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Today’sCPA MAY/JUNE 2013




TSCPA Year In Review Succeeding as a Professional The ABCs for the (Very) Small Business A Tale of Two Warranties

Also: Private Company Council

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Fred Timmons, CPA



Staff MANAGING EDITOR DeLynn Deakins 972-687-8550 800-428-0272, ext. 250

TECHNICAL EDITOR C. William Thomas, CPA, Ph.D.

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

CONTRIBUTORS Ali Allie, Melinda Bentley; Rosa Castillo; Jerry Cross, CPA; Anne Davis, ABC; Avery Elander; Donna Fritz; Chrissy Jones, AICPA; Rhonda Ledbetter; Craig Nauta; Judy Neathery; Kim Newlin; Catherine Raffetto; Katey Selph

DIRECTOR, MARKETING & COMMUNICATIONS Janet Overton Design/Production/Advertising The Warren Group

cover story


20 2012-2013 TSCPA Year in Review

5 Chairman’s Message

society features 14 Spotlight on CPAs

CLASSIFIED Donna Fritz Texas Society of CPAs 14651 Dallas Parkway, Suite 700 Dallas, Texas 75254-7408 972-687-8501

Editorial Board Arthur Agulnek, CPA-Dallas; Kristan Allen, CPA-Houston; James Danford, CPA-Fort 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, CPAHouston; Kamala Raghavan, CPA-Houston; James Reeves, CPA-Fort Worth; Barbara Scofield, CPA-Permian Basin; Brinn Serbanic, CPA-East Texas; Paul Willey, CPA-Dallas. © 2013, 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.


| MAY/JUNE 2013


Wise Council – Texas CPA to Chair New Regulatory Group for Private Companies

25 An Update on Today’s CPA 26 Capitol Interest

A Different Texas Legislature

technical articles 29 Succeeding as a Professional 32 The ABCs for the (Very) Small Business

Perspectives for Year End 2012-2013

6 Tax Topics

Should She Marry Him?

8 Business Perspectives

Seeking Value Across the Globe

9 Accounting and Auditing

Audit Report Modifications vs. Emphasis-ofMatter, Other-Matter Paragraphs

10 Emerging Issues Hyperspecialization – The New Normal?

12 Chapters

Dallas Chapter Partnerships Benefit All

departments 17 Take Note 42 Classifieds 44 CPE Calendar

36 A Tale of Two Warranties

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Today’s CPA online at 3



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Chairman’s Message By Fred Timmons, CPA | TSCPA Chairman

Perspectives for Year End 2012-2013 Editor’s Note: In the final Today’s CPA issue of TSCPA’s fiscal year, Chairman Fred Timmons, CPA-San Antonio, gives a recap of events in 2012-2013. It’s hard for me to believe that almost a year has passed since I first became your TSCPA chairman. In this last message for 2012-2013, I’d like to share information and perspectives on a few professional issues of the year and TSCPA’s actions in support of members. You’ll want to read the “Year in Review” article in this Today’s CPA for more details about the Society’s programs and activities. Two important issues this year were the “fiscal cliff ” and the Patient Protection and Affordable Care Act. Congress reached a lastminute fiscal cliff compromise and passed the American Taxpayer Relief Act on January 1. This act permanently extended a large number of tax items from the 2001 and 2003 tax acts and extended many expired tax provisions. TSCPA kept members informed and the TSCPA CPE Foundation acted quickly on January 2 to address the fiscal cliff decision by adding a new webinar and webcast responding to the bill. The Affordable Care Act was upheld by the U.S. Supreme Court last July. TSCPA offers CPE programs on the act that focus on key topics and planning strategies related to tax and health insurance changes contained in this far-reaching legislation. Since TSCPA is one of the largest state CPA societies in the U.S., we have an opportunity to support initiatives that help protect the interests of the accounting profession and the public. One of the programs we supported this year is called the Comeback America Initiative (CAI). This initiative emphasizes policy, operational and political reforms that are needed to put the U.S. government on a more sustainable fiscal path. David Walker,

CPA, former U.S. comptroller general, is the CEO and founder. CAI developed various communications efforts, such as the “$10 Million a Minute Bus Tour” that included a stop in Dallas in September. In his presentation, Walker discussed a series of issues, including the debt, federal spending, growth of government, health care and Social Security, and he offered solutions to the problems our country is facing. You can find more information on the CAI’s website at The Private Company Council (PCC) was created by the Financial Accounting Foundation in 2012 to settle differences in U.S. generally accepted accounting principles, where appropriate, for privately held companies. In its work, the PCC will determine whether modifications or exceptions to existing nongovernmental U.S. GAAP are required to address the needs of private company financial statement users. In September, a member of the TSCPA Board of Directors, Billy Atkinson, CPAHouston, was appointed to serve as PCC chairman. He was nominated by the TSCPA Executive Board to serve on the PCC. The PCC has held two meetings so far, the first in December and the second in February. You can read more about Atkinson and the work of the PCC in the Spotlight on CPAs article in this issue of Today’s CPA. In one other area of interest, in January the U.S. District Court for the District of Columbia struck down the IRS’s registered tax return preparer program and enjoined it from enforcing the regulations. TSCPA provided information about the program and the court rulings through the Society’s communications vehicles, including our blogs and the Viewpoint e-newsletter.

Fred Timmons will share some interesting stories or facts about Texas in each issue of Today’s CPA during his year as TSCPA chairman. The distance from Beaumont to El Paso is 742 miles. The distance from Beaumont to Chicago is 770 miles. El Paso is closer to California than to Dallas. As we finish out the year, I would like to remind you that it is time to renew your TSCPA membership for 2013-2014. You should all know by now how much I love our great state of Texas. Our Texas Society of CPAs is one of the top societies in the United States. That is due to the outstanding staff of TSCPA and the super group of volunteers who do so much for all of our members. It has been my extreme pleasure to visit each and every chapter and to learn how much everyone volunteers for the Society. Without this community of Texas CPAs, TSCPA would not be able to continue its work to protect our certificates, offer outstanding professional development opportunities and CPE choices, keep members informed on legislative, regulatory and professional issues, and much more. For me, TSCPA has been my life for the past year. My partners are probably ready for my year to come to a close, even though they have been tremendously supportive and I could not have done it without them. But I have loved every minute of it and will be sad when it comes to an end. TSCPA has provided me the opportunity to expand my horizons and network with friends and colleagues throughout Texas, which has benefited me throughout my career. It has been my privilege to serve as your chairman and I want to thank each and every one of you for your continued support of this great organization. ■

Fred Timmons can be contacted at


| MAY/JUNE 2013


Tax Topics By Greta Hicks, CPA | Column Editor

Should She Marry Him?

A frequently asked question from female clients is, “My boyfriend has tax problems and he has asked me to marry him. Should I?” The standard answer is, “Tell him yes, but only after his tax problems are resolved.” Once married, his tax problem may become your tax problem. No, this is not a personal advice column, but this a common, and serious, potential tax problem. First, remember that we are in a community property state. Second, the Internal Revenue Service (IRS) follows the income and property laws where the taxpayers are located. Because of certain tax benefits married filing jointly (MFJ) allows, many married taxpayers choose to file a joint tax return. If MFJ is elected, “both taxpayers are jointly and individually responsible for the tax and any interest or penalty due on the joint return even if they later divorce. This is true even if a divorce decree states that a former spouse will be responsible for any amounts due on previously filed joint returns. One spouse may be held responsible for all the tax due.” Facts from a recent phone call: Jean is a teacher with two children and owns her home. All her income taxes have been currently filed and fully paid. Her boyfriend, Joe, owes back taxes. When he asked her to marry him, she said “Yes.” What are the possibilities regarding the taxes and what are potential solutions? 1. Prenuptial agreement. Consult with an attorney to discuss the possibility of her income being her income and her house remaining her house. A prenuptial is not a cure-all, but it is better than no agreement. 2. Suppose they file a joint tax return, and the IRS keeps their refund and applies it to his back taxes. What are her remedies? Rev.

Rul. 2004-74 provides guidance under Internal Revenue Code (IRC) 6402 “regarding the amount of an overpayment from a joint tax return that the IRS may offset against a spouse’s separate tax liability for taxpayers domiciled in Texas.” Three different fact situations as discussed and the solution is determined by which spouse made tax payments and which spouse incurred liability. She can file a Form 8379, Injured Spouse Allocation. The IRS will use a formula discussed in Rev. Rul. 2004-74 to determine which part of the refund is hers and refund that amount to her. When filing a Form 8379 “with a joint tax return or amended joint tax return, enter ‘Injured Spouse’ (preferable in red) in the upper left corner of page 1 of the joint return.” IRS Tax Tip 2011-60, Revenue Ruling 74-611, Rev. Rul. 85-70, Publication 555 at and the Financial Management Services,, provide additional information regarding application of income tax laws in a community property state. If Form 8379 is not timely processed, call the Treasury Offset Program Call Center at 800-304-3107. 3. Maybe the remedy is to file a married filing separately (MFS) income tax return. Humm? First, the MFS tax bracket is higher, which results in more taxes than filing as MFJ. Also, in a community property state (without a prenuptial agreement), the income of both individuals is added together and divided in half. The good news is each will owe income taxes on one-half of their community income

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 or



| MAY/JUNE 2013

under the MFS rates. See Publication 555 for details of allocating community income. On a MFS tax return, one-half of his self-employment income is on her tax return, which results in her owing taxes on one-half of his income; however, one-half is better than being responsible for 100 percent of taxes owed on a MFJ tax return. The good news is that on a MFS return, she does not owe any self-employment taxes on the one-half of his self-employment income reported on her return. 4. Suppose the IRS decides to levy her paycheck. IRM “In community property states, taxpayers who are liable for delinquent tax have a community property interest in their spouse’s property and rights to property. In this case, the delinquent taxpayers’ property rights in their spouses’ property and rights to property might be subject to levy.” See references in 2 above and Internal Revenue Manual (IRM) references. 5. Let’s say a federal tax lien is filed and it is attached to her house. What then? She can attempt to keep her house as separate property by not allowing him to make payments on the house or by not making payments on the house from community funds and/ or joint bank accounts. She will need to prove funds have not been co-mingled and refute the underlying tax liability. 6. After filing a MFJ income tax return, the couple decides to get a divorce. If they owe taxes on the joint income tax return, either one of them can file a Form 8857, Request for Innocent Spouse

Relief. Form 8857 covers three types of relief: innocent spouse relief, relief by separation of liability and equitable relief. When requesting relief based on community property laws, Form 8857 must be “filed no later than six months before the expiration of the period of limitations on assessment (including extensions)” against the nonrequesting spouse or former spouse for the tax year for which the innocent spouse is requesting relief. For additional information on innocent spouse relief, see IRS News Release IR2011-80 and Notice 2011-70. Generally, community property laws require taxpayers to allocate community income and expenses equally between both spouses. However, community property laws are not taken into account in determining whether an item belongs to the innocent or nonrequesting spouse (or former spouse) for purposes of requesting any relief from liability. Per Rev. Proc. 2003-19, the nonrequesting spouse has the right to appeal the preliminary determination to grant partial or full relief to the requesting spouse when the preliminary determination letter is issued April 1, 2003, or later. However, the nonrequesting spouse may not petition the Tax Court from the final determination letter. If relief is denied in part or in full, and the requesting spouse petitions the U.S. Tax Court, the nonrequesting spouse, by law, will be given the opportunity to become a party in that proceeding. The answer remains, “Clear up the tax problems before marriage.” ■

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Business Perspectives By Mano Mahadeva, CPA, MBA | Column Editor

Seeking Value Across the Globe As the U.S. faces a historic $16 trillion debt and the European Union seeks to prevent a fiscal crisis among its members, a relatively loose grouping called the “BRICS” nations has become a robust economic machine that represents nearly half the world’s population, nearly a fifth of the global gross domestic product and nearly a fifth of world trade. “BRIC” is an acronym for the world’s leading emerging economies: Brazil, Russia, India and China. South Africa joined the bloc in 2010, resulting in “BRICS.” During the global meltdown, we saw these nations withstand the financial crisis better than expected and outperform developed countries. They suffered slower growth, but bounced back. They built foreign reserves, which afforded them a cushion during the downturn. Politically and socially, they have shown more restrain and calm, earning them respect as sound managers on a global stage. Weary of low interest rates, higher asset pricing and limited opportunities in developed nations, more net new investment continues to be allocated to these nations in a herd-like manner, with the hope of receiving higher returns. In general, these economies offer attractive investment opportunities. The local risks are higher, but so are the returns. They also present a positive, but moderate correlation with developed markets. As a result, the risks of investing in these markets get partly diversified in a global portfolio. Hence, they can have a positive contribution in terms of a risk-return tradeoff. However, a global economy calls for a more discerning and sophisticated strategy. The question should not be, “Should I invest 10 percent of my assets abroad?” But instead, “Where do I invest my 10 percent abroad” to obtain a higher risk adjusted return? So, within the broader homogenous emerging market asset class, investors need to seek those specific “assets” poised for greater opportunities.

To reach a fully developed state, a market has to transform itself from a frontier stage to that of an active, mature and sophisticated state to attract investors. Today, there are many frontier or “pre-emergent” markets, with varying capabilities, knocking on the BRICS door for membership. They are a hotbed of innovation, creating disruptive industries from health care and biotechnology, to e-commerce and travel. Think Corona Beer and CEMEX of Mexico, and Hyundai and Samsung in Korea. These companies reached the pinnacle by adopting unconventional thinking, and by competing intensely with innovative leadership, technology and brand building. These frontier markets could not be more different from one another! Here are some examples. Turkey has 75 million people and has an economy equal to 1 percent of global GDP; political stability has made it a model nation across Islamic countries. It had a high economic growth rate of 11 percent in 2012, due to car and textile exports, and tourism. Today, Turkey is pursuing critical infrastructure projects, such as nuclear power plants and highspeed rail, both of which need an infusion of capital. The country is well-positioned as a counterweight to Iran, and is the gateway between Europe and Asia. But labor costs continue upward, and overall unemployment is at 10 percent with a wide disparity of per capita income across the country. South Korea has a GDP of $1.1 trillion and a population of 49 million. It is a world leader in manufacturing, has a low unemployment rate of 3.4 percent among

the G20 nations, and has a per capita income of around $30,000. The nation is also diversifying away from its strength of manufacturing into new growth industries of biotech, aerospace, robotics and industrial equipment. As we move from the east to the south, markets such as Vietnam, Indonesia, Thailand and the Philippines have outpaced most of the global exchanges over the last 12 months due to rapid population growth, the application of sound fiscal policies and easier credit. The predominantly younger population, who are in their spending prime, has moved from the rural areas to the suburbs to work. Medical tourism is a key growth driver, and foreigners are moving in droves to retire in these countries to take advantage of substantially lower living costs. Investors expect these frontier or preemergent countries to grow at a higher rate than either developing markets or developed markets. Reasons suggested are a rapidly evolving middle class; a growing household income; rapid growth in domestic demand; lower levels of personal debt; lower labor costs; and an abundance of natural resources. A transition to a more democratic political system with less corruption, promotion of free enterprise, more efficient regulation of the financial industry, and a firm application of the laws should benefit local markets. On the new global stage, nothing is static; everything is dynamic. Nations are doing business amidst the new economic realities in which traditional models do not apply. Countries that embrace the new are thriving. And these are the values we need to seek. ■

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



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Accounting and Auditing By C. William (Bill) Thomas, CPA, Ph.D. | Column Editor

Audit Report Modifications vs. Emphasisof-Matter, Other-Matter Paragraphs If you are in public practice, you’ve already weathered the 2012 financial reporting season. Hopefully, you kept the Clarity Auditing Standards close at hand on your engagements, right down to the issuance of the opinion. The January/February 2012 issue of Today’s CPA contained a short summary of the “clarity” changes to the standard (“unmodified”) audit report. The standard report basically communicates the same message it always did, except in more detail. It now has four main paragraphs with subheadings: “Report on Financial Statements” (introductory); “Management Responsibilities;” “Auditor Responsibilities;” and “Opinion.” The new standard (AU-C700) prescribes a more detailed description of both management and auditor responsibilities. Many of you may have been able to complete your audits and issue your opinions without diverting from the basic report format. But what if the circumstances didn’t permit the issuance of the standard (unmodified) report? The Clarity Standards contain some changes in specific terminology and requirements for placement of explanatory paragraphs. These changes are discussed briefly below.

