCE? If the couple has a child, only one parent is entitled to the dependency exemption. In general, the exemption is awarded to the custodial parent unless the divorce or separation agreement specifies that the exemption will be taken by the noncustodial parent. The custodial parent may also agree in writing to assign the exemption to the noncustodial parent. The signed statement must be attached to the noncustodial parent’s tax return each year that the exemption is claimed. (Form 8332 may be used for this purpose.) Any alimony awarded must be included in the recipient’s gross income and the payor may take a deduction for adjusted gross income. FOOTNOTES 1. Hicks, G. 2013. “Revenue Ruling 2013-17, DOMA and 2013 Returns.” Today’s CPA November/December.
Janie Whiteaker-Poe, CPA, JD, Ph.D., is an Assistant Professor at Baylor University. After obtaining her J.D. from Washington University in St. Louis, she worked in Washington, D.C. auditing the financial statements of federal executive agencies. She received her Ph.D. in Accounting with a concentration in taxation from the University of Kansas. She can be reached at Janie_WhiteakerPoe@baylor.edu.
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CPE Article By Amanda Finch
Curriculum: Management Level: Basic Designed For: Risk or compliance managers/ directors, executive and leadership team members, and CPAs Objectives: Understand the impact of the SSAE 16 standard, compared to prior SAS 70 standard Key Topics: Compliance, risk, Sarbanes-Oxley, internal controls, attestation, and audit Prerequisites: None Advanced Preparation: None
FROM SAS 70 TO SSAE 16 – THE IMPACT OF THE STANDARD You’ve probably heard that Statement on Auditing Standards (SAS) 70 was superseded by Statement on Standards for Attestation Engagements (SSAE) 16. You may be wondering about the impact of this change. This article will discuss the shift to SSAE 16, helping you understand the impact of the change whether you are: • a CPA providing advice to internal or external clients, • an executive of a company that undergoes SAS 70 audits, or • an employee impacted by the audit or assessment activities (like an IT manager or HR professional, for example). WHO IS IMPACTED BY SSAE 16? Any organization required to undergo SAS 70 audits is impacted by the new SSAE 16 standard. The SSAE 16 standard superseded the SAS 70 standard on June 15, 2011. Any auditor’s report produced after that date must conform to the new standard. SSAE 16 applies to the same companies as SAS 70 and in similar ways. If your company provides services to publicly traded companies registered with the Securities and Exchange Commission (SEC), you may need to produce an “Independent Service Auditor’s Report on a Description of a Service Organization’s System and the Suitability of the Design of Controls” in accordance with the American Institute of Certified Public Accountants (AICPA) SSAE 16. This is more simply (and mercifully) known as a SSAE 16 assessment. Companies that offer services such as payroll processing, benefits administration or claims processing are among those whose customers may require a copy of their SSAE 16 assessment report. Do you sell a Software-as-a-Service or “Cloud” offering to publicly traded companies? If you do, you are a service organization and may be subject to this requirement. Many adopted the convention of pronouncing SAS 70 as “sass seventy.” The author of this article makes no comment on whether it would be prudent to refer to “SSAE” as “sassy.” Phonetic choices are left to the reader’s discretion. WHAT IS THE RATIONALE FOR THESE ASSESSMENTS? One hates to drop the “E-bomb” in polite conversation. Yet, Enron and other accounting scandals have not faded from the long memory of regulatory requirements. In response to such Today’sCPA
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scandals, the Sarbanes-Oxley (SOX) Act holds officers of publicly traded companies responsible for the fairness and completeness of their company’s financial statements. It is a fact, however, that any company’s financial statements are only as reliable as its internal controls. These controls are the processes designed to meet objectives for financial reporting reliability, operational effectiveness and efficiency, and compliance with applicable laws and regulations. That is why the SOX act requires that signing officers evaluate their controls and report any deficiencies. Companies that are not publicly traded may still be impacted by SOX. If a company’s services impact the financial statements of one of their SOX-affected customers in any way, the service provider’s own controls come into question under SOX. That’s because SOX requires companies to vouch for all the controls that keep their financial reporting honest – which includes those of their service providers. So how could any company’s officers attest to the quality of their service providers’ controls? Without SSAE 16 assessments, the choices would be daunting. A company could: 1) audit the service providers’ controls to make assertions about their quality, 2) take charge of the service providers’ controls, or 3) state that the service providers’ unknown controls are a possible weakness in their own. These choices are obviously flawed. No publicly-traded company wants to go on record admitting to inadequate controls. On the other hand, it would be hard to audit every service provider one does business with, or to take charge of their controls. Similarly, service providers with multiple SOX-affected customers could go bankrupt responding to an onslaught of customer audits throughout the year. continued on next page
