Today’sCPA SEPT./OCT. 2011
T E X AS S O C IET Y OF
C E RT I F I E D P U BL IC AC C OU N TANT S
THE DODD-FRANK WALL STREET REFORM AND CONSUMER PROTECTION ACT:
WHAT’S IN IT FOR CPAS? Understanding Transfer Pricing Exit Strategy for Minority Investors Legislative Advocacy
Also: Coverage of TSCPA’s Annual Meeting
Find out more about the TSCPA HSA-Qualified Group HDHP
You May Want To Consider
Take Advantage of this Tax-Free Savings Option... Combine tax-free savings with a traditional health plan when you add a Health Savings Account (HSA) to an HSA-Qualified High-Deductible Health Plan (HDHP). Call today for details—you can have access to the “traditional” medical coverage you’re used to, with the flexibility to choose a provider that fits your needs…and budget! Plus a tax-free savings account that can help with the cost of your deductible.
Get an Instant Rate Quote
More Flexibility with an HDHP Switching to a High-Deductible Health Plan can give you access to an HSA, and even more flexible deductible options so you can find a heathcare provider that works for your needs and your budget!
Tax-Free Savings with an HSA The confining rules of a Flexible Savings Account are out—no more “use-it-or-lose-it” rules. An HSA can provide a Health Savings Account that allows you to deposit pre-tax money and withdraw your savings tax-free for medical bills. Many Americans are excited about the flexibility they have with their HSAs, especially the rollover option. You can rollover unused funds year to year. You get to keep your money no matter what! You can take your HSA with you from job to job and plan to plan. The TSCPA Group HDHP is underwritten by New York Life Insurance Company, 51 Madison Ave., New York, NY 10010 (Policy Form GMR).
CALL 1.800.262.7689 Or visit us online at www.TSCPAinsure.com
IMPORTANT NOTICE: The TSCPA currently makes available to its members a High-Deductible Insurance Plan (HDHP) designed to be HSA-qualified. The plan is underwritten by New York Life Insurance Company. The TSCPA, Marsh U.S. Consumer, a service of Seabury & Smith, Inc., and New York Life bear no responsibility for the establishment or administration of a Health Savings Account (HSA) you may open. NOTE: New York Life Insurance Company and the TSCPA cannot give, and this advertisement is not intended as, legal or tax advice. We strongly urge that you consult with your accountant or tax advisor before opening an HSA to determine if this savings vehicle is available to and appropriate for you. Also, if you or any of your dependents are covered under another health insurance program, it could affect your eligibility for a tax-advantaged HSA. You should consult with your accountant or tax advisor to determine if you are eligible for an HSA. For complete details of the TSCPA HSA-Qualified Group HDHP including eligibility, premium rates, coverage provisions, exclusions, limitations and termination provisions, etc., please visit www.tscpainsure.com. 50897, 50179 ©Seabury & Smith, Inc. 2011
AR Ins. Lic. #245544 CA Ins. Lic. #0633005 d/b/a in CA Seabury & Smith Insurance Program Management
CHAIRMAN Donna Holliday Wesling, CPA
EXECUTIVE DIRECTOR/CEO John Sharbaugh, CAE
SEPTEMBER/ OCTOBER 2011
VOLUME 39, NUMBER 2
EDITORIAL BOARD CHAIRMAN Arthur Agulnek, CPA
Staff MANAGING EDITOR DeLynn Deakins email@example.com 972-687-8550 800-428-0272, ext. 250
TECHNICAL EDITOR C. William Thomas, CPA, Ph.D. Bill_Thomas@baylor.edu
COLUMN EDITORS Greta P. Hicks, CPA Mano Mahadeva, CPA, MBA James F. Reeves, CPA C. William (Bill) Thomas, CPA, Ph.D.