The clarity standards contain a new definition of “modifications.” The term now pertains to “opinion modifications” rather than mere “report language modifications.” Under the new definition, there are now only three types of opinion modifications: qualified opinion (either GAAP departure or scope limitation); adverse opinion (pervasive GAAP departure); or disclaimer (pervasive scope limitation). A new “definitions” section now clarifies the definitions for “modification” and “pervasive.” If a report modification is necessary, the auditor should add a paragraph to the standard report under the sub-heading “Basis for [specifically modified] Opinion.” Disclosure of the specific type of modification (qualified, adverse, disclaimer) is required in the sub-heading. The prescribed detailed contents of the modification paragraph (facts and effects) are essentially unchanged from the former standards. The modification paragraph must be placed in the report immediately preceding the opinion paragraph.



Under the former standards, we generally dumped all instances in which the standard report couldn’t be issued into “report modifications” or “departures from standard wording.” Within this category were two sub-categories: opinion qualifications (GAAP departures and scope limitations) and other modifications that didn’t constitute qualified opinions (consistency, going concern, emphasis-of-matter, uncertainties, departures from GAAP necessary for fairness, etc.). There was a separate standard titled “Reports on Comparative Financial Statements” that described opinion modifications when, for example, we didn’t audit the financial statements of a prior year, or when a predecessor auditor elected not to re-issue a report.

The former standards permitted optional (but not required) insertion of an explanatory paragraph (location was not specified although it was generally understood to be before the opinion paragraph) in four specific “emphasisof-matter” circumstances: (1) the occurrence of a material subsequent event; (2) the entity was a component of a larger business enterprise; (3) a material related party transaction; or (4) a material accounting change. The Clarity Standards have changed these rules substantially. The term “emphasis of a matter” now means “drawing attention to disclosures that are fundamental to users’ understanding of the financial statements.” The following circumstances now require insertion

of an emphasis-of-matter paragraph: 1. Disclosure of a fact that became known to the auditor after release of the report for a particular year that requires a different audit report from that previously expressed (see Paragraph .16c of AU-C 560) 2. Disclosure of the auditor’s substantial doubt about the entity’s ability to remain a going concern (Paragraphs .12 and .16 of AU-C 570) 3. Reference to accounting changes that materially affect comparability of financial statements (Paragraphs .08-.09 and .11 .13 of AU-C 708) 4. Audits of financial statements prepared on the basis of special purpose financial frameworks (formerly called “special purpose reports”) (Paragraphs .19 and .21 of AU-C 800) Emphasis-of-matter paragraphs must now be inserted after the opinion paragraph. The term “other matter” refers to something other than a financial statement disclosure that is relevant to the users’ understanding of the audit, the auditor’s responsibilities, or the auditor’s report. Exhibit C of AU-C 706 contains a listing of eight circumstances that require “other matters” paragraphs. Space prevents listing them all, but examples are references to work done by the auditor or another auditor on prior period financial statements, references to other information in documents containing audited financial statements, and work done on supplementary information (whether required or not). “Othermatter” paragraphs must be placed after both the opinion paragraph and any “emphasis-of-matter” paragraphs. Keep the standards handy! You’ll need them for these special circumstances. ■

C. William Thomas, CPA, Ph.D., is the KPMG/Thomas L. Holton Chair and the J.E. Bush Professor of Accounting in the Hankamer School of Business at Baylor University in Waco. Thomas can be reached at


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Emerging Issues By James F. Reeves, CPA | Column Editor

Hyperspecialization – The New Normal? Adam Smith observed in his Wealth of Nations (circa 1776) that the division of labor would drive economic progress for centuries to come. Smith’s insights were reframed in a 21st century context in a recent Harvard Business Review article titled “The Age of Hyperspecialization.”1 In that article, the authors suggest that much of our prosperity comes from the productivity gains resulting from dividing work into smaller and smaller tasks performed by ever more specialized workers, particularly knowledge workers aided by today’s communications technology. The key to managing in a world of hyperspecialization is a deep understanding of the workflow, which can be visually captured in the form of a workflow map that makes it easy to identify tasks that can be performed with higher quality, at greater speed, and/or at a lower cost by a specialized resource. Individual workers involved in hyperspecialized roles may find they have greater flexibility and, in some cases, leverage in relation to more traditional roles, but risk becoming siloed, which could impact career progression.


In essence, what they are saying is that as labor becomes more knowledge-based and as communications technology advances, the division of labor accelerates to a point where workers become hyperspecialized. The pros and cons and implications of this concept for CPAs are the subjects of this column.

IMPLICATIONS OF HYPERSPECIALIZATION Breaking down work previously performed by one individual into more specialized units performed by multiple people can lead to improvements in quality, speed and cost: Quality, because work is done by someone who is good at it; speed, because tasks can often be performed in parallel rather than sequentially; and cost, because of more efficient use of the organization’s resources. In the case of knowledge work, this division of labor, in turn, frees up the knowledge workers to spend time on higher-value activities.

The HBR article specifically refers to accountants as among the key types of employees who are increasingly difficult to find and hire, due to the shortage of qualified people available. It suggests that the shortage could be alleviated by redefining jobs: for example, with skilled accountants coordinating the work of hyperspecialists performing lower-skilled aspects of their jobs. That may be one aspect of the hyperspecialization trend – the part of it that leads to outsourcing data entry and lower level tasks to low-cost providers, inside or outside the organization. To me, though, hyperspecialization in the CPA profession is a natural outgrowth of increasing complexity, globalization, regulation and commoditization, and is more far-reaching than the outsourcing of repetitive tasks. This conclusion was echoed by a task force of the Indiana CPA Society (INCPAS) that recently published a white paper on hyperspecialization.2 The INCPAS white paper provides several interesting examples of hyperspecialization within the CPA profession, both in public accounting and industry. For example, an audit of a mid-sized public company might bring in valuation, tax, IT, actuarial, derivatives, employee benefit and forensic specialists, in addition to the core audit team, which itself has probably developed specialized industry expertise. These specialists might reside within the firm or within a firm’s association of firms. Smaller firms may not be able to afford or may choose not to join such associations of firms, instead relying on informal networks of specialists that can be called upon as needed for expertise the small firm may not have. State CPA societies can play a valuable

James F. Reeves, CPA, is Senior Vice President, New Product Development at the Tax and Accounting business of Thomson Reuters. Contact him at, or visit his blog at



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role in facilitating these informal networks, thereby helping small and mid-sized firms remain competitive. Each year, Accounting Today publishes a list of top niche services among the Top 100 firms. Looking at the 2013 report shows firms accelerating revenue growth in services like state and local taxation, international taxation, estate and gift tax planning, and business valuations. While the rankings of the top niche services change from year to year, the overall concept of developing specialized expertise as a competitive differentiator is nothing new. Where the concept of hyperspecialization enters the conversation is, for example, when a state and local tax practitioner becomes the firm’s or association’s go-to resource for state nexus issues; where an international tax practitioner evolves into a transfer pricing specialist; or a firm’s health care practice leader becomes the “play or pay” expert for businesses implementing the Affordable Care Act. In other words, hyperspecialization in a CPA context is a relative and evolving concept, but at its core involves the division of labor into ever more specialized tasks or roles, and narrower and narrower areas of expertise.

tasks requires coordination and oversight, including project management and communication skills, to ensure engagements are completed in a timely and quality manner. CPAs in a hyperspecialized world may specialize earlier in their careers, and while that may have its benefits both for the individual and the firm via increased billing rates for specialized expertise, the young specialist may in effect become siloed and not develop the broadbased business knowledge required by someone in a most trusted advisor role. It may provide a great opportunity for technicians who want to focus on their technical areas of expertise, but may limit their ability to progress in their careers.



The INCPAS white paper suggests that the hyperspecialization trend will significantly impact CPAs, how they work, and the skills required. The division of labor into multiple specialized

1. “The Age of Hyperspecialization” by Thomas W. Malone, Robert J. Laubacher and Tammy Johns, Harvard Business Review, July 2011. 2. Hyperspecialization White Paper, INCPAS Board Task Force, Nov. 11, 2012.

HERE TO STAY With the increasing volume and velocity of regulatory change, with communication technology eliminating geography as a barrier, and with the commoditization of certain elements of core CPA services, hyperspecialization is here to stay and is accelerating faster than we probably realize. It’s a great example of the new normal – and how normal just isn’t what it used to be. ■

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Chapters By Rhonda Ledbetter | TSCPA Chapter Relations Representative

Dallas Chapter Partnerships Benefit All con·ver·gence Noun \kən-’vər-jən(t)s\ 4: the merging of distinct technologies, industries, or devices into a unified whole Synonyms: confluence, conjunction, meeting Related Words: combination, connection, consolidation, joining juncture, linking, merging, unification, union The annual Convergence event has become an opportunity for deep connections among varied professionals in the process of merging distinct education offerings into a unified whole. Through its work with associating organizations in planning Convergence, the Dallas Chapter is continuing to build upon its community connections: • Dallas Bar Association Tax Section • Dallas Estate Planning Council • Financial Executives International (FEI), Dallas Chapter • Institute of Internal Auditors (IIA), Dallas Chapter • Tax Executives Institute (TEI), Dallas Chapter • State Bar of Texas Taxation Section The same principles that apply to cities across Texas, regardless of size, are equally at work here. CPAs are involved in their communities, so it’s natural for them to find ways for collaboration that benefits the greatest number of individuals. Working with others who have similar needs, they can build education events at a level that exceeds what they can develop separately. Interdisciplinary learning is crucial for business professionals in their quest for the knowledge that will keep them competitive. The chapter has worked hard to help CPAs move seamlessly between work for a variety of employers: business and industry, nonprofit, public practice, government, education, law firms, and more. Providing education that addresses universal core competencies is a big part of its purpose. In an area of Texas that’s all about growth, it was a logical step for the chapter’s leaders to look at an already successful event and take it to another level. Recent TSCPA Dallas Chapter Chairman Paul Willey, CPA, has also served as president of the FEI Dallas Chapter, forging a link.


Working with members of the local chapter of FEI as judges for the Dallas Business Journal CFO of the Year Award was such a positive experience that the CPA chapter leaders began looking for other opportunities to work together and their partnership in the event now known as Convergence was born. Involvement of the other groups grew organically from a mutual desire for more outreach to the business community and greater visibility. Associating organizations have assisted with determining topics, securing presenters and getting sponsors, in addition to providing information about the conference to their members. The Dallas Bar Tax Section makes an audio recording of some of the sessions and makes them available on their website. Event Chairman Tom Walker, CPA, explains: “I first attended the Convergence conference in 2011. At the time, I was the chair of an IRS Advisory Committee tasked with interacting with members of the public. The Dallas CPA Society was kind enough to offer us exhibit space among the sponsors, so I got to meet a number of the conference attendees. They also convinced me to give a brief presentation at the luncheon that day. Little did I know that would lead to me serving as vice-chairman for the event in 2012 and now chairman in 2013.” “It’s been a real honor to get to work with the folks on the planning committee these last couple of years,” continues Walker. “I think the diverse nature of the group is what helps drive the success of the event itself. We’re able to get input and assistance from such a large cross-section of the Dallas financial community that we have connections with almost every related organization in some form or fashion. Through my involvement with Convergence, I personally have become connected to FEI, TEI and the Dallas


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Estate Planning Council. Those are just the ones that directly impact my professional life. The list of all groups instrumental in putting on this event is just too big to include here. “I’m extremely excited about this year. As we get closer to the date, I am amazed at the efforts of the planning committee and the Dallas Chapter staff. In addition to being a great benefit to the attendees, I think this conference has become a testament to the strength of the Dallas area financial industry overall.” Reflecting the integration of all components of the community, the chapter will present its first Community Advocate Award at this year’s Convergence. The recipient is Robert Miller, whose column in the Dallas Morning News has spotlighted philanthropy and reminded readers that they can do more to bring hope, compassion and encouragement to those who need it most. The chapter’s newest video promoting Dallas will be premiered at the conference. Echoing the theme set by presentation of the Community Advocate Award, this year’s edition will focus on quality of life in the greater Dallas area. The chapter worked with the Dallas Regional Chamber, which provided input for the preparation of the video and will be represented at the event. As a part of the fabric of the community since its founding in 1929, the chapter is happy to be a cheerleader for the area, and to work to attract CPAs to live and work there.  ■

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Spotlight on CPAs By Anne McDonald Davis, ABC

Wise Council

Texas CPA to Chair New Regulatory Group for Private Companies nervous, so we talked about it and decided, ‘OK, go ahead and nominate me, but I won’t commit until I know exactly what’s involved and whether I’m really a candidate.” In the end, he relented and agreed to serve. He jokes that one factor is the Astros don’t have a very good team right now. On a more serious note, he emphasizes: “I credit a lot to my roots with the Texas Society of CPAs. These friends came to me initially and asked me to do this, and it’s because of them that I’m doing it.” So for the present, fishing, golf and retirement will have to compete with yet another service mission for Atkinson’s profession.