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The SSAE 16 assessment is designed to solve these problems. A service provider can choose to undergo only its own SSAE 16 assessment, and then simply provide a copy of the SSAE 16 auditor’s report to any of their customer’s auditors who request it. Because it’s an “auditor-to-auditor” report, a company’s auditors can rely on the report to verify the quality of their service providers’ controls, without having to assess the service providers themselves. HOW IS THE SSAE 16 STANDARD DIFFERENT FROM SAS 70? Management Attestation
SSAE 16 is an attest standard, not an audit standard. This technicality relates to the SSAE 16 assessment requirement that management will attest in writing to the fair presentation and design of the company’s controls. Under the previous SAS 70 standard, only the auditors reported on controls; the company’s management was not required to make any attestations. This attestation is the main difference between SAS 70 and SSAE 16. Under SAS 70, your company’s management provided representations in the form of a signed management representation letter given to the auditors prior to issuance of the SAS 70 report. The letter was not included in the actual report, however. A company’s “system,” in the language of the SSAE 16 standard, is the system that delivers services along with the controls and activities that support service delivery. Management’s attestations, included in the SSAE 16 report, are based on their description of their system. Management will attest: • That management’s description of the system fairly presents the system that was designed and implemented during either the period covered by the assessment (called a “Type II” assessment) or at a point in time (called a “Type I”); • That the controls related to the control objectives stated in that description were suitably designed during that period (for a Type II) or at that point in time (for a Type I) to achieve the control objectives; and • For Type II assessments, that the controls operated effectively throughout that period to achieve the control objectives. The auditors will examine the company’s controls to form their own opinion on these matters. The fact that management must now make these attestations further highlights management’s full responsibility for the controls in operation, and also better aligns SSAE 16 with SOX. SOX affected companies’ management are held accountable for the veracity of their financial report attestations, and SSAE 16’s attestation requirement keeps the same kind of accountability in place for service organizations. Suitable Criteria for Evaluation
New in SSAE 16 is a requirement that a company’s management must use suitable criteria for evaluating the overall system used to provide services. The criteria used must be specified in the management attestation section of the report. The criteria should come from a widely recognized standard. Which 38
standard to use depends on the type of services the company provides; standards like ITIL, COSO, COBIT or ISO may apply. Guidance regarding suitable criteria is provided in the SSAE 16 standard. Evidence from Prior Engagements Disallowed
Under SAS 70, auditors could use evidence collected during prior audits to reduce the extent and duration of controls testing. Under SSAE 16, auditors may not use evidence from prior engagements about the satisfactory operation of controls, even if that evidence is supplemented with new evidence provided for the current reporting period. As a result, companies now accustomed to reuse of prior evidence will find their preparatory work increased under the SSAE 16 assessment. Disclosure of Reliance on Internal Auditors
If any tests of controls are performed by a company’s internal auditor, the SSAE 16 engagement auditor is required to clearly identify those tests in their description and describe their procedures with respect to the internal auditor’s work. The SAS 70 standard did not require such disclosure. This will require that the company undergoing assessment provide a detailed description of their internal audit activities, processes, tools, and conclusions to the SSAE 16 engagement auditor. Restrictions on Report Use
SAS 70 restricted use of the audit report to a company’s management, customers and financial statement auditors. SSAE 16 further narrows the restriction regarding customers, depending on the type of report. For a Type I, use is restricted to entities that are customers as of the report date. For a Type II, use is restricted to entities that are customers during the report period. Included Versus Excluded Subservice Providers