WEB EDITOR Wayne Hardin firstname.lastname@example.org
CONTRIBUTORS Ali Allie; Melinda Bentley; Rosa Castillo; Kay Crider; Jerry Cross, CPA; Anne Davis, ABC; Donna Fritz; Rhonda Ledbetter; Craig Nauta; Kim Newlin; Jim O’Guinn; Bob Owen, CPA; Catherine Raffetto; Patty Wyatt
DIRECTOR, MARKETING & COMMUNICATIONS Janet Overton Design/Production/Advertising The Warren Group thewarrengroup.com email@example.com
CLASSIFIED Donna Fritz Texas Society of CPAs 14651 Dallas Parkway, Suite 700 Dallas, Texas 75254-7408 972-687-8501 firstname.lastname@example.org
Editorial Board Arthur Agulnek, CPA-Dallas; Lisa Bauman, CPA-Dallas; James Danford, CPA-Fort Worth; Greta Hicks, CPA-Houston; Jeffrey Liggitt, CPA-Dallas; Mano Mahadeva, CPA-Dallas; Alyssa Martin; CPA-Dallas; Dawne Meijer, CPA-Houston; Ty Moore, CPA-Houston; Jan Taylor Morris, CPA-Houston; Windford Paschall, CPA-Fort Worth; Marshall Pitman, CPA-San Antonio; Mattie Porter, CPA-Houston; Kamala Raghavan, CPA-Houston; James Reeves, CPA-Fort Worth; Mike Rogers, CPA-Houston; Brinn Serbanic, CPA-East Texas; Paul Willey, CPA-Dallas. © 2011, 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.
| SEPTEMBER/OCTOBER 2011
24 The Dodd-Frank Wall Street Reform & Consumer Protection Act:
What’s in it for CPAs?
society features 14 A Marine’s Story
Houston CPA Works to Preserve the Memory of a Fallen Comrade
34 columns 5 Chairman’s & Executive Director’s Message
A New Strategic Plan for TSCPA
6 Tax Topics
Software Development Costs
7 Business Perspectives
Derivatives – Part Deux
22 Capitol Interest
8 Accounting and Auditing
30 A Way Out for Minority Investors in Private Texas Companies
Minority shareholders who did not establish exit strategies at the time of purchase still have a way out under Texas law.
34 CPE: Understanding the Complex World of Transfer Pricing
Failure to address transfer prices can have serious tax consequences.
An SEC Proposed Solution to IFRS Adoption: ‘Condorsement’
10 Emerging Issues
New Normal Revisited
Outstanding Chapter Awards, 2010-2011
departments 16 Take Note 42 CPE Calendar 44 Classifieds 3
All your clients are different. Explore how you and Paychex can work together to provide solutions that meet their unique needs. Every client is different, but they all have one thing in common. To stay successful, they need to focus on running their businesses and not navigating payroll complexities, healthcare insurance and new tax regulations. Your client could be a traditional family-run business searching for the best retirement plan, a large corporation faced with the new Health Care Reform legislation, a small business owner thatâ€™s experiencing growing pains, or a not-for-profit organization looking to understand the HIRE Act provisions.
Join the more than 20,000 CPA firms that have broadened their service offerings and enhanced their roles as trusted business advisors by referring their clients to Paychex. Participation is free and there is no obligation. Enroll online at www.cpa2biz.com/paychex, by phone at 877.534.4198 or through your local Paychex representative.
Newly referred clients will receive
ONE FREE MONTH of payroll processing
Chairman’s & Executive Director’s Message By Donna Holliday Wesling, CPA | TSCPA Chairman & John Sharbaugh, CAE | TSCPA Executive Director/CEO
A New Strategic Plan for TSCPA Strategic planning enables an organization to define its direction and formally consider its future course. During the 2010-2011 year, TSCPA leadership completed the Society’s new strategic plan for the next three years. To develop the plan, input was received from TSCPA’s chapter presidents, presidents-elect and executive directors, Executive Board, Board of Directors, Strategic Planning Committee, and staff directors. A survey was conducted that polled a sample of members to find out the most significant problems members are facing in their day-to-day work environment. Their feedback was incorporated into the new plan, which was presented at TSCPA’s Annual Meeting of Members this past June. The objectives include the following. Professional Competency – Provide members with access to trusted resources and continuing professional education to maintain their professional competency. Support members in the delivery of quality services to their employers or clients. Advocacy – Serve the professional interests of TSCPA members by being the advocate for Texas CPAs to public policy makers, regulators, and standards-setters. Promote the profession to the public at large. Operational Excellence – Operate TSCPA in an effective and efficient manner by assuring that the appropriate level of resources, technology, and volunteer leadership is available to deliver excellent member service. Recruitment and Retention – Attract and retain competent individuals to become CPAs by promoting the career opportunities that the CPA profession provides. Retain
existing members and recruit all eligible candidates to TSCPA by promoting the benefits of membership.