PRIVATE COMPANY ANGST Billy Atkinson, CPA-Houston, had certainly earned his retirement. Aside from a distinguished 39-year career at PricewaterhouseCoopers, LLP, Atkinson had served as chairman of the National Association of State Boards of Accountancy (NASBA) from 2009 to 2010 and as the presiding officer of the Texas State Board of Public Accountancy (TSBPA) from 2003 to 2005. Time to hang up his CPA hat, walk the dog and play golf at home in Sugar Land, and head out to the family fishing cabin in Port O’Connor. But wait. The Financial Accounting Foundation (FAF) had issued a call for nominations to chair the recently created Private Company Council (PCC), and a number of Texas CPAs in-the-know felt strongly that Atkinson was their man. “The Texas Society contacted me and asked if they could nominate me,” recalls Atkinson. “I said, ‘I don’t need to do this. Someone else should do it.’ So I referred them to others.” Then leadership at TSBPA also asked … and then NASBA. Atkinson chuckles, “By that time, my wife started questioning what this all meant and even my dog was getting


Back in 2009, the American Institute of CPAs (AICPA), FAF and NASBA established a blue-ribbon panel to address how U.S. accounting standards could best meet the needs of users of private company financial statements. As NASBA chairman, Atkinson was a sponsoring member of that panel. Contrary to Atkinson’s expressed viewpoint, the majority of the panel strongly recommended the creation of an independent standard-setting board, separate from the Financial Accounting Standards Board (FASB), rather than having any proposed changes to existing U.S. Generally Accepted Accounting Principles (GAAP) subject to ratification by FASB. The decision of the FAF Trustees was that FASB will “endorse” changes submitted by the PCC and the PCC would thus follow the process of accounting standards development as used by FASB. Little did Atkinson realize that he would be the first chair of the new entity. At the inaugural meeting of the PCC on Dec. 6, 2012, Atkinson says they were focused on the issues that cause the most angst among private company “stakeholders.” (Atkinson uses the latter as a generic term for users, preparers, and their accountants or auditors who deal with the application of the

standards to their transactions.) Those areas included consolidation of variable interest entities, accounting for “plain vanilla” interest rate swaps, accounting for uncertain tax positions, and recognizing and measuring, at fair value, various intangible assets (other than goodwill) acquired in business combinations. “These issues are among a fairly short list most often mentioned, issues that generate a lot of ‘angst,’ as I said, and a lot of concern. I refer to this as the ‘low-hanging fruit,’ because it’s the most obvious,” Atkinson explains. At the next meeting, which was held on Feb. 12, 2013, the PCC formally added these items to its agenda, with the exception of accounting for uncertain tax positions.

UNCERTAIN TAX POSITIONS The new chair clarifies: “What we tend to refer to as FIN 48, we looked at it carefully and we could see no current relevance or excess cost vs. benefit issues for private companies, other than the difficulties that they had in initial implementation. Private companies ultimately have to acknowledge their uncertain tax positions in various states, federal or foreign jurisdictions … and deal with the likelihood of liability once those facts are fully known to the taxing authorities and others. And so FIN 48 requires companies to really have to do some work, and it’s hard. Other than that, we couldn’t find, at least not currently, any justification for moving forward with such a project.” So the PCC has tabled the issue while they seek additional input from private company stakeholders. Atkinson assures there’s “still an open book on that one.”

INTANGIBLE ASSETS ACQUIRED IN BUSINESS COMBINATIONS As the PCC began to address the issue of recognizing and measuring, at fair value, various intangible assets (other


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than goodwill) acquired in business combinations, they considered what Atkinson calls “Day 1 costs” and “Day 2 costs.” He extrapolates: “The ‘Day 1 costs’ are the allocation of the purchase price to the various intangible assets, and the question we had is this: are those intangible assets that have been identified in practice, are they too broad? Should they be narrowed somewhat based upon supporting documentation, versus these other factors that have kind of come up in practice? And then with regards to goodwill, is there a need for some minimum amount of goodwill amortization that would help mitigate the often costly impact of existing accounting rules and resulting allocation of purchase prices to these intangibles?” The PCC acknowledged that private companies incur a great deal of expense in getting appraisal evaluations for intangibles, and that cost seems to sometimes not measure up against the benefits. “So we’re looking at that,” he nods.

developed and looked at between now and our May meeting. What items might be added to the agenda in the future? We’ve asked the [FASB] staff to look at stock-based compensation, as well as development-stage enterprises. Basically, we’re doing what we’re supposed to be doing, what I believe the stakeholders expect from the PCC. And part of our process is not just to do it ourselves, but to engage with the entire FASB organization, together with their due process, and that’s what’s happening now.” In addition to the May meeting, the PCC will meet again in July, September and November.


Of the variable rate debt in the marketplace, Atkinson indicated that the PCC was considering the more simple forms incurred by private companies. “When they turn around and basically hedge variable interest rates – we’re looking for some common-denominator-type transactions that might be subject to a simpler form of accounting,” he explains. “It may be possible that a variable rate note with a single lender and counterparty could indeed be in substance fixed rate debt. So, we are taking a look at it now.”

In their first joint standard-setting activity, the PCC and FASB voted to seek additional public comment on a proposed private company decision-making framework. At press time, the proposal was slated to be re-exposed in April. “We will use the framework as kind of a guide to remind us of some of the fundamental differences that we mutually agree are out there for private stakeholders vs. public stakeholders,” affirms Atkinson. “It will give us some guiding criteria to determine whether, and under what circumstances, it’s appropriate to adjust any financial reporting requirements for private companies that are following GAAP.” The PCC chair regards the framework not as a “decisive instrument” but rather one to guide the PCC and FASB in their mutual quest to identify opportunities to reduce the cost and complexity of preparing private company financial statements in accordance with GAAP.



The PCC is considering VIEs that are under the standard and whether, in certain situations, related party transactions could, for private companies, be subjected to a little more accounting care. Beyond this, VIE accounting, in general, may need a contemporary revisit. What’s next? Atkinson projects: “So, all the facts and considerations supporting those agenda items are going to be further

Since the PCC was established, AICPA has proposed a new accounting framework for small and medium enterprises (FRF SMEs). Will this initiative impact the work of the PCC? Atkinson says “not really.” “The AICPA framework is meant for non-GAAP applications,” he explains. “It’s for companies or entities that do not have to issue financial statements in accordance with GAAP, but can issue them on some



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other basis of accounting, such as cashbased, income tax basis, special contract or agreement basis and the like. I’m sure that AICPA and its task force are focused on those financial statement users, their needs and whether or not another diverse basis of financial reporting is needed for user dissemination and how such would be promulgated independently and reliably. The PCC is dealing with issues associated with GAAP, so we’re really not connected to the FRF – SMEs issue.”

ADVISING FASB Another major responsibility of the PCC will be to serve as the principal advisory body to FASB on the appropriate treatment for private companies concerning items under active consideration on FASB’s technical agenda. Atkinson draws the connection: “We are constructed of people who are private company-centric in background, not just as auditors or preparers, but most importantly as users as well. Our real construct is to provide that perspective on a continuing basis. We have two primary directives: one to perform look-back reviews on existing accounting standards, and also to look at current technical standards projects and/ or exposure drafts from FASB to assure that private company issues are likewise being addressed in the active standard-setting process.” Also, although the PCC does not sit on FASB’s Emerging Issues Task Force, they will likely be called upon to look at and to address EITF issues involving private companies. Atkinson enthuses: “FASB has been, up to this point in time, extremely understanding and receptive to all this. I think that the FAF, FASB and the PCC are all pulling in the same direction. As I have mentioned in other interviews, we have the wind in our sails as opposed to the wind in our face!” That bodes well for those who hope the establishment of the PCC will accelerate FASB consideration of private company issues and that the PCC will be able to assist FASB in streamlining the exposure process so that private company considerations are continued on next page


Spotlight on CPAs continued from page 15

included in future EDs. Atkinson tempers that expectation just a little. “We’re not really here to redesign FASB’s process,” he cautions. “What we’re here to do is to provide good input, good motivational input: facts, figures, considerations and practice experience from preparers and users to assure that private company considerations are involved in FASB decisions – past, present and future. No one should expect that we will be short-cutting their process to any great extent. Now we will deliberate in addressing private company issues and not deferring them simply because they’re hard. The low-hanging fruit that I talked about earlier should move through fairly quickly compared to more difficult issues that will require careful public consumption and evaluation. We’re not going to skip any critical steps.” Rather, the new chair views his biggest challenge in the coming years as getting a process in place that will generate a steady stream of input from a broad cross section of private company stakeholders. Atkinson stresses that the PCC wants to hear from all interested parties. “I tend to emphasize users, but I certainly don’t de-emphasize preparers and auditors. The feedback process has to be robust. And it need not be formal; it can be an e-mail. Somebody can scratch something on a piece of parchment paper and send it to me! We need input from people who are really suffering inappropriately rather than those who find complex accounting for complex transactions and want to merely complain. Good input – that’s where my stress point is; I’m not stressed over the resolve of FASB. I’ve seen plenty of instances where there was an opportunity to push back at the PCC and they haven’t. We’re already on the ground, running with the issues.”

THE RIGHT FIT When Atkinson was appointed chair, Mack Lawhon, chairman of the FAF Trustee’s Private Company Review Committee that will oversee the PCC, opined, “Billy Atkinson will bring to the PCC a deep understanding of the complex issues facing FASB as it seeks to serve the


best interests of all those who use, prepare and audit private company financial statements.” Lawhon’s statement reflects the impetus behind that joint nomination of Atkinson by TSCPA, TSBPA and NASBA. The veteran Houston CPA’s background encompasses the essential knowledge base to support the PCC’s inaugural efforts. Atkinson smiles: “My wife thinks I have put in a lot of public service … which I suppose has prepared me for this. It also kept me well grounded as I practiced public accounting – provided me with a perspective on things, whether I was dealing with enforcement or rule-setting issues at TSBPA. Remember, I was chair during the three years immediately following Enron while the Texas Accountancy Act was going through sunset … so I had to deal with those issues in the face of legislators and a public who were quite angry. That gave me a very interesting window on regulation and on public trust. But we all rise to the occasions as they come to us in life, no matter what they are, and those just happened to be mine.” Above all, Atkinson’s experiences have made him keenly aware that the public relies on CPAs to be transparent, honest and highly ethical. His practice, largely private companies, acquainted him with the anxiety and growing concerns clients and stakeholders had with GAAP, as it seemed to not be as relevant to them in certain areas. “And so having that practice background with clients, with other users of financials, coupled with the public responsibilities that I had on the State Board and NASBA, helped me develop a psyche that balanced all this stuff out, and that asked all the questions the PCC will be addressing. I bring a lot of perspective and heart into these discussions,” he acknowledges.

RETIREMENT STILL UNDER WAY Although Atkinson enthusiastically embraces his new responsibilities as PCC chair, he is still carving out his retirement years and all that offers. “When you retire, there’s a lot you want to do in life and every year is precious to you. I have my wife,

children, grandchildren and other family and friends … many things I enjoy doing,” he says quietly. Some things won’t change. Atkinson humorously complains that his dog won’t let him sleep late. Still, there’s that fishing cabin. He lists: “I really enjoy fishing and waterfowl hunting while watching the sunrise. I’m a member of a duck-hunting club out in Garwood, Texas, called the Bucksnag Hunting Club.” (Naturally, he’s the president.) “I also enjoy golfing and traveling,” he continues. “Of our four grandsons, two live close to us and two are in Bandera, and Little League stuff with them has started. They are a blast and I am extremely proud of my children and their spouses. And I’m also on the board of directors of Atkinson Candy Company, an 80-year-old company in Lufkin that my uncle started. His grandchildren own and run the company now. They have asked me to step in and help where I can. I’m glad that I am able to do something like that as well in retirement, because it’s kind of fun.” Atkinson also proudly proclaims his status as “a Texas Aggie” and serves on several boards and councils for the university. He admits that he spends “way too much money” on Aggie football season tickets, but slyly asserts that it’s a pretty good pay-off right now. And since the Astros are letting him down, he’s become somewhat of a Sugar Land Skeeters minor league baseball fan. “I also used to be very active in the Make-A-Wish Foundation of the Texas Gulf Coast, Boys and Girls Harbor, and other community organizations,” recalls Atkinson. “You know, being involved in public service of any sort, whether it’s working with homeless or sick children, or the elderly or people in your church … you develop a psyche that actually helps you make better business decisions. At some point in time, you learn to put your pencil down and ask the question: What are the ‘people’ costs? It matters.” Sounds like the PCC is in good hands. To contact Billy Atkinson with input for the PCC, please e-mail■


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Take Note

Recruitment Campaign: Texas Society of CPAs … Certainly Not Dry Members know that TSCPA isn’t dry and boring! There’s nothing boring about the current financial and economic storm. We’re all in the same boat and need to chart a course together. TSCPA members represent the best in the profession and are needed now more than ever. Although Texas CPAs are unique individuals with different areas of practice, they still have a common identity and goals, which is why you should encourage your nonmember colleagues to join TSCPA. The Society will help them keep their heads above water with upto-date information, protection of their CPA certificate, continuing professional education, ethics training, leadership opportunities, and more. Send your nonmember colleagues to to join today and help them ride the waves ahead.

TSCPA’s Young CPAs Conference is June 14 This year’s Young CPAs and Emerging Professionals Conference will be held on Friday, June 14 at the Westin Houston, Memorial City. This daylong event for young CPAs, CPA candidates and accounting students is back for the sixth year. The conference will feature sessions on: • fraud; • financial reporting; • team building and working with different personalities; • the future of technology in the accounting profession; and • much more.

On the TSCPA Website: Digital Version of Today’s CPA Magazine Each issue of Today’s CPA magazine is available online. You can access it from the home page on The link is on the right-hand side of the home page just below News Alerts and the CPE Catalog. The magazine is posted in a digital format, as well as .PDF files that can be downloaded.

CGMA Designation for Management Accounting

Succession Planning Resource for Members Only – The Practice Management Institute

The Chartered Global Management Accountant (CGMA) designation was created through a joint venture of AICPA and the Chartered Institute of Management Accountants (CIMA). The CGMA is a global designation that recognizes CPAs working in a range of management accounting roles in businesses, industries and governments worldwide. A resource-rich website,, provides 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 stay current on important professional issues. The CGMA is available to qualifying AICPA members, and TSCPA members who are also AICPA members receive a discount. To learn more, visit their website at

Since succession planning is one of the most important practice management issues, TSCPA is here to help 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, scroll down and select Practice Management under Tools and Information.

For more information and to register, please go to TSCPA’s website at and search on “Young CPA.”


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Take Note Watch a New Video for the ACAN Program

TSCPA’s Accountants Confidential Assistance Network (ACAN) is a program dedicated to helping Texas CPAs, CPA candidates and accounting students who may need assistance with 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 Do you know someone who could benefit from the assistance of the ACAN program? Refer them to a new video that TSCPA created about ACAN. It reminds those dealing with these issues that “You are not alone.” The video is available in the ACAN area of TSCPA’s website. To view it there, go to the website at, select Resource Center, and then scroll down and click on Accountants Confidential Assistance Network.

Members Expelled 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. • James C. Ash, Jr., Arlington; • James M. Barker, Jr., Fort Worth; • Phillip M. Davis, El Paso; • John H. Hudson, Dallas; • Jennifer Lee Johnson, Houston; • Joyce McDaniel, Corpus Christi; • Eric Jay Rue, Carrollton; • David L. Whatley, Tyler.


TSCPA Thanks 2012-2013 Campus and Faculty Reps Through TSCPA’s campus and faculty rep program, representatives strengthen the Society’s presence on Texas campuses by sharing information and learning more about what we can do to support students and educators. In addition, the campus rep program serves to promote student membership and gain valuable feedback from students. TSCPA would like to extend a special thanks to those students and faculty members who represented TSCPA so well throughout the year. To learn more about the program, please go to the Students section of the website at FACULTY REPS Anthony B. Ross, Sr. – Concordia University Texas Michael R. Daub – Howard Payne University Gisele Moss – Lamar University Emily Bellamy – LeTourneau University Karen Russom – Lone Star College System Bob Thomas – Midwestern State University Suzanne N. Cory – St. Mary’s University Treba Marsh – Stephen F. Austin State University Mike Shaub – Texas A&M University Rabih Zeidan – Texas A&M University, Corpus Christi Dennis Elam – Texas A&M University, San Antonio Ray Pfeiffer – Texas Christian University Kim Webb – Texas Wesleyan University Rob Walsh – University of Dallas Susan Rhame – University of Dallas Mattie C. Porter – University of Houston, Clear Lake Tiffany Mitchell – University of Mary Hardin–Baylor Allison McLeod – University of North Texas Carol Collinsworth – University of Texas at Brownsville Art Agulnek – University of Texas at Dallas Linda R. Vaello – University of Texas at San Antonio Barbara W. Scofield – University of Texas of the Permian Basin Rod Elrod – University of the Incarnate Word STUDENT REPS Jonathan Webster – Lamar University Michele Adriana Garcia – LeTourneau University Dusty Burkett – Mountain View College Rogelio Cuevas – Our Lady of the Lake University Kathleen René Garza – Schreiner University Brittney L. Honeycutt – Texas A&M University, Corpus Christi Luis Martinez – Texas A&M University, San Antonio Heyue Lena Dong – Trinity University Thi Tra – University of Houston, Clear Lake Alan Hester – University of Houston, Downtown DeAnna Jones Debenport – University of Texas at Arlington Megan Mattingly – University of Texas at Dallas Mayra Huereca – University of Texas at El Paso Amy Janke – University of Texas at San Antonio Jesse Vick – University of Texas of the Permian Basin Jennifer Heimer – University of the Incarnate Word


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Take Note Ask a Member Program TSCPA’s Ask a Member program is a resource you can use to connect with other members for informal consultation when you have a question, concern or situation that arises and might be outside your area of expertise. Ask a Member program volunteers provide quick, informal assistance on an as-needed basis, giving you access to the knowledge and experience of other Texas CPAs. It’s a resource that TSCPA offers to help you with your professional needs. To access it, go to the website at Under the Resource Center tab, scroll down and select Ask a Member. A log in is required to see a listing of other members who have volunteered to provide assistance.

Five Exam Candidates from Texas Receive 2012 Elijah Watt Sells Award In March, AICPA announced the 39 winners of the 2012 Elijah Watt Sells Award. There were five Texas exam candidates who qualified for the award. Texas had the highest number of qualified candidates to come from any one state. This awards program was established to recognize outstanding candidate performance on the CPA Examination. Under the 2012 criteria, award winners must have received a cumulative average score of 95.5 or higher across all four sections of the exam, completed testing during the previous calendar year, and passed all four sections of the exam on their first attempt. Congratulations to Ning Zhu, Adam Wright, Jennifer Tindle, James Braun, and Bradley Bowen.

Membership Suspensions 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 – • Robert J. Bourgeois, CPA, Fort Worth; • Philip W. Cook, CPA, Fort Worth; • James E. Reese, CPA, Plano.


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Notice of 2013 TSCPA Annual Meeting of Members and Board of Directors Meeting June 28-29, 2013 The 2013 TSCPA Annual Meeting of Members and Board of Directors Meeting will be held June 28-29, 2013, at Caesars Palace in Las Vegas. A tribute to Roman opulence, Caesars Palace is located on the Strip, approximately four miles north of McCarren International Airport. The property’s amenities include the new Qua Baths and Spa, a luxurious retreat with an array of unique treatments and services, including Roman Baths. The 129,000-square-foot casino offers a variety of gaming options. Caesars has two golf courses, and two onsite shopping venues hold more than 120 stores. Caesars Palace 3570 Las Vegas Boulevard South Las Vegas, NV 89109 Phone: 866-227-5938 (toll free) Website: To book reservations by phone, call Caesars’ Contact Center at 866-227-5944. Our room block is listed as TSCPA Annual Meeting or you may reference our group code, SCTSC3. Reservations may also be made online, via this unique web link: https://resweb. Room Rates: $179 + 12% Clark County Room Tax (for run of house rooms) ($30 extra person charge for more than 2 people) Room block cutoff date: Monday, May 27, 2013. (The room block may sell out before this date. Make your reservations early!) For more information and a schedule of events, please go to TSCPA’s website at Under “About TSCPA,” click on Meetings/Calendar and then 2013 Annual Meeting of Members, June 28-29 in Las Vegas (.PDF).


Cover Article



w e i v e R n I ear By DeLynn Deakins Managing Editor, Today’s CPA

With TSCPA’s 2012-2013 fiscal year coming to a close, it is time to look back at some of the highlights of the year.

Work continued in support of TSCPA’s strategic plan objectives. The objectives are the foundation for programs, initiatives and activities developed on behalf of TSCPA members.


he current plan covers a three-year period that began in the 2010-2011 year. The objectives of the plan are: • Professional Competency; • Advocacy; • Operational Excellence; and • Recruitment and Retention.

The next few pages of Today’s CPA will focus on the work that was done to accomplish the objectives of the strategic plan. Last year, TSCPA moved to a new database and we are now in the final stages of implementing the new association management system, Avectra’s netFORUM. The system improves the process to integrate and deliver the Society’s member information in one centralized database. It is a tool designed to give TSCPA the capabilities, capacity and resources to further enhance member services.


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The program to train future TSCPA leaders was continued. The revised Leadership Development Institute accepts a maximum of 25 participants. The multi-day program will take place during May and participants will be invited to attend TSCPA’s annual Leadership Day. In addition, TSCPA’s second annual Rising Stars program kicked off in December. This program recognizes members who are age 40 and under and have proven to be innovative leaders within the profession and in their communities. The next group of Rising Stars will be recognized at TSCPA’s Annual Meeting in June. In January 2012, AICPA and the Chartered Institute of Management Accountants launched the Chartered Global Management Accountant (CGMA) designation. TSCPA is working with AICPA to encourage members to acquire and maintain the designation. The CGMA is a global designation that elevates continued on next page


Year In Review continued from page 21

management accounting, and it recognizes the experience and skills of CPAs in business, industry and government. It provides a way for CPAs to enhance their professional credibility and gain access to extensive global resources and expertise. In the legislative and regulatory area, activities included work at the state and national levels. Before each legislative session, TSCPA’s Legislative Advisory Committee (LAC) reviews the legislative environment and recommends an agenda to the Executive Board. As part of this process, the State Taxation Committee (STC) makes recommendations to the LAC for changes in state tax law that might improve simplicity, consistency and technical efficacy. The STC recommendations this fiscal year all involved the franchise (margin) tax. Last October, the margin tax was once again ruled constitutional by the Texas Supreme Court. In addition to the STC recommendations, the LAC proposed that TSCPA oppose efforts to levy a sales tax on professional services and supported making some changes in the Accountancy Act to clarify client confidentiality issues and ensure the confidentiality of complaint investigations. The agenda also included supporting legislation to renew the Texas State Board of Public Accountancy’s status as a self-directed, semi-independent (SDSI) state agency. The LAC recommendations, including the franchise tax items, were approved by the Executive Board. TSCPA representatives appeared in support of the bills mentioned and also worked with legislators to eliminate or modify bills that would have an adverse effect on CPAs. For more information about TSCPA’s legislative agenda, please see the Capitol Interest article in the January/February issue of Today’s CPA. In conjunction with the Texas legislative session, CPAs visited the Capitol on Jan. 29, 2013, and TSCPA hosted a reception for legislators, staff and state officials that evening. The visits and reception are important for keeping CPAs’ visibility high among legislators. Several legislators expressed interest in TSCPA’s franchise tax recommendations, and follow-up visits were made with those legislators to give them an in-depth briefing about the proposals. There were victories this year in the area of CPA mobility legislation. In September, California Gov. Jerry Brown signed the mobility legislation passed by the California legislature. California’s mobility law is effective July 1, 2013. The District of Columbia’s mobility statute was implemented on October 1. With these wins, all the states in the continental United States, as well as Alaska, have modified their laws so it is easier for CPAs with valid licenses to practice across state lines. CPA mobility efforts in Hawaii are still in progress. If you need further information, AICPA provides CPA mobility resources on its website. Go to and search “CPA mobility” on the home page.

CPA-POLITICAL ACTION COMMITTEE TSCPA’s CPA-Political Action Committee is the membermanaged, member-driven and member-focused political action committee for TSCPA. Through the CPA-PAC, CPAs can help ensure the accounting profession has a voice in legislative and regulatory affairs in Texas.


Seventy-five percent of contributions to the CPA-PAC are allocated to local legislative candidates. Each TSCPA Chapter PAC committee determines which candidates will be supported. The remaining funds are dedicated to statewide races, and those decisions are made by the statewide PAC steering committee. To learn more about the CPA-PAC and make a donation, please visit TSCPA’s website at

TSCPA’S FEDERAL TAX POLICY COMMITTEE TSCPA’s Federal Tax Policy Committee (FTP) works to serve as a voice to represent Texas CPAs to the U.S. Congress, Department of the Treasury and the Internal Revenue Service (IRS) on U.S. tax matters. The committee responds to actual and proposed federal tax legislation, regulations and administrative pronouncements. During the year, the committee sent comment letters on several issues. They included letters to the IRS on: • Notice 2012-73 guidance on proposed regulations (REG168745-03) regarding the deduction and capitalization of tangible property expenditures; • proposed regulations (REG-130507-11) regarding the taxation of net investment income (NII) under Internal Revenue Code section 1411; • the administrative burdens new Forms 1099-B cost basis reporting requirements impose on taxpayers and tax preparers when a security is sold; • interim changes to the individual taxpayer identification number (ITIN) application procedures; • its proposed regulations on disclosure of return information to carry out eligibility requirements under IRC section 6103 for health insurance affordability programs; and • urging that the IRS Office of Professional Responsibilities maintain exclusive authority to initiate enforcement action against a tax practitioner for Circular 230 violations affecting practice rights so that the practitioner’s due process rights set forth in Circular 230 are protected. The committee also sent letters to Texas members of Congress: • asking for their support of H.R. 2382 (S. 845), Tax Reform Due Date Simplification and Modernization Act; and • to support the passage of H.R. 1864 (S. 3485) the Mobile Workforce State Income Tax Simplification Act. To read the letters, please visit the Federal Tax Policy Committee’s community on TSCPA’s website at


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ACTIVITIES OF TSCPA’S PROFESSIONAL STANDARDS COMMITTEE Again this year, the Professional Standards Committee (PSC) responded to exposure drafts issued on proposed standards, rules and regulations. The PSC’s objective is to respond to exposure drafts from FASB, GASB, AICPA, the SEC, and any other accounting and auditing standard-setting body that has an impact on the practice of accountancy in Texas. The exposure drafts and letters of comment are posted on TSCPA’s website. To read them, please go to and under the Resource Center tab, scroll down to Member Communities, select Professional Standards Committee, and log in as a member.

CONTINUING PROFESSIONAL EDUCATION The TSCPA CPE Foundation, Inc. continued its work to offer course topics and delivery methods that meet the education preferences of our members. You can turn to TSCPA as your one-stop shop for programs that are presented in a way that is most convenient and efficient for you. In addition to the live conferences and seminars, CPAs can earn valuable and relevant continuing education credit online through hundreds of webcasts and webinars on a variety of timely topics. This year, TSCPA was one of the first CPE providers to develop programs that address the impacts of the Patient Protection and Affordable Care Act and the American Taxpayer Relief Act of 2012 that averted the nation’s “fiscal cliff ” in January.

TSCPA’s conferences and clusters are large audience programs that bring state and national speakers to Texas who cover the latest issues, trends and applications on specific topics. They are held in locations around the state. In professional issues webcasts, TSCPA Chairman Fred Timmons, CPA-San Antonio, and TSCPA Executive Director/ CEO John Sharbaugh, CAE, provided a beneficial overview of current issues affecting the profession. With these free two-hour webcasts, members can earn two CPE credit hours. The next professional issues webcasts are scheduled for this May and September. TSCPA also continued to offer Federal Tax Update podcasts (non-CPE credit). These podcasts examine federal tax legislation, court cases and other developments. Through the onsite training program, TSCPA can bring CPE to your door. Professional development providers and instructors go directly to CPAs’ offices to deliver the courses. Our onsite training salesperson, Annie Daub, visits companies and firms across the state, and she is also available at TSCPA conferences to answer questions about onsite training. No matter which area of CPA practice you’re in, and whether you’re a seasoned professional or just starting out, you can count


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on TSCPA for high-quality courses and content to help you stay up-to-date on the latest professional issues, legislation, rules and regulations. Given the courses available in the vast CPE catalog to choose from, make TSCPA your first place to check for a flexibility of schedules and breadth of topic offerings, with price levels to accommodate your budget. For more information and to register, visit the Society’s website at TSCPA staff is also available to assist you at 800-428-0272 or 972-687-8500 in Dallas.

MEMBERSHIP MATTERS In the membership area, efforts included a yearlong recruitment and retention campaign. With specialized programs and services, and a network of diverse and experienced professionals, TSCPA is full of surprises and value-adding benefits. As of April 1, 2013, 1,148 members had been recruited during the campaign. The chapters participated by implementing recruitment and retention programs locally in their areas. TSCPA continued the free membership program for newly certified CPAs. The program offers up to 12 months of free membership. A free membership solicitation was sent to new licensees on a monthly basis and the Society continued to participate in the two TSBPA swearing-in ceremonies. Efforts also continued for recruiting and retaining members in business and industry. New this year, business and industry members in Fort Worth and Dallas were invited to attend behindthe-scenes events this spring. The Fort Worth event is scheduled for May 9 at the Ballpark in Arlington. It will include a presentation from the Rangers’ CFO and a tour of the ballpark. The Dallas event will be held on May 30 at the AT&T Performing Arts Center. It will include a presentation from a person on their staff and a tour of the center. In another effort, TSCPA invited firm administrators in the five large chapter areas to networking luncheons. TSCPA also sent tax season survival kits to firm administrators statewide, which were well received during the busy tax season. In the student membership area, TSCPA now has 1,947 student/ candidate members as of April 1, 2013. The Society continued the Campus and Faculty Rep Programs, where TSCPA works with Texas students and educators to serve as a connection on campuses to promote membership, share resources and engage the next generation of CPAs. The Accounting Career Education (ACE) program encourages members to share their knowledge about accounting careers with students. The ACE program uses CPA career guides, videos and lesson plans for educators. TSCPA and the chapters are working together to fill requests for speakers and materials. As of March 29, there have been 80 requests from schools and/or members. The Society hosted a three-day workshop for high school educators interested in receiving training in accounting curriculum written by Dr. Dan Deines from Kansas State University. Deines has developed the Accounting Pilot and Bridge Program in an effort to increase support for approval of accounting curriculum to qualify for advanced placement credit.


Year In Review continued from page 23

As of press time, planning is underway for an April 30 event for community college students in San Antonio. At this event, speakers will discuss the value of pursuing the CPA credential. TSCPA also continued to work with students from the University of Texas at Dallas to provide content on the student blog at The blog gives student perspectives on courses, study habits, interviewing, and other adventures while in pursuit of the CPA credential.

SOCIAL MEDIA OUTLETS TSCPA is active in various social media outlets. The Society’s Twitter page is reviewed daily for followers to receive updates on the latest industry news, stats, helpful tips and professional briefs. Using Twitter enables TSCPA to provide current information affecting the profession. The Twitter handles are: • @TXCPAs – General news about all things TSCPA and accounting-related. • @TXCPA2B – TSCPA student info, exam information, and accounting news and updates. TSCPA is also on Facebook, allowing members to “like” the Society and its numerous activities and offerings. This information is updated several times a week with helpful and informative notes. TSCPA’s community page can be found on the Society’s group page, or by doing a search for Texas Society of CPAs at the top of your Facebook home page. In addition to these efforts, several TSCPA chapters have their own Facebook pages. To reach CPAs in a more corporate/business setting, TSCPA has created numerous LinkedIn groups and subgroups for members to join. It is a way for professionals to stay in contact with colleagues. TSCPA’s LinkedIn groups are reviewed and updated regularly to keep members informed of the latest news and upcoming activities. Members can also stay current on Society and accounting profession news through TSCPA’s blogs. The following blogs are available on the website: • Executive Director/CEO John Sharbaugh at www.thesharblog. com; • Governmental Affairs at; • Federal Tax Policy Committee at blog; • Business and Industry blog at; • is TSCPA’s student minded blog, written by four accounting students at: TSCPA adds LinkedIn group pages and Twitter hashtags for upcoming CPE conferences. Members who join the LinkedIn groups can learn additional details about the conferences, as well as connect with other conference attendees. Members can also tweet using the official hashtags to be involved in and follow along with the conference discussion on Twitter.

• • • • • • • • • •

Technology Conference: #techCPE13 Energy Conference: #energyCPE13 Nonprofit Organizations Conference: #nonprofCPE13 Texas School District Accounting Conference: #txschCPE13 CPE Family Conference: #familyCPE13 Advanced Health Care Conference: #healthCPE13 Texas State Taxation Conference: #txtaxCPE13 Advanced Estate Planning Conference: #estplanCPE13 Financial Institutions Conference: #fininstCPE13 Single Audits and Governmental Accounting Conference: #sagaCPE13 • Texas CPA Tax Institute Conference: #txcpaCPE13 • CPE Expo Conference: #CPEexpo13

360 DEGREES OF FINANCIAL LITERACY The program to educate consumers on personal finance issues – 360 Degrees of Financial Literacy – continued again this year. TSCPA’s consumer website,, provides free personal finance resources. The following activities supported the program: • updated content for all life stages on; • worked with TSCPA members on various local and statewide financial literacy events, presentations and speaking engagements; • continued the workplace financial education initiative to inform Texas employees (specifically, HR and communications professionals) about the program and other workplace financial literacy resources; • updated VYM with workplace financial education materials, such as flyers, table tents, paycheck inserts and money management documents; • created Tax Talk 2012 section on VYM with resources and tools to assist taxpayers with the latest information to make tax season easier and more efficient; • developed materials and promoted 2012 Financial Literacy month (April) and Social Media Outreach Day; and • continued “12 Days of Christmas” financial tips, and distributing the TakeOff! monthly e-newsletter for consumers, which now has more than 1,500 subscribers. To learn more about the financial literacy program and the resources that are available, visit

THE APPROACHING NEW YEAR On June 28-29, TSCPA will hold the Annual Meeting of Members and Board of Directors Meeting at Caesars Palace in Las Vegas. At the meeting, TSCPA Chairman Fred Timmons, CPA-San Antonio, will cover activities and achievements of the 2012-2013 year. In the next issue of Today’s CPA, you’ll meet incoming TSCPA Chairman Willie Hornberger, CPA-Dallas. He’ll provide an overview of his goals and plans as we begin the upcoming new year.  ■

DeLynn Deakins is the managing editor of Today’s CPA.



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Society Feature By C. William (Bill) Thomas and DeLynn Deakins

An Update on Today’s CPA In the May/June issue of Today’s CPA magazine each year, we give a brief report on the activities of the Editorial Board, and the progress being made to keep the magazine as timely and relevant to the needs of TSCPA members as possible. In 2012, the economy continued on a slow path toward economic recovery. Job markets have strengthened. Financial markets have now recovered to 2007 levels, which has been a bright sign for investors. In Washington, D.C., the Democratic Party was successful in winning a second four-year term in the White House. Republicans have retained a majority in the House of Representatives, while Democrats retain control of the Senate. In spite of the rhetoric, bi-partisanship is becoming a dying art. While tax increases and a strengthening economy are providing some relief, federal budget deficits continue to soar amidst talk of tax reform and debate on how the federal deficit could be balanced with a mixture of more spending cuts and tax increases. The Texas economy continues to be better off than most other states, thanks to low taxes and new life for the energy sector. Health care reform is now in full swing, impacting the lives of most Americans. Issues related to health care reform pose substantial challenges for regulators, as well as taxpayers and the CPAs who advise them. Leadership at the Securities and Exchange Commission has changed, creating doubt about U.S. transition to International Financial Reporting Standards. Meanwhile, a new financial reporting framework has been developed for small- and medium-sized entities. The Public Company Accounting Oversight Board has developed several new auditing standards for public companies, and auditing standards for non-public entities have been completely recodified and simplified. All of these events have helped shape the content of articles in Today’s CPA.

rate of submissions to Today’s CPA has steadily declined, while our acceptance rate has gone up. The key to maintaining highquality material in our journal is increasing the number of submissions. We are redoubling our efforts this year to solicit more submissions from both practitioners and academics. If you or someone in your organization has an idea that you feel can be developed into an interesting article for Today’s CPA, we encourage you to contact us. We will help you develop your idea. It is only by receiving a large number of relevant submissions from a broad cross-section of our readership that we can continue to deliver relevant reading content for TSCPA members. If you would like to receive our editorial guidelines, please contact DeLynn Deakins at


We would like to thank the members of the Editorial Board for volunteering their time and considerable efforts to review articles for publication, pre-test CPE quizzes, and participate in meetings and on conference calls. We also recognize and thank our copy editor and contributing writer, Anne Davis, and the column editors and contributors: TSCPA Chairman Fred Timmons, CPA-San Antonio; Greta Hicks, CPA-Houston; Rhonda Ledbetter, TSCPA Chapter Relations Representative; Mano Mahadeva, CPA-Dallas; Bob Owen, CPA-Dallas; James Reeves, CPA-Fort Worth; and John Sharbaugh, TSCPA Executive Director/CEO. We also thank the accounting and financial professionals who author articles for Today’s CPA. Authors from public practice, industry, government, and education are invited to submit articles for consideration in Today’s CPA. ■

Today’s CPA is a bi-monthly, peer-reviewed magazine. TSCPA’s Editorial Board members review the articles that are submitted for consideration. The Editorial Board represents a cross-section of the overall membership of TSCPA. Their names are listed in the magazine’s masthead each issue. Articles may include a technical analysis and/or informed commentary on the topic. We attempt to balance the magazine’s content to cover the various interest areas of TSCPA’s membership. Each issue also includes an article that provides continuing professional education (CPE) credit. This article is peer reviewed, and the quiz is pre-tested by reviewers prior to publication. In Figure 1, you’ll find a comparative summary of our activities for the past three calendar years. It shows that the

Figure 1. Summary of 2010-12 Activity Articles









15 (41%)

19 (39%)

21 (34%)


10 (28%)

16 (33%)

22 (36%)

In Review




3 accepted

7 accepted

8 accepted

Invited Short articles


C. William (Bill) Thomas is technical editor and DeLynn Deakins is managing editor of Today’s CPA.


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Capitol Interest By Bob Owen, CPA | TSCPA Managing Director, Regulation and Legislation

A Different Texas Legislature Pundits are surprised and some even shocked at the level of bipartisanship displayed during the 83rd Session of the Texas Legislature. Bipartisanship had at least taken a leave of absence over the last few sessions; some thought it was gone for good. With many new legislators in both the House and Senate, the predictions were for a very conservative Legislature. It went without saying that more conservative would also mean more partisan. That conservative prediction has proved to be correct as far as the filing of a number of bills dealing with social issues, but at this point in the session, it’s hard to say whether any of those bills will pass. The demeanor of legislators has been cordial and respectful, even when they disagree. The initial budget deliberations were remarkably calm and when an initial budget bill was passed by each house, it was by large, bipartisan margins. Democrats did not try to delay or make parliamentary points just to embarrass Republicans. Many controversial budget amendments that had no chance of passing were pulled down by the authors rather than taking time in futile debate – a stark contrast from the 2011 session, where acrimony was the norm and futile debate was raised to a new art form. This session, there was good, healthy discussion over budget amendments and win or lose, the amendment authors accepted the will of the body without obvious rancor. Freshmen legislators even started a “Purple Thursday” tradition, wearing purple ties and shirts on Thursdays to demonstrate a cooperative effort between the “red” Republicans and the “blue” Democrats. Last session, the only purple seen was the complexion of angry legislators. This new spirit of cooperation was recognized on the Senate floor during the debate of a bill that last session would have been a bitter battle between Republicans and Democrats. Sen. Royce West (D-Dallas) commented: “There must be something in the water this session …” It may be something in the water, but there are several other possibilities for the more reasonable approach this session (in addition to it being the logical way to govern). The most obvious is money. There is money to craft a reasonable budget this time around. Last session, there was not enough money for anything, as legislators dealt with a $24 billion shortfall. Education funding was cut by over $5 billion and there was a bitter partisan fight over the issue. Another reason for this bipartisan, reasonable approach is that the Republican leadership demonstrated a genuine willingness to listen to the concerns of the Democrats and made a good faith effort to restore as much education funding as seemed prudent. The Democrats, in turn, appeared to adopt a cooperative rather than combative attitude towards achieving their own agenda, recognizing that the “art of the possible” was better than a shutout. The state also faces some major infrastructure issues; dealing with water and roads was added to education as a priority. The voters, whether Democrat or Republican, would like those needs addressed, and both parties want to be a part of the solution. It remains to be seen as to how effectively they will deal with the infrastructure, but up to


this point legislators of both parties and the Republican leadership are putting forth a major effort to do so. Part of the infrastructure funding solution is the possible use of the Economic Stabilization Fund, better known as the Rainy Day Fund (RDF). When Governor Rick Perry surprisingly, and shockingly to some, indicated he was OK with using the RDF to address water and road issues in his State of the State speech, the RDF became the focus of the legislative effort to fund water and roads. Some find it curious that when the state had a $24 billion shortfall and was cutting over $5 billion from the public education budget, that wasn’t considered a “rainy day.” Two years later, when there is evidently enough revenue to fund the state for the next two years, the RDF can be used for infrastructure issues. Just what is a rainy day? It’s confusing. Perhaps the voters are actually more interested in water and roads than education. The House has already passed a water conservation bill that is predicated on $2 billion of funding from the RDF. The funding bill has not yet been considered, but it’s clear that’s the plan. No bills on roads yet, but there is still much discussion, and voters can expect to see a constitutional amendment (see below). There is a potential problem with use of the RDF. The Texas Constitution sets limits on how much the state budget can grow in any one biennium. Because the last budget was bare bones, the Legislature faces busting the budget cap for the first time in many years. The budgets passed by the Senate and House are relatively close to that budget cap; the House budget is within about $600 million. Evidently spending from the RDF, even though the money is in the bank, is subject to the budget cap. If RDF expenditures are covered by the cap, something else in the budget may have to be cut to fund the water plan alone; and then what about roads? The Legislature can vote to override the constitutional budget cap, but most Republicans and some Democrats are not willing to make that vote. They figure it would be political suicide for the next primary election. Legislators may need to get creative with all their bipartisan brains to resolve this Gordian knot. And they are. The most likely effective solution will be a constitutional amendment offered by Senate Finance Committee Chairman, CPA Sen. Tommy Williams (R-The Woodlands). There are certain “dedicated” funds set aside by the Texas Constitution that are not subject to the budget cap. Williams proposes a constitutional amendment that would establish a “state water implementation fund” and “a state infrastructure fund” as two of


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those dedicated funds. And that constitutional amendment provides initial funding for both dedicated funds with $6 billion from the RDF. The amendment was drafted, posted, heard before the Senate Finance Committee and voted out unanimously in less than a week. During the committee deliberations, a number of committee members indicated they thought that public education should be a part of the amendment and some indicated that they would be offering amendments on the Senate floor to give the voters the opportunity to set up dedicated funds for public education. If the proposed amendment does pass both the Senate and the House by the required two-thirds majority, the voters will get to decide. Since the money’s there and voters want to drive and drink (water that is), the odds would appear to be in favor of passage. Even if it passes the legislators and the voters, the proposal does not resolve the water and road problems for Texas. The state’s water plan calls for over $50 billion to guarantee enough water long-term. The Texas Department of Transportation says they need $4 billion per year in new money to maintain and build new roads to meet the needs of Texas drivers. This proposal provides $6 billion; $2.5 billion for water and $3.5 billion for roads. Legislators can get creative. In a state that constitutionally requires a balanced budget (we are a so-called “pay as you go” state), legislators have been creative enough so that 17 cents out of every state expenditure in the budget is spent with borrowed funds, according to a couple of legislators during the House budget debate. Senate Finance Committee Chairman Williams, speaking to CPAs before the session, pointed out that the state has already borrowed all it could and should to build new roads. Sen. Kevin Eltife (R-Tyler) is very concerned about the amount of debt we have already incurred to build Texas roads. He offered his own constitutional amendment to provide a temporary increase in the general sales tax rate by one-half of one percent, with the new funds dedicated to retiring the current road debt. The tax increase would go away when the debt is retired or in 30 years, whichever comes first. Eltife’s proposal had not yet received a hearing at my magazine copy deadline. There are about 50 days left in the session as I write this article. Let’s hope the bipartisan efforts to resolve the state’s major issues continue until the end. The major social issues espoused by some of the more conservative legislators have yet to have floor debates and that could turn the bipartisan tide. The hope is that the “get’er done” attitude will prevail. By the time you read this, you should know.

client confidentiality. The bills also make it clear that in CPA firm mergers or acquisitions, client’s permission is not necessary for those negotiations as long as the firms enter into mutual nondisclosure agreements. • Strengthen Texas State Board of Public Accountancy (TSBPA) investigation confidentiality by inserting a provision in the Texas Open Meetings Act that specifically exempts TSBPA enforcement committees from that act. While the Accountancy Act makes it clear TSBPA investigations are confidential, a specific reference in the Open Meetings Act will eliminate possible conflicts between the two laws. • Repeal the prohibition of TSBPA from waiving fees and penalties, even in extenuating circumstances, and repeal certain CPA examination provisions that are out of date due to the computerization of the exam. SB 228 has passed the Senate and joined HB 608 on the House Local/ Consent Calendar, which is reserved for bills without opposition. This is generally good news, as almost all bills scheduled for the Local/ Consent Calendar pass automatically without debate. Hopefully, by the time you read this, it will be on its way to the governor for signature.

SDSI For those who are not regular readers of Capitol Interest, SDSI stands for “self-directed, semi-independent.” Those are the code words for government agencies that are not subject to the appropriations process; the Legislature does not dole out money to the agency nor tell them how to spend it. TSBPA has been an SDSI agency for over 10 years. The board’s operations are supported by revenues from license and examination fees, and the agency budget is set by the board members. In all other respects, the agency is just like any other government licensing agency. They have to follow agency laws and guidelines, and they have to make regular financial and operational reports to the Legislature and the governor. For this privilege, TSBPA pays $703,344 annually into the state’s general revenue fund. The legislation authorizing SDSI for TSBPA was subject to review by the Sunset Advisory Commission this session. The legislation must be renewed by the Legislature for SDSI status to continue. The Commission recommended renewal. HB 1685 by Rep. Four Price (R-Amarillo) and SB 208 by Sen. John Whitmire (D-Houston) are identical bills renewing SDSI status for TSBPA and two other agencies. HB 1685 has passed the House, and it’s now up to the Senate.



How is the accounting profession fairing in this era of bipartisanship? TSCPA-proposed changes to the Accountancy Act are embodied in SB 228 by Williams and HB 608 by Rep. John Otto (R-Dayton), CPA. These identical bills: • Make changes in accountant-client privilege, first by restricting the circumstances when a CPA must reply to a subpoena seeking client information and second by making it clear that CPAs may respond to investigations by the Public Company Accounting Oversight Board and the Texas Securities Board without violating

There have been over 80 franchise tax bills filed this session. They run a long gamut from eliminating the tax completely to making the $1 million revenue exemption permanent and available to all taxpayers. Legislative leadership has indicated that there will be some money dedicated to giving franchise tax relief in some form. Perry said some of the state’s surplus should go back to taxpayers and evidently, the franchise tax is the chosen vehicle. It’s not yet known how much money is available. Perry suggested $1.6 billion, but House Ways and Means Committee Chairman Harvey Hilderbran (R-Kerrville) says it probably


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Capitol Interest continued from page 27


TSCPA monitors bills filed during the session and keeps track of those that might have some impact on CPAs or the profession. By far, most of the monitored bills are tax-related, but there are always a few that might impact the regulation of the profession. For the third session in a row, there has been no bill filed to restrict CPAs’ tax practice under the guise of regulating the unauthorized practice of law. Perhaps after seeing such bills go nowhere over a number of earlier sessions, the diehards have given up. The bills that we intercepted this session, and so far have successfully opposed, included: • A proposal to excuse state and local governments from complying with generally accepted accounting principles with regard to pension reporting as required by the Governmental Accounting Standards Board. won’t be that much. When the dollar amount is known, Hilderbran will likely make the decision on what can and will be done. Hilderbran has expressed an interest in trying to find an overall single change that would benefit all franchise taxpayers, but if there isn’t enough money for that, there will be a piecemeal approach. The most likely reform is to make the $1 million revenue exemption permanent. If there is enough money, the exemption might be extended to all taxpayers or perhaps taxpayers with revenues below a specified amount ($20 million is that amount in one bill). A lot of the bills filed are limited to benefits for specific industries. TSCPA’s State Taxation Committee made a number of recommendations for improving the franchise tax and almost all of those recommendations are included in one or more bills filed by various legislators. Some of the recommendations have large negative fiscal implications, which make them less likely to be considered. Several of the TSCPA-supported bills have been heard before the Ways and Means Committee, but none have been approved by the committee. You can find all the franchise tax bills, along with other bills of interest to CPAs, on the TSCPA website at under the Governmental Affairs tab.

THE FUN STUFF Legislators have an incredible amount of work to do during the short 140-day session, but they still take time for fun and games. They spend some time passing resolutions recognizing and memorializing people and their accomplishments. For instance, this session resolutions were passed honoring the two Texas back-to-back Heisman Trophy winners, Texas A&M’s Johnny “Football” Manziel and Baylor’s Robert “RG III” Griffin III, and congratulating Alva and Willie Mae Haydon of Dripping Springs on their 75th wedding anniversary. You can decide which is the greater accomplishment, winning the Heisman or staying married for 75 years. The legislators also like to make official designations. So far, they have passed only one designation:

• A bill that would have weakened TSBPA’s ability to keep unlicensed accountants from practicing public accounting. • Legislation that would have virtually eliminated peer review for compilations services. • A proposal to require that all CPA members of TSBPA be in public practice and that at least two of the board members must be solo practitioners. • A bill that would have required government consultants’ confidential reports to be publicly disclosed or posted on the Internet by any legislator. • A bill that used the term “audit” inappropriately, applying the term to pharmaceutical reviews that had nothing to do with financial statements or work done by auditors. Successfully opposed does not necessarily mean the bill is dead, but it is either dead or it has been modified to resolve our issues. • Designating the Shamrock St. Patrick’s Day Celebration as the official St. Patrick’s Day Celebration for Texas. Where is Shamrock, Texas? In the Panhandle, near the Oklahoma border. I’ll see you there next St. Paddy’s Day. But they still have many others under consideration. The following have passed the Senate: • Recognizing the annual Small Town Christmas celebration in the city of Belleville as the Official Small Town Christmas Event of Texas. • Designating the first week of May as Texas Bison Week. • Designating September 12 as Mary Ann “Molly” Goodnight Day. These have passed the House: • Designating Nacogdoches as the official Garden Capital of Texas. • Designating the Kemp’s ridley sea turtle as the official State Sea Turtle of Texas. • Designating February 16 as Texas Homemade Pie Day. • Designating pecan pie as the official State Pie of Texas. And these have been filed and the authors are hopeful. They are designating: • Floydada as the Pumpkin Capital of Texas. • Peach cobbler as the official cobbler of Texas. • Garland as the Cowboy Hat Capital of Texas. • The pumpkin as the official State Squash of Texas. • Declaring the city of Canton to be the Walking Capital of Texas. • Gregg County the Balloon Race Capital of Texas. • The Saturday before the first Wednesday in February as Texas Academic College Scholarship Day (this is to give academic recognition on what is traditionally national signing day for college athletes). • Jewett as the Sculpture Capital of Texas. • March 5 as Charles Goodnight Day. • Grand Prairie as the Purple Martin Conservation Capital of Texas.■

Bob Owen, CPA, is TSCPA’s managing director of regulation and legislation. Contact him at



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Feature By Susan M. Sorensen, Ph.D., CPA; Donald L. Kyle, Ph.D., CPA; and Patricia Hunt Holmes, Ph.D., J.D.

Succeeding as a Professional –

Getting Fired is Your Last Opportunity to Make a Good Impression and Other Tips You May Not Have Thought About If you understand this title, you are on your way to understanding how to survive and thrive in a tough competitive professional environment. This may seem like a strange piece of advice, but it is based on many years of experience. Even if you are never “let go,” it sets the tone for the non-technical skills that you need to be successful. Just recently, this piece of advice was shared during an MBA lecture, and the following is an excerpt from the e-mail received two weeks later, when one of those students, a bright, hard-working young man, was “let go,” along with a fellow worker. I was laid off on Monday. It was a surprise to my supervisors as well as me. My fellow contract employee had a fit and stormed out of the office and I heard people say “oh well, no loss.” I went in and sent e-mails to people in other offices who I had been working with explaining what had happened and that I could no longer help on their projects and wished them luck. I went to everyone I interacted with and said goodbye. I went to all the managers and asked for recommendations and explained that I was not upset with anyone regarding the way things happened and told them how I had tied up all the loose ends that I could think of. Not only were the managers sorry to see me go, they were so impressed that I had gone the extra mile to tie up loose ends and send e-mails on my way out that they began sending e-mails and making calls so that before I was out of the building, I had e-mails setting up interviews for a different department in the company. I have a phone interview tomorrow (Tuesday) and feel as though the prospect is very good. I am now a disciple of the “being fired is your last chance to make a good impression” philosophy. The student called it his “success story of making a good last impression” and said he would always remember how beneficial it was to remain businesslike and professional even under unpleasant, uncomfortable circumstances. CPAs who spend their whole career at one firm still have to deal with clients firing them. Again, this is an opportunity to thank them for the past relationship and assure that the door stays open for opportunities in the future. Business, especially within a profession, is like a small town and you will likely meet people again. The CPA exam is designed to make sure that everyone is technically competent, so long-term survival is usually determined more based on behaviors and interpersonal skills. Understanding the career structure of a professional firm is important. Staffing is often referred to as “keeping the pipeline full.” The pipeline represents a continuous flow of individuals at each level of experience and requires new people being hired each year and others moving up or out. The pipeline, as depicted in Figure 1, narrows to reflect the professional pyramid structure. Many hard-working, highly qualified people find themselves involuntarily dropped from the pipeline. If this happens, remember that most


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firms put a lot of effort into their relationships with alumni, since they may work for, or become, clients themselves in the future. Staying inside the pipeline requires continually increasing your real and perceived value to the firm. How do you maintain and increase your value? The following are nine tips you may not have considered. Figure 1: The Professional Pipeline

1. Be willing to “take the leap, and build your wings on the way down” (Kobi Yamada). If you only do things you already know how to do, you will never advance in your career. Accept new challenges as opportunities to shine, and trust that if you just start somewhere and keep working diligently, you will eventually accomplish the task. 2. Think of yourself as self-employed, even if you are an employee. If you want to stay in the pipeline, take responsibility for increasing your value. To move up the pyramid, your competencies will need to increase so the value to the firm of what you produce increases. In spite of what you are told during an interview, it is not the firm’s responsibility to provide you with a long, successful career. Make sure you keep up with your changing profession and develop new skills and areas of expertise. 3. Observe and accept the reality of the professional pyramid. If you observe a pyramid type of organizational structure, like the one in Figure 2, accept and plan for the uncertainty that exists in an up-or-out environment. 4. Just like any other business, if you want to get paid more, produce more. This may seem obvious, but we are often too busy to really think about what our personal production function looks like and how it fits into the overall production of the firm. You will be paid according to your firm’s value of the competencies that you possess. Understand and accept


Succeeding as a Professional continued from page 29


Figure 2: The CPA Firm Pyramid Structure



Professional Competencies & Billing Rates

Partners Managers

Output Value

Figure 3: Output Value of a Task as a Function of Experience

Experience at a Task Figure 4: Output Value of Increasing Competencies as a Function of Experience

Output Value

that every task has a monetary value. How well and how fast you perform any task is subject to limitations, and those limitations put a ceiling on the value of what you can produce, as shown in Figure 3. The simpler the task, the sooner you reach the point where your incremental improvement declines. Figure 4 shows value increasing as new, more valuable competencies are obtained and is more reflective of pay increase expectations. 5. Marry your profession, not your firm. This expression has been used for many years and applies to all types of occupations. Most professionals change firms or jobs. Although you need to spend most of your effort keeping your current job, you need to spend time preparing for the future and any required moves. The more firm-specific your knowledge is, the less value you may have to another employer. No matter how good you are at your current task, the firm may no longer need those skills at your pay or experience level. 6. Invest your time wisely – locate professional resources and learning. When you are asked to perform a task that requires new competencies, spend some of your own time reading and learning about this new area. The client pays for your professional efforts, not your early learning curve in a new area. This will improve the firm’s professional perception of you. Stay competitive. Be aware of upcoming changes in your profession and don’t just wait for the firm to provide the skills you will need in the future. The firm may be able to more productively hire these skills elsewhere. Keep in mind that technology now allows professionals all over the world to compete. 7. Be professional if you want to be paid like one. Every business has an image, and you need to develop and protect your image. This includes appearance, actions and words. Although there is only one chance to make a first impression, people will update their impression every time you meet. Consider things like the following: • Wear a virtual business suit; people are watching. The Internet is now the most observed location in business. Everything you transmit over or upload onto the Internet or social media has the potential to last forever and be observed by clients, colleagues and employers. Keep in mind that technology allows even keystrokes to be monitored in a business setting. • Any unprofessional verbal impression will linger longer than the look of your expensive suit. The use of inappropriate language will cost you career opportunities. In addition to avoiding bad language, professionals need to correctly pronounce technical terms and acronyms. Take opportunities, such as webcasts, to listen to other professionals and pay attention to their usage of words. Terms change over time and new buzz words are added. Develop a habit of looking up unfamiliar words so you sound knowledgeable, current and in the loop. • Write like it may last forever and come back to haunt you. Online writing, like snail mail, should be professional.

Experience with Tasks Changing Today’sCPA

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Write, proofread and re-think what you are writing before you fill in the “address” line to avoid sending partially done or regrettable e-mails. Respect the age, culture and position of the recipients. Compose your messages with as much care as you would in a written letter. Not everyone LOLs or finds this clever. Texting has encouraged poor grammar. 8. Respect the productivity of others. Make efficient use of your time with others. Write “open points” lists while you are working and ask your questions, if possible, in batches and when it is convenient for your clients or your supervisors. While it is important for you to keep working, each time

you ask someone a question it interrupts their workflow. Developing a balance improves the firm’s overall productivity and will make others more interested in working with you. 9. Avoid turning discussions into win/lose situations. You can lose the war by winning a battle that never even had to be a battle. Learn to disagree respectfully. Professionals discuss, share facts and opinions, and then attempt to reach a professional consensus. When necessary, agree to disagree and reach a businesslike compromise where appropriate. Developing long-term, productive relationships is critical to making your professional business a success. ■

Susan M. Sorensen, Ph.D., CPA-Houston, is an accounting chair at the University of Houston-Clear Lake. Her prior 30-year career in public accounting included working for three of the Big 4 accounting firms. She may be contacted at Donald L. Kyle, Ph.D., CPA-Houston, is a professor at the University of Houston-Clear Lake. He may be contacted at Patricia Hunt Holmes, Ph.D., J.D., Houston, is a retired partner, Vinsen, Elkins LLP, specializing in tax exempt healthcare and utility finance. She may be reached at pholmes@


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Feature By John E. Simms, Ph.D.

The ABCs for the (Very) Small Business With the advent of the technology age, activity-based costing has become a fairly common practice, but many companies don’t have the financial means for implementing a full-blown activity-based costing system. Some medium and large companies have multiple levels of support departments, variable activity between support departments and production departments, and high levels of product diversity. Such highly complex organizations often shift to activity-based costing (ABC) to remain competitive. 32


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However, for a start-up or many smaller companies, the additional cost of the technology infrastructure required by a full ABC system may seem far beyond the budget horizon. There’s good news – it may not have to cost that much to receive the benefit of the core essentials of ABC. The basics of ABC use a simple database (e.g., a spreadsheet), simple statistical tools, and a heavy dose of common sense. It does require a statistical package – from $500 to $5,000, depending on the needs – but that’s still a far cry from the cost of high-end systems. The key is to understand how the particular company works.

WHEN IS ABC NEEDED? Typical scenario: Alicia, an entrepreneur, starts the company. At the beginning, Alicia is focused on the biggest challenge in business – selling her product. Alicia begins by creating a cost-plus model, maybe even sometimes doing quick cost estimates mentally and recording them later. As the months go by, business grows and Alicia gets better at keeping records, as well as estimating and planning the costs. A year or two goes by and Alicia develops a reputation as someone who is bright, energetic and creative. As customers begin asking for different kinds of work, she hires new people with different skills, and diversifies the goods and services offered. This stabilizes cash flows and income. Alicia then invests in a company intranet and hires someone to maintain it. She promotes hourly employees to salaried positions, and also hires a manager on salary to run most of the day-to-day details. After a while, Alicia can afford to cut back to 40 or 50 hours a week instead of 70. She is a good businessperson, adding value to the lives of both customers and employees, and the hard work is paying off. The company continues to expand, taking on more complex jobs on a larger scale. However, as Alicia’s business continues to grow, something odd begins to happen. A bid is lost to a larger competitor on a lucrative job. This is a surprise – the company had always been able to compete, because operations were more streamlined and efficient. Alicia suspects that the competition has begun to notice and is now deliberately underbidding. The same thing begins to happen with other competitors. The company wins bids on jobs that provide lower profit margins, but the bigger jobs, representing opportunities for real growth, seem to be out of reach. To make matters worse, the fixed costs that were expected to be spread across many projects have to be borne by the very projects least able to pay for them. Alicia’s company begins to show a decline in returns, and the company is forced into one of two choices: scaling down operations to protect existing obligations or borrowing money to invest in even greater infrastructure. Scaling down is unattractive – the whole point is to move forward, not retreat. In discussions with the bank, one question stands out: How can making an additional investment increase profit margins? It doesn’t do any good to borrow at 7 percent to complete projects that make 10 percent when profit margins (without the more lucrative jobs) are currently at 8 percent. Alicia goes back to the office determined to solve the problem. In examining the way the company builds bids, it becomes apparent that indirect costs have been spread across jobs based on a number of questionable estimates such as expected revenues or expected variable costs. This is skewing bids, over-costing some and under-


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costing others. A friend suggests looking into activity-based costing. Alicia has read about it in the trade journals, but it always sounded like something that was mainly for larger companies that could afford to make fairly large investments in databases, software and IT personnel. She asks, “What exactly is ABC, can it be done on a small scale, and most importantly, will it help?”

HOW IT WORKS Alicia’s situation is all too typical of a small business experiencing the “growing pains” of expansion. Small start-ups usually have a very low operating leverage (a high proportion of variable costs). Variable costs are normally easy to trace to the source. Think of materials and hourly wages, all of which can be traced directly to particular jobs or clients. As the firm or company grows, it becomes cheaper to provide resources that are shared across jobs or clients; that’s the whole point of economies of scale. As the number and types of shared resources increase, the allocation of the costs of those resources becomes more complicated. It may even get to the point where a cost-plus pricing strategy begins to show symptoms of being severely dysfunctional, as in the case described above. Activity-based costing was specifically developed to address these very issues. The idea of ABC is to find out which costs increase and decrease at the same time (correlation), and group all the costs that move together into what’s called a cost pool. An examination of the items in a cost pool will usually provide clues as to what is causing them to change. Whatever is causing the increase or decrease is the activity cost driver. By taking the total cost for one period of all the items in each cost pool and dividing by the number of times the cost driver occurred, a cost rate per activity can be calculated. It helps if one is able to measure it multiple times over several periods. The resulting activity occurrences are multiplied times the appropriate cost-plus rate. In this way, each client will be billed for all the resources used, and only for those resources used. In most cases, there will be an increase in the accuracy of the costing process. There are limitations, of course, to the level of accuracy. Usually, there are some costs that don’t change at all (e.g., rent on office space) and have to be allocated to jobs somewhat arbitrarily as appropriate. One of the goals is to minimize arbitrary allocation and shift as much as possible to cause-related allocation.

THE DATABASE The key to the initial step is developing the database and any spreadsheet will do. Most companies already have one that is usable. In most cases, the accounting software creates the database through the account definitions and categories. These are used to develop a cost model. For example, there may be a category for “Delivery” that includes fuel, driver wages and depreciation. Obviously, these three items have very different cost sources. The way to handle this is to create subcategories such as “Delivery: Fuel,” “Delivery: Driver Wages” and “Delivery: Depreciation.” If there is more than one delivery vehicle, it may be necessary to break it down further (e.g., “Delivery: Depreciation: Truck 1” and “Delivery: Depreciation: Truck 2”). If all the fuel costs are on one company credit card, use subcategories to divide it up so that you can tell which vehicle is getting how much fuel. continued on next page


The ABCs for the (Very) Small Business continued from page 33

Table 1: Factor Analysis Results Variable

Factor 1

Factor 2

Factor 3

Factor 4

Factor 5

























Gas: Truck1






Gas: Truck2


















At this point, it becomes obvious very quickly that direct knowledge of the way the company operates is a primary factor in the success of the application of the costing process. This step is the most time consuming, but essential. Remember: The more categories and definitions created, the more accurate the cost model will be and the more likely it will be to provide usable improvements! Separate everything that can be separated. They can always be combined later if necessary. Once the database is built, a cost model can be developed.


Step 1: Identifying Cost Pools. It’s tempting to predetermine the categories (confirmatory factor analysis, discussed below). This is not recommended for a first pass, because managers are almost always surprised by at least some aspects of the causal factors that are in play. The only way to discover these “hidden” relationships is to start by allowing the computer a free hand in defining the groups. This is accomplished through exploratory factor analysis. For the initial analysis, it’s usually best to use the “kitchen sink” approach. Assume no knowledge about how the costs in the business work and let the software determine the relationships. To do this, the database should be set up with all the cost categories listed across the top in columns and time periods down the left side in rows. Each cell should contain the total costs for that category in that time period. The steps to take from this point on depend on the software used. There are many good packages available. Generally, it’s worth it to invest in a basic standalone statistical analysis software program. Whatever system is used, the concepts and functions are the same. With all the categories separated into time periods, the factor analysis function is selected with the cost categories designated as the variables to be analyzed. Most programs have a default limit to the number of factors (or groupings) to create. If the software requires a number, a large one (say 50+) should be used. If the software offers the option to select “no limit” then that is preferable for a first pass. The results should come out in a format something like those presented in Table 1. The categories will be those designated from the accounts designated. The numbers shown are for demonstration purposes – the actual numbers will be different with no cells highlighted. The highlighted boxes represent the cost pools. These are correlated cost variables that increase and decrease together by


a common cost driver. Group them based on the factor weights (or loadings). In Table 1, Rent and Salaries have very high factor weightings (.98 and .97 respectively) and so are grouped together. Common sense dictates that these two factors do not change from period to period, so Factor 1 is labeled as “Fixed Costs” and the cost driver is the passage of time. In a regression analysis, the period total of the fixed costs would be the intercept, or alpha, for the cost model. Factor 2 is dominated by Wages and Materials. Wages represent hourly workers and materials may represent inputs to the product or supplies used in the course of business. In either case, the two factors will most likely be driven by the amount of business (volume). These are classified as variable costs with volume of business as the cost driver. How to measure the volume depends on the business (units of product, hours of service, etc.). Factor 3 represents fuel costs. In these times, it is typical to have lower factor loadings in this type of category because of the unpredictability of changing fuel costs. There are three choices for dealing with this type of unpredictability: 1) simply accept it and mark up prices to cover it; 2) adjust the fuel cost variable by indexing to a particular base year; or 3) incorporate a statistically more sophisticated method called an interaction effect. The last one uses multiple regression analysis and requires a somewhat greater comfort level with statistical analysis techniques. Factor 4 is selling costs. This one is included to provide an example of the problem of a mixed cost. Although it is reported as a single line on the income statement, selling costs are often many types of costs totaled together. For example, if sales personnel are paid a combination of fixed salary and commission, this category should be split with the salary included in the fixed cost category and the commission included in a different cost category. This is typical of a case where the initial categories were not differentiated sufficiently. Factor 5 represents the fact that most likely the analysis will yield numerous factors that don’t appear to correlate with any others; there almost certainly will be some, perhaps many. This is where knowledge of the business comes into play. Brainstorming helps – take a piece of paper and write down suspected causes for each of those uncorrelated costs. If there are items that are one-time costs not to be repeated, they can be ignored for the time being. If they are mixed costs, then each needs to be separated into their components and grouped into cost pools with other variables that have the same cause (or cost driver). It is not the goal to eliminate all the uncorrelated variables. There probably are some variables that are actually uncorrelated with any others, but a serious effort must be made to minimize the number in a rational, methodical way.

SECOND PASS: CONFIRMATORY FACTOR ANALYSIS The “adjustments” to the above model included splitting up mixed costs into their components, combining variables that share a common cause, and excluding one-time costs. The resulting model should contain significantly fewer variables than the number provided by the exploratory analysis. In confirmatory factor analysis, the variables are assigned to a reduced number of factors based on the results of the initial pass and the adjusting process. Running


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the program results in a description of the loadings for each factor using the new (assigned) variables. The groupings can be confirmed or, if necessary, further adjustments can be made until a satisfactory result is achieved. When the final cost pools are defined with the associated cost drivers, activity rates can then be developed. Step 2: Developing Activity Rates. Each cost pool represents a group of variables that are driven, or can be approximated, by a particular, measurable activity. The total costs of each cost pool for a period are divided into the number of times the activity occurred during that same period. This yields the cost per occurrence for that activity; e.g., the activity rate. Fixed costs always present a problem because by definition they aren’t usually directly caused by the product or service the customer requires. The fixed cost category may also include uncorrelated variables from the first pass. Since most fixed costs are driven by the passage of time, it makes sense to use a time-based activity rate. The most common solution is to estimate the total amount of time expected to be spent on all the jobs during a month, for example, and divide the fixed costs into easy-to-use increments such as direct labor hours, billable hours, etc. Once the rates are developed, they can be applied to your business operations.

Step 3: Applying Activity Rates to Jobs or Job Types. If the types of tasks involved vary widely from job to job, it may be more effective to simply apply the rates directly. This is basically treating each customer’s requests as a custom job. Most businesses start out that way, but evolve into more cost-effective organizations by repeating techniques, buying and producing materials in quantity, and geographically optimizing logistics. As the customer base expands, it becomes easier to “re-use” intellectual capital, for example. Eventually, it becomes possible to classify customers or jobs by the type of work they demand. In this way, a software consultant may be able to charge different per-day rates depending on the software being used based on the consultant’s history of activities required for that type of work. The above process develops a simple cost model for a relatively simple business model. The scenario of Alicia described earlier presents an entrepreneur who is suffering from an acute case of success and the associated growing pains. Undoubtedly, as a company grows, more sophisticated models will be needed to accurately describe the activities and costs associated with the business. ■

John E. Simms, Ph.D., is an assistant professor at the University of St. Thomas in Houston, specializing in managerial and cost

accounting. Prior to his move into academia, he successfully founded and operated several small businesses in Texas and Michigan. He may be contacted at


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CPE Article By Josef Rashty, CPA


Curriculum: Accounting and Auditing Level: Intermediate Designed For: CPAs in public accounting and industry Objectives: To present an overview of accounting for warranties under current practice and the proposed revenue recognition guidance. Key Topics: Revenue recognition, cost estimate, cost accrual, and deferred revenue accounting. Prerequisites: None Advanced Preparation: None 36


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This article will discuss the accounting guidance for warranties under the current Generally Accepted Accounting Principles (GAAP) in the United States and the proposed guidance under the proposed revenue recognition exposure draft. The accounting concepts for warranties have remained mostly unchanged under the proposed exposure draft, but some terminologies have changed and, of course, the framework for revenue recognition under the proposed guidance is different from the current practice. The Financial Accounting Standards Board (FASB) and the International Accounting Standards Board (IASB) (collectively, the Boards) jointly issued an exposure draft (ED) in June 2010, Revenue from Contracts with Customers, to supersede virtually all existing revenue guidance under U.S. GAAP and International Financial Reporting Standards (IFRS). The comment period for the ED ended in October 2010. The Boards decided to re-expose their proposal in November 2011, subsequent to deliberations. The comment period for the revised ED was 120 days and ended on March 13, 2012. The Boards received approximately 350 comment letters on the revised proposal – significantly fewer than the nearly 1,000 they received on the original ED issued in June 2010. The Boards continued their redeliberations on the revised ED.

THE PROPOSED REVENUE RECOGNITION GUIDANCE In March 2013, the Boards substantially concluded their redeliberations on their joint 2011 ED and reached decisions on the remaining key issues including disclosures, transition, and effective date. The Boards intend to issue the final standard by the end of the second quarter of 2013. The standard will be effective for the first interim period within annual reporting periods beginning on or after January 1, 2017. Entities will have the option to apply the final standard retrospectively or use a simplified transition method. Entities are not required to restate prior periods if they decide to use the suggested simplified method. The provision of the final guidance regarding warranties is not expected to differ from the proposed ED and the discussions in this article. The proposed standard takes a contract-based asset and liability approach, applicable to almost all industries. Revenue is recognized when an entity has satisfied its obligations to its customers, which occurs when control of an asset (a good or service) has been transferred to the customer.


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Entities perform the following steps for revenue recognition: • Identify the contract with the customer. • Identify the separate performance obligations in the contract. • Determine the transaction price. • Allocate the transaction price to distinct performance obligations. • Recognize revenue when each performance obligation is satisfied. Companies often sell their products and services with warranties. The objective of such warranties is to provide coverage for the sold products and services, which are intended to be free of any existing and future defects. The proposed ED discusses the accounting for these types of warranties as part of its revenue recognition guidance.

CURRENT U.S. GAAP GUIDANCE Under the existing U.S. GAAP, revenues and estimated costs to fulfill any warranty obligations are recognized at the time the goods are delivered or services are performed if the warranty is not separately priced. The current guidance distinguishes between the post-sale performance warranties and extended warranties. Post-sale performance warranties – Accounting Standards Codification (ASC) 450-20 – Contingencies – Loss Contingencies, requires an entity to accrue for the costs of the post-sale performance warranties of contracts at the time of sale of the product, rather than at the time that warranty claims are presented. Therefore, entities should record an estimated accrual for their warranty expenses at the time of sale. Extended warranties – Accounting Standards Codification ASC 605-20 – Revenue Recognition – Services, requires that the sellers of extended warranty or product maintenance contracts recognize revenues ratably over the period in which they are obligated to perform the related warranty services. The current U.S. GAAP requires entities to defer revenues from separately priced extended warranty and product maintenance contracts, and recognize them on a straight-line basis over the contract period – except in those circumstances in which sufficient historical evidence indicates that the costs of performing services under the contract have incurred on other than a straight-line basis. In those circumstances, revenue shall be recognized over the contract period in proportion to the costs expected to be incurred in performing services under the contract. Entities may also sell the extended warranties under multipleelements arrangement contracts. The existing guidance for revenue arrangements with multiple deliverables (ASC 605-25-2, Revenue Recognition – Multiple-Element Arrangements) requires the contract to be divided into separate units. Revenues under multiple-elements arrangement contracts are recognized based on one of the following methods for each accounting unit: continued on next page


CPE Article continued from page 37

• Vendor-specific objective evidence (VSOE) (ASC 605-306A), which is determined based on the price charged for a deliverable when it is sold separately or, if that is not available, by the price established by management. • Third-party evidence of selling price (ASC 605-30-6B), which is the price that other vendors or other competitors charge for similar products. • The best estimate of selling price (ASC 605-30-6C), which is determined based on market conditions and other factors if the product is to be sold separately.

THE PROPOSED GUIDANCE FOR WARRANTIES The proposed guidance, similar to current GAAP, distinguishes between two different types of warranties: • Assurance-type warranties that promise the customer to deliver products and services as they are specified in the contract. • Service-type warranties that provide extended services to the customer, in addition to normal assurance that the delivered product will perform as it is specified in the contract. The accounting treatment for these two types of warranties differs significantly under the proposal. An assurance-type warranty would give rise to a warranty obligation (but not a separate performance obligation for revenue recognition purposes) and would be accounted for using a cost accrual approach. A service-type warranty, on the other hand, would be deemed a separate performance obligation and would require a deferral of revenue. A contract may also contain both an assurance-type warranty and a service-type warranty. Note, however, that if the warranties cannot be reasonably accounted for separately, they should be accounted for together as a single performance obligation, with revenues deferred and recognized ratably over the period the warranty services are provided. Distinguishing criterion – In assessing whether a contract provides service-type in addition to assurance-type warranties, an entity should consider the following factors (IG 13 ED): (a) Requirement by law – If the existing laws and regulations require an entity to provide a warranty, the existence of such requirement is an indication that the warranty is not a servicetype obligation. These regulatory requirements typically exist to protect customers with assurance-type warranties from the risk of purchasing defective products. (b) Coverage period – The longer the coverage period, the more likely that the warranty is a service-type obligation because it is more likely to provide a service in addition to the assurance that the product complies with agreed-upon specifications. (c) Nature of the services – If it is necessary for an entity to perform specified tasks to provide the assurance that a product complies with agreed-upon specifications (for example, a return shipping service for a defective product), then those tasks likely do not give rise to a performance obligation. Allocation of transaction price – An entity should identify separate performance obligations by identifying different goods


or services promised in a contract (Paragraph 23 ED), and recognize revenue when it satisfies such performance obligations by transferring a promised good or service to a customer (Paragraph 31 ED). For a contract that has more than one separate performance obligation, an entity should allocate the transaction price to each separate performance obligation in an amount that reflects the amount of consideration to which the entity expects to be entitled in exchange for satisfying each identified performance obligation. To allocate an appropriate amount of consideration to each separate performance obligation, an entity would determine the standalone selling price at contract inception and allocate the transaction price on a relative standalone selling price basis (Step 4 of revenue recognition ED). The best evidence of a standalone selling price, however, is the observable price of a good or service when the entity sells that good or service separately in similar circumstances and to similar customers (Paragraph 72 ED). If that is not available, an entity shall consider all information (including market conditions, entityspecific factors, and information about the customer or class of customer) that is reasonably available to the entity at the time (Paragraph 73 ED). The ED recommends the following estimation methods (Paragraph 73): • Adjusted market assessment approach – an entity can evaluate the market in which it sells goods or services and estimate the price that customers in that market would be willing to pay for such goods or services. • Expected cost plus a margin approach – an entity can forecast its expected costs of satisfying a performance obligation and then add an appropriate margin for that good or service. • Residual approach – if the standalone selling price of a good or service is highly variable or uncertain, an entity can estimate the standalone selling price by reference to the total transaction price less the sum of the observable standalone selling prices of other goods or services promised in the contract. Change of estimates – In assurance-type warranties, an entity reflects any revision to its original estimates as an adjustment to the recorded cost accrual. In service-type warranties, however, any changes in original estimates may not only impact the warranty costs but also the warranty revenues.

ILLUSTRATION The following illustration reflects accounting for warranties under the proposed guidance. Entity A sells product A for $10,000 at the beginning of the year and provides for the first-year assurance-type warranties. Historically, the average cost of assurance-type warranties during the first year of sale has been about $20 for this type of product. Entity A has also included a five-year service-type or extended warranty with this sale at no charge to the customer. The standalone selling price of product A is $12,000 and the standalone selling


| MAY/JUNE 2013

price of service-type or extended warranty for this type of product is $3,000. Therefore, the total selling price is comprised of product selling price for 80 percent and service-type or extended warranty price for 20 percent of the total selling price. As a result, the selling price of $10,000 should be allocated to product sales for $8,000 (80 percent of total selling price) and to service-type or extended warranties for $2,000 (20 percent of total selling price). Entity A incurred no costs for assurance-type warranties but $50 costs for service-type or extended warranties during the first year subsequent to sales. Journal entries for this transaction at the time of initiation of sales are illustrated in Figure 1.

FIGURE 1 Dr. Accounts Receivable


Cr. Product Revenues


Cr. Deferred Revenues (service-type warranties) To record the original sales entry.


Dr. Assurance-Type Warranty Expenses


Cr. Expense Accruals To record an accrual estimate for assurance-type warranties.


Journal entries at the end of the first year are as follows: Dr. Expense Accruals


Cr. Assurance-Type Warranty Expenses To reverse the accrual for assurance-type warranties since Entity A did not incur any expenses for this type of warranties. Dr. Service-Type Warranty Expenses



Cr. Accounts Payable To record the extended warranty expenses. Dr. Deferred Revenues (service-type warranties) Cr. Service-Type Warranty Revenues To record the straight-line annual amortization of service-type deferred revenues ($2,000 divided by 5).

$50 $400 $400

The above journal entries remain principally the same under the current GAAP guidance, other than some changes in accounting terminologies. Of course, the framework for revenue recognition is different under the proposed ED from existing GAAP. This difference may impact the determination and allocation of selling price for revenue recognition purposes under the proposed guidance and existing GAAP.

COMMON PRACTICES IN DIFFERENT INDUSTRIES This section of the article will discuss some of the common practices in different industries related to warranty obligations. Consumer products companies – Consumer products companies often sell their products with warranties. When a


| MAY/JUNE 2013

consumer products company sells goods to retailers, and those goods are covered by a warranty, they would most likely have two contracts to consider under the proposed revenue recognition model: (i) a contract to fulfill their products warranty obligations to the retailer, and (ii) a contract to fulfill their warranty obligations to the consumer who buys the products from the retailer. If a warranty provides a service to the customer in addition to assurance about the agreed-upon specifications, a consumer products company must separately account for both an assurancetype warranty (cost accrual) and a service-type warranty (revenue deferral). Consumer products companies would likely find it challenging to estimate a standalone selling price for service-type warranties since they most often do not sell service-type warranties on a standalone basis. Furthermore, revenue recognition for service-type warranties for consumer products companies would not begin until the consumer purchases the product from the retailer. This may require these companies to develop and maintain a sophisticated system for tracking the beginning of the warranty period. Retailers – Even though retailers sell many products with warranties, the warranty obligations are often the responsibility of the manufacturer of the product or a third party. However, in some cases, retailers provide warranty coverage for their products and also may sell service-type or extended warranties for the products they sell. Retailers that provide warranties would have to determine whether they are the legal obligor under the warranty arrangement to determine the appropriate accounting treatment under the proposal. If retailers are the obligor, they would follow the same considerations outlined above for consumer products companies, including deferring revenue for service-type warranties instead of simply accruing the estimated costs. Homebuilding industry – It is a common practice in the homebuilding industry for a builder to offer its customer a warranty on the purchase of a home to protect the buyer against latent defects. The term of the warranty period is generally one year, unless statutory or legal requirements prescribe a longer period. The proposed guidance states that if an entity is required by law to provide a warranty, it should be considered an assurance-type warranty since the warranty exists to protect customers from the risk of purchasing defective products. Homebuilding companies may also provide service-type or extended warranties in addition to assurance-type warranties. Real estate – Real estate companies may provide their customers with warranties related to properties or services sold and account for them under assurance-type or service-type warranties. Manufacturing and construction manufacturing – Manufacturing and construction companies also provide servicetype or extended warranties in addition to assurance-type warranties. Therefore, they must separately identify and account for them. Software companies – Software arrangements in which software is physically delivered (e.g., CD, tape, etc.) often contain continued on next page


CPE Article continued from page 39

warranties for defective media, such as a malfunctioning CD. These and other warranties generally should be accounted for in conformity with ASC 450, as assurance-type warranties. Additionally, there may be warranty obligations related to warranties for defective software, including warranties that are routine, short-term and relatively minor. These obligations shall also be accounted for in conformity with Topic 450, as assurance-type warranties. However, if there are significant uncertainties about the extent of possible warranty claims or there is a wide range of possible loss, software companies should consider deferring all the revenues until the warranty period has expired. Software companies also provide post-contract services (PCS) to their customers. PCS provides for the right to receive services (other than those accounted for separately) or unspecified product upgrades and enhancements on a when-and-if-available basis. PCS typically includes one or more of the following: • Telephone support. • Bug fixes or debugging. • Unspecified upgrades/enhancements on a when-and-ifavailable basis. PCS may be provided by a software vendor even though not evidenced by a written contract (implied PCS). PCS, or at least part of it, can be considered service-type or extended warranties. PCS revenues should be recognized on a straight-line basis over the life of the contract, whereas the expenses should be recorded on an accrual basis as they incur. Software companies under the current GAAP guidance can use VSOE to determine the selling price of different components of a multi-elements arrangement contract that includes PCS. Under the proposed guidance, however, they may need to use other methods, such as the best estimate of selling price, to determine the selling price of software and PCS under the proposed guidance. Automotive industry – Automotive parts suppliers (APSs) and original equipment manufacturers (OEMs) typically provide warranties when they sell their products to customers. Normally, the price of the products includes the product warranty. For example, when purchasing a new vehicle from the dealership, the price includes an assurance-type warranty that the vehicle will operate for a specified period of time (for example, three years and/or 36,000 miles). In addition, certain OEMs may

offer extended warranties that the retail consumer can purchase through the dealer. The extended warranty typically provides more comprehensive coverage over a longer period of time (typically five to 10 years/or 50,000 to 100,000 miles). APSs and OEMs would need to evaluate whether a warranty provided with a product covers only defects that existed at the time of sale or whether it provides an additional service. They should consider the following factors: • Whether the warranty is required by law. • The nature of the tasks the entity promises to perform. • The length of the warranty coverage. The new guidance requires OEMs to exercise significant judgment when determining whether a long-term warranty period provides any additional services. For example, an OEM might conclude that its five-year warranty on a luxury vehicle is not an additional service because the vehicle is “better” than a standard vehicle. That is, the OEM may believe that the materials used to manufacture the vehicle are of a higher quality than the materials used in a standard vehicle and as a result, any latent defects would take longer to appear. OEMs would also need to carefully consider how the extended warranties are offered and purchased by the customer. For example, if the vehicle is sold to the dealer without the extended warranty, the purchase of an extended warranty by the customer at a later date is likely to be considered a separate transaction, or if the OEM sells vehicles to a dealer including the extended warranty, the OEM may need to allocate a portion of any discounts to the warranty using the relative standalone selling price method.

SOME IMPACT ON MOST COMPANIES THAT PROVIDE WARRANTIES Even though the proposed ED would not change the general accounting framework for warranties, the revenue recognition criteria and some terminologies could very well change under the final guidance (e.g., the concept of VSOE may no longer exist under the final guidance). The final guidance may also impose stricter rules in segregating assurance-type warranties from service-type warranties. The new ED on revenue recognition would probably have some impact on all companies across all industries that provide some form of warranties to their customers for products and services. ■

Josef Rashty, CPA, has held managerial positions with several publicly held technology companies in the Silicon Valley region of California. He is a member of the Texas Society of Certified Public Accountants and can be reached at or



| MAY/JUNE 2013

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 June 30, 2013, 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____________________________

A Tale of Two Warranties BY JOSEF RASHTY, CPA

1 Under existing GAAP, companies recognize revenues ratably over the period in which they are obligated to perform the related warranty services for all extended warranty or product maintenance contracts. A. True B. False


Under existing GAAP, entities that sell the extended warranties under multiple-elements arrangement contracts can allocate the revenues based on one of the following methodologies: A. VSOE B. Third-party evidence of selling price C. The best estimate of selling price D. All of the above

6 The proposed guidance recommends the following estimation method(s): A. B. C. D. E.

Adjusted market assessment approach Expected cost plus margin approach Residual approach None of the above All of the above

7 The proposed guidance states the change of estimates will impact revenues in the following types of warranties: A. B. C. D.

Service-type warranties Assurance-type warranties All of the above None of the above

3 The proposed guidance discusses the following type(s) of warranties:

8 The proposed guidance states the change of estimates will impact costs in the following types of warranties:

A. B. C. D.

A. B. C. D.

Assurance-type warranties Service-type warranties All of the above None of the above

Service-type warranties Assurance-type warranties All of the above None of the above

4 Service-type warranties under the proposed guidance resemble extended warranties under current GAAP.

9 Under the proposed guidance, deferred revenues are usually associated with the following type(s) of warranties:

A. True B. False

A. B. C. D.

5 The proposed guidance distinguishes the service-type warranties based on the following criterion (criteria): A. B. C. D.

Requirement by law Coverage period Nature of services All of the above

Service-type warranties Assurance-type warranties All of the above None of the above

10 In the software industry, PCS, or at least part of it, can be considered servicetype or extended warranties under the proposed guidance. A. True B. False

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.


| MAY/JUNE 2013

Answers to last issue’s self-study exam: 1. a. 2. d. 3. a. 4. c. 5. a. 6. a. 7. d. 8. a. 9. a. 10. b. 41

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A majority of people admit to not being financially prepared if a disability were to occur. According to the 2011 Consumer Disability Awareness Survey, 65% of working Americans say they could not cover normal living expenses even for a year if their employment income was lost.1 In reality, the odds are one in four that an employee entering the workforce will experience a long-term disability prior to retirement. What’s more, the average length of a long-term disability claim is more than 2.5 years.1 Think about your financial situation. If you suffered a disability that prevented you from working for several months (or several years), how would you pay your bills? The time to protect yourself from this risk is now. The Group Disability Income Insurance Plan—exclusively for TSCPA members—can help, with: Benefits of up to $5,000/month Affordable group rates If you pay your own premiums, benefits are generally paid TAX-FREE.2

Underwritten by: New York Life Insurance Company New York, NY 10010 On Policy Form GMR-FACE/G-14046-2

thInk you don’t need dIsabIlIty Insurance? thInk agaIn. | 1-800-262-7689 *For details about the plan’s features, costs, eligibility, renewability, limitations and exclusions. 1 CDA 2011 Consumer Disability Awareness Survey, Council for Disability Awareness. The research can be viewed at Viewed 2/1/13. 2 Please consult your tax advisor for more information.

AR Ins. Lic. #245544 • CA Ins. Lic. #0633005 d/b/a in CA Seabury & Smith Insurance Program Management 59959 (6/13) ©Seabury & Smith, Inc. 2013


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Today's CPA May/June 2013  

A look back at the highlights of the past year; tips for succeeding as a professional; and tips for a tiny business.