A service provider may itself rely on services provided by another company in the course of doing business (for example, a data center). If the services subject to a company’s SSAE 16 assessment depend on anything obtained from another service provider (called a “subservice organization”), one of two methods apply: the inclusive method or the carve-out method. The choice of method has not changed from the SAS 70 standard. What differs in SSAE 16 is that for the inclusive method, a subservice provider’s management must provide their own set of assertions regarding their internal controls. If such assertions cannot be obtained from the subservice provider, the carve-out method must apply. As with SAS 70, the inclusive method includes the subservice providers’ controls in the assessment, requiring assessment participation from the provider. A carve-out assessment excludes the subservice provider’s controls from the assessment, but would not relieve the company from the need to monitor the subservice provider’s controls. With a carve-out assessment, a company would probably want to also obtain the subservice provider’s own SSAE 16 report as a way to address the subservice provider’s Today’sCPA
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controls. The choices for monitoring those controls get more complicated if a key subservice provider foregoes an SSAE 16 assessment of the right type. The choice of inclusive or carve-out method depends on whether a company’s customers would find a carve-out assessment acceptable, and whether the subservice providers can reliably provide an assessment report of their own.
reasonable assurance that information systems are protected from unauthorized access, interference, damage or destruction.” For each objective, the activities performed to meet the objective must also be described. The auditors performing the SSAE 16 assessment will ask for evidence to support the claim of undertaking these activities.
WHAT REMAINS THE SAME?
Type I and Type II
Scope of the Assessment
The SSAE 16 standard, as with the SAS 70 standard, does not dictate the set of controls that must be covered by the assessment. The company being assessed decides which controls are pertinent to the services it provides. That decision could be poorly made if a company fails to anticipate what its customers’ auditors would consider pertinent to the scope of the assessment. One way a company can define scope is to review its services contracts. The contractual obligations around services delivered may reasonably draw the boundaries that define a system and the controls that support it. System Description
SSAE 16 also relies on a written description of the system, the controls and the objectives the controls are designed to meet, just as with SAS 70. The auditors assess whether the description fairly describes the system and controls, and whether the controls are designed to meet the stated objectives. Control objectives are stated in a similar fashion in SSAE 16 as in SAS 70. For example: “Control activities provide
As with SAS 70, SSAE 16 reports come in one of two types: Type I or Type II. Both types rely on management’s description of controls. The scope of each type of report is similar to that under SAS 70. Type I assesses whether a company’s internal controls are fairly and completely described, and whether they have been adequately designed to meet their objectives, assessing the controls in place at a certain point in time. Type II does the same, but takes it further – it actually tests the controls in operation over a certain stated time period. This means the Type II is more thorough and requires more time and effort. The type of assessment report a company needs (I or II) depends on which type its customers request. The customers know how the services impact their operations, which in turn determines the type of report they will require. Basic Format of the Audit Report
Beyond the management attestation, the auditor’s reports will follow the same basic format as for SAS 70, with the following components: continued on next page
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CPE Article continued from page 39
• The auditor’s Opinion Letter, which states whether they believe the company’s controls are adequate (also called the “Independent Service Auditor’s Report”); • The descriptions of the services the company provides, and its controls, covering: ºº The control environment (management style, ethical philosophy, organizational structure, etc.); ºº Risk assessment and management; ºº Information and communication systems; ºº General controls; ºº Application controls; ºº Monitoring procedures; • User control considerations (a “user organization” means a customer, using the services in question); • Any other relevant information, provided by your management, that may apply to the report. Assessment Process
Like the SAS 70 audit, the SSAE 16 assessment requires that the auditors review the management’s assessment of their controls and provide an opinion on its validity. They will review the control objectives and control activities at the company to verify that they exist and are designed as described. The auditors will obtain samples of artifacts (like documents or reports) to support each control activity. For Type II assessments, the auditors will test the effectiveness of the controls to determine that they can reasonably meet the control objectives they were designed to meet. What About the ISAE 3402 Standard?
SSAE 16 also responds to the convergence of accounting standards between those in the United States and the globally accepted principles (ISAE 3402) for reporting on controls at service organizations. SSAE 16 and ISAE 3402 are similar in many respects. A company should seek its auditor’s advice before deciding to undergo a separate assessment (and report) for that standard. Companies are Not “Certified”
Although this may seem a trivial point, AICPA apparently disagrees with the commonly used phrases “SAS 70 Certified” or “SSAE 16 Certified.” Technically, no certification is conferred under these standards. It is more accurate to say “SSAE 16 Compliant. ” GETTING READY FOR SSAE 16 The bad news is that companies with no prior SAS 70 audit experience will not find their first assessment is made easier by
the new SSAE 16 standard. The good news is that it won’t be tremendously more difficult. The new requirements are a small percentage of the total work required to prepare for a first-time assessment, since the bulk of the work is in describing and documenting controls. Many firms offer readiness engagements to help companies prepare for their first SSAE 16 assessment, which can go a long way toward assuring that the first assessment goes smoothly. Such assurance can be worth the investment, because the auditor’s opinion letter will clearly reveal any problems or gaps, which is an undesirable outcome for all the time, effort and money spent on the assessment. SSAE 16 compliance is often a requirement for obtaining or keeping key customer accounts, so the stakes can be high. For an SSAE 16 assessment, just as with a SAS 70 audit, the auditors will “walk through” the controls being assessed and interview employees who have a role in performing the controls. This means that in preparing for the assessment, a company must draft its controls description in coordination with the employees who perform the control activities. The employees should collaborate to verify that the description is complete and accurate, and to provide the samples that serve as evidence of the controls. Although this work remains the same in SSAE 16, the new management attestation requirement may trigger a more intense focus on controls by the company’s executives. CURRENTLY AUDITED COMPANIES Companies accustomed to SAS 70 audits see a bit of extra work with SSAE 16 assessments, including: • Writing the management attestation; • Verifying that the appropriate criteria are used for system evaluation and documenting the criteria; • Dealing with subservice providers by: ºº Obtaining the necessary attestations and cooperation from subservice providers (for the inclusive method); or ºº Obtaining the SSAE 16 assessment reports or devising other appropriate ways to monitor their controls (for the carve-out method); • Providing evidence for every control, when the company may be accustomed to the reuse of prior evidence; and • Coordinating with the SSAE 16 assessment auditors in the event your own internal auditors have assessed or will assess your controls. The standard applied on June 15, 2011. It pays to make sure you fully understand the impact to your company. ■
Amanda Finch is the director of Risk and Compliance at Journyx. She has directed and managed many SAS 70 (now SSAE 16)
audit readiness and response projects, and has the battle scars to prove it. She is also CEO of ADV Group (www.alliancevalue. com), a consulting firm that helps software companies develop competitive strategies. Finch has worked with companies large and small, as well as a broad range of startups. She has also contributed to law journals and other publications on the topic of regulatory compliance for software-service providers and consumers.
| JANUARY/FEBRUARY 2014
CPE Quiz Today’s CPA offers the self-study exam below for readers to earn one hour of continuing professional education credit. The questions are based on technical information from the preceding article. Mail the completed test by February 28, 2014, to TSCPA for grading. If you score 70 or better, you will receive a certificate verifying you have earned one hour of CPE credit – granted as of the date the test arrived in the TSCPA office – in accordance with the rules of the Texas State Board of Public Accountancy (TSBPA). If you score below 70, you will receive a letter with your grade. The answers for this exam will be posted in the next issue of Today’s CPA. PARTICIPATION EVALUATION (Please check one.) 5=excellent 4=good 3=average 2=below average 1=poor 1. The authors’ knowledge of the subject is: 5__ 4__ 3__ 2__ 1__. 2. The comprehensiveness of the article is: 5__ 4__ 3__ 2__ 1__. 3. The article and exam were well suited to my background, education and experience: 5__ 4__ 3__ 2__ 1__. 4. My overall rating of this self-study exam is: 5__ 4__ 3__ 2__ 1__. 5. It took me___hours and___minutes to study the article and take the exam. Name _______________________________ Company/Firm________________________ Address (Where certificate should be mailed) ___________________________________ City/State/ZIP_________________________ Enclosed is my check for: ___ $10 (TSCPA member) ___ $20 (non-member) Please make checks payable to The Texas Society of CPAs. Signature____________________________ TSCPA Membership No._______________ After completing the exam, please mail this page (photocopies accepted) along with your check to: Today’s CPA; Self-Study Exam: TSCPA CPE Foundation Inc.; 14651 Dallas Parkway, Suite 700; Dallas, Texas 75254-7408. TSBPA Registered Sponsor #260.
FROM SAS 70 TO SSAE 16 – THE IMPACT OF THE STANDARD BY AMANDA FINCH
1 A. B. C. D.
The SSAE 16 standard: Superseded the SAS 70 standard. Applies in addition to the SAS 70 standard. Is optional for companies that currently undergo SAS 70 audits. Applies to companies outside the United States.
On what date did the SSAE 16 standard become effective?
A. January 1, 2012
B. July 1, 2011
described and examined. C. Differs from SAS 70; the auditors requesting the assessment report decide which controls will be described and examined. D. Is dictated by the SSAE 16 standard.
The basic format of an SSAE 16 report differs from that of a SAS 70 report in that it:
A. Does not include user control considerations. B. Includes management’s attestation regarding controls.
C. They are broader than under SAS 70 regarding auditors that may receive the report. D. They are narrower than under SAS 70 regarding customers that may receive the report.
The scope of controls assessment under SSAE 16:
A. Is exactly the same as with SAS 70; the company being assessed decides which controls will be described and examined. B. Differs from SAS 70; the auditors of the company being assessed decide which controls will be
clearly described. D. May be used, but only for one subsequent assessment.
Restrictions on the use of an SSAE 16 report:
A. They are exactly the same as for SAS 70 reports. B. They are narrower than under SAS 70 regarding auditors that may receive the report.
C. They must describe how they monitor the controls of the subservice providers. D. They must invite their subservice providers’ auditors to participate in their assessment.
Under the SSAE 16 standard, evidence from prior engagements:
A. Is not permitted to be used. B. May be used. C. May be used, so long as any updates or changes are
C. May not rely in any way on internal audits performed by the company being assessed. D. Must perform assessments in tandem with internal audits performed by the company being assessed.
If companies choose the “carve-out” method:
A. They do not need to reference their subservice providers’ controls. B. Their subservice providers’ controls are included as part of the assessment.
C. A network security assessment standard. D. An attestation engagement standard.
Auditors performing an SSAE 16 assessment:
A. Must disclose any reliance on internal audits performed by the company being assessed. B. May optionally disclose reliance on internal audits performed by the company being assessed.
D. December 31, 2010
The SSAE 16 standard is:
A. An audit engagement standard. B. A cloud computing standard.
C. June 15, 2011
C. No longer contains an auditor’s opinion letter. D. Covers either “inclusive method” or “carve-out method” assessments.
An SSAE 16 Type II assessment differs from a Type I assessment in that:
A. It does not require tests of controls. B. It tests only the controls related to information technology and communication networks. C. It tests controls in operation at a single point in time to assess their operational effectiveness for achieving control objectives. D. It tests controls in operation over a stated time period to assess their operational effectiveness for achieving control objectives.
Answers to last issue’s self-study exam: 1. C 2. A 3. D 4. A 5. B 6. D 7. C 8. D 9. A 10. D Today’sCPA
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