SUPPORTING THE OBJECTIVES
Professional Competency. In the market research that TSCPA has conducted, members have said they consider their most pressing overall professional challenge to be keeping current with the constant changes in tax regulations, professional standards, and laws that affect them. To address this concern, a variety of communications vehicles will continue to be used to disseminate professional information, including a weekly electronic newsletter and specialty electronic newsletters targeted to members’ specific areas of practice or interest, print publications, social media, and other technology. TSCPA’s website is continually updated and offers access to current news, information, tools, and professional resources. Members can also look to TSCPA for professionally diverse CPE programs. An extensive array of programs are offered in a variety of program delivery formats, including conferences, seminars, webcasts, webinars, online/self-study, onsite training, satellite broadcasts, and podcasts. The Society recently added the ACPEN Databank, a non-CPE credit research tool for professional information that provides 10-20 minute video clips available on demand.
Advocacy. TSCPA will maintain and enhance the relationships with elected officials, governmental agencies, and regulatory bodies. Efforts will include the existing Key Person program, Legislative Reception, member visits to the state capitol, PAC fundraising programs, and more. Chapter participation in the efforts will be encouraged. TSCPA will also continue responding to appropriate exposure drafts and issue comments on regulatory and tax policy issues. For members, TSCPA will promote resources such as the Accountants Confidential Assistance Network, speakers bureau, accounting career awareness program, and other Society services. Operational Excellence. In this area, TSCPA will focus on ensuring the organization has adequate technology to meet the needs of members. The Society will also: continue to recruit members for service on committees, task forces, and other projects, examine ways to encourage and develop new volunteer leaders, coordinate with local chapters on a variety of programs and services, and ensure adequate financial resources so that programs and services can be provided to members. Recruitment and Retention. Campaigns targeting non-members, including students, for membership will be maintained and include incentives to join. Since TSCPA’s chapters are instrumental in recruiting members, efforts will be coordinated with the chapters and appropriate resources provided to assist them. Looking to the future of the profession, the Society will develop and promote resources that are specific to students, including outreach to Texas colleges and universities.
ACHIEVING TSCPA’S MISSION Through this strategic plan, TSCPA is plotting a course for the organization for the next three years. The objectives expressed in the plan will assist TSCPA in achieving its mission of supporting members in their professional endeavors and promoting the value and high standards of Texas CPAs. If you’d like to read the plan, it is posted on TSCPA’s website at www.tscpa.org/ Content/51092.aspx. n
Donna Holliday Wesling can be contacted at email@example.com. John Sharbaugh can be contacted at firstname.lastname@example.org.
| SEPTEMBER/OCTOBER 2011
Tax Topics By Greta P. Hicks, CPA | Column Editor
Software Development Costs There seems to be no quick answer to the tax treatment of software development costs, especially among tax compliance officers in Texas. Local IRS auditors would prefer to call software development cost “start-up costs” and insist upon capitalization, and they began a fiveyear amortization in the year that the business began operations. Or, the auditor would lean toward the “matching concept” and not allow write off of expenses until there is income. More likely than not, since there is generally no income in the year of the software development costs, the auditor would attempt to say that “there is lack of profit motive” and disallow the costs entirely. Software development costs are not start-up costs, but are more closely related to “research and development (R&D) costs.” Begin your research with the IRS Audit Technique Guide (ATG), “Computers, Electronics, and High Tech Industry,” Training 3147-110 published in 1998. This ATG gives a great overview of the industry but be careful, the tax law may be obsolete. Your next best overview source is BNA Portfolio 556, “Research and Development Expenditures.” IRS guidance on software development costs began with Rev. Proc. 69-21, which was later superseded by Rev. Proc. 200050. Both revenue procedures define what computer software is and is not. Each also explains how developing computer software is not a Sec. 174 R&D cost, but that software development costs are treated similar to R&D costs. Read I.T. Regs. 1.174-2 for definitions and examples. Rev. Proc. 2000-50 defines the difference in developed software and purchased software and the tax treatment of each. Costs to acquire software are capitalized and amortized under §167(f) and §197(d) (1)(C)(iii). Sec. 167(f) covers the treatment of certain property excluded from Sec. 197 (intangibles). If a depreciation deduction is allowable under 167, “such deduction
shall be computed by using the straight line method and a useful life of 36 months.” Under 197(e)(3)(B), the term for 167(f) computer software means any program designed to cause a computer to perform a desired function, “except that such term shall not include any such software which is an amortizable section 197 intangible.” Additionally, Rev. Proc. 2000-50 provides for two tax treatments of developed software costs: Current Expense Method and Capital Expenditures Method. More importantly, Rev. Proc. 2000-50 states: If the taxpayer consistently uses one method, the IRS “will not disturb a taxpayer’s treatment of costs paid or incurred in developing software for any particular project.” For specific examples of how the IRS interprets Rev. Proc. 2000-50, read Private Letter Rulings (PLR) 9345012, 93310057, 9331061, and 200236028. Under the current expense method, software development costs would for a cash basis taxpayer be expensed in the year costs are paid. Following the example of 174 R&D costs, software development costs would be the costs incident to the development or improvement of an experimental or pilot model which meets basic design specifications. Rev. Proc. 2000-50 goes further to say that it is not only the program but also “the documentation required to
describe and maintain that program or routine.” Rev. Rul. 58-356 indicates that a taxpayer can elect the current expense method by including various 174 expense amounts in salaries, supplies, etc. In the example, no mention was made of R&D in the return filed. See sections 1.174-3(b)(3)(v) and 1.174-4(b)(1)(vi) and Rev. Rul. 70-637 for the importance of timing of election to use the current expense method. Under the capital expenditures method, Rev. Proc. 2000-50 states that “all of the costs properly attributable to the development of software by the taxpayer are consistently treated as capital expenditures that are recoverable through deductions for ratable amortization, in accordance with rules similar to those provided by §174(b) and the regulations thereunder, over a period of 60 months from the date of completion of the development, or, in accordance with the rules provided in §167(f)(1) and the regulations thereunder, over 36 months from the date the software is placed in service.” Consistency is important in that if the taxpayer wants to change from one method to the other, a Form 3115, Change of Accounting Method, may be required (IRC 446 and 481 and Rev. Proc. 2011-14). A taxpayer must satisfy all of the requirements of Rev. Proc. 2011-14 to obtain automatic consent. For R&D credit, it appears that software development costs generally are to be eligible for the credit in §41. However, in Sec. 41 software is limited to “new” or “significantly improved” software. This article is by no means a thorough discussion on the tax treatment of software development costs. Hopefully, you now have enough information to overcome an IRS auditor’s assertion that software development costs are start-up costs, that the taxpayer does not have a profit motive, or that the taxpayer cannot deduct these costs until there are sales of the product. Use this article as a guide for further research, not as substantial authority. n
Greta P. Hicks, CPA, is a consultant on IRS problems, seminar discussion leader, author of continuing education courses and web content provider. She can be reached at email@example.com or www.gretahicks.com.
| SEPTEMBER/OCTOBER 2011
Business Perspectives By Mano Mahadeva, CPA, MBA | Column Editor
Derivatives – Part Deux A derivative is a financial instrument that offers a return based on the return of some other underlying asset. That is, a return derived of another and named as such. The history of these instruments is surprisingly longer than most people realize and is traced back to the mid-1700s when farmers had to protect themselves from declines in prices due to overproduction or drought. Derivatives come in two flavors – plain vanilla and exotic. There are four classifications of “plain vanilla” derivatives: • swaps – helps one to exchange payments in a different currency; • options – gives one the right, but not the obligation, to buy an asset in the future, at an agreed upon price; • futures – the right to buy an asset in the future at a fixed price; and • forwards – similar to futures, but more customizable in terms of size, expiration date and price. These four classifications come in two types – exchange traded and over-thecounter transactions. The former consists of the “option to buy” and the “right to sell” shares in the market. The latter, and the larger of the two, are arranged between two parties. The other flavor of derivatives – exotic – comprises all other classes. This is the class that creates problems. Companies use derivatives as a hedge to reduce cash flow volatility and earnings volatility. Derivatives are used to speculate, enhance returns, undertake arbitrage, transform cash flow, or structure a desired position. However, the possibilities for direct and indirect use of derivatives are endless, as users continue to innovate with traditional and exotic products. Derivatives serve a variety of purposes in the global economic system. They make underlying markets more efficient by producing information and by enabling investors to trade on information that may
otherwise be unavailable or expensive. Second, derivative markets provide opportunities to break financial risks into smaller components and then buy or sell those components to meet companyspecific risk management objectives. Third, derivative markets are driven by low transaction costs, as they are a means to manage risk and in effect, serve as a form of insurance. If the cost were high, it would never grow and probably never exist. Fourth, firms of all sizes benefit from the use of derivatives. However, derivatives are complex instruments to use. For the end user, making a choice among instruments is not easy. To make a choice, one needs an understanding of the risk-return tradeoff of the instrument and an awareness of the accounting, financial and legal consequences of the company’s earnings and cash flow. Without a clearly defined risk-management strategy, the use of these instruments can be a hazard. Comparative analyses by industry, product and even country are no easy task due to regulatory and accounting applications. Disclosure of derivatives has increased, but it may be impossible to list all the details of a company’s derivative activity and all details of its risk. Then there are valuation issues that conflict with management incentives, as well as assessing the true cost of a derivative, when one takes into account the cost of the associated risk. In 2005, due to the rapid growth of derivative instruments and the collapse of
Orange County, Freddie Mac and Barings, Warren Buffett led a blistering attack on derivatives, calling them “financial weapons of mass destruction” in an annual letter to his shareholders. Bill Gross, Manager of PIMCO bond funds, joined him. In hindsight, they were right. Risk exposures were not fully understood. Financial models managed and measured risks. Common rules were violated easily and often. Rare tail risks and low probability, system-wide adverse events derailed the economy in 2008. In its wake, the regulation of derivatives became a primary focus of financial regulatory reform. In July 2010, the Dodd-Frank Act was signed into law by President Barack Obama (see cover story), which established a new framework for regulatory and supervisory oversight of the over-the-counter derivatives market, estimated at more than $600 trillion. Derivatives have redefined the financial services arena. These instruments are here to stay as they can provide an efficient way to transfer risk from those who do not want it to those who do. These are powerful tools, which can be used in the management of risk. However, with power comes danger. Therefore, they must be used with the necessary care, knowledge and controls to avoid disaster. Managing risk is part of what companies must do to generate sustainable growth of shareholder value. This provides an opportunity for the CPA to assess and recommend pragmatic alternative solutions to help provide resilience to unexpected circumstances. n
Mano Mahadeva, CPA, is executive director with U.S. Oncology in Plano. He serves on both the Editorial Board and the Business and Industry Issues Committee for TSCPA. Mahadeva can be reached at firstname.lastname@example.org.
| SEPTEMBER/OCTOBER 2011
Accounting and Auditing By C. William (Bill) Thomas, CPA, Ph.D. | Column Editor
An SEC Proposed Solution to IFRS Adoption: ‘Condorsement’ At a recent conference, I heard a technical expert from a Big 4 Firm refer to a term I’d never heard before: “condorsement.” A quick reference to an online thesaurus produced “no results were found.” That’s because “condorsement” is a newly-minted Securities and Exchange Commission (SEC) term to describe a proposed alternative to achieve incorporation of international financial reporting standards (IFRS) into the financial reporting structure for U.S. public companies. As you might expect, “condorsement” incorporates a combination of both “convergence” and “endorsement,” which heretofore have been viewed as somewhat mutually exclusive means to achieve the final result of requiring U.S. public companies to adopt IFRS by the middle of this decade. “Wait,” you say, “I thought IFRS adoption by U.S. public companies was a done deal.” We have all been assuming that since 2008, right? That was before the big banking and economic meltdown of 2008-09, a change in federal administrations (with attendant changes at the head of both the SEC and the Public Company Accounting Oversight Board (PCAOB), 14 trillion-dollar federal deficits, bankrupt state governments, and grassroots efforts in the accounting profession to push the Financial Accounting Foundation for separate accounting standards for private companies. The idea of giving up national sovereignty over U.S. accounting practices to an international group figures in the mix as well. Another problem that sometimes escapes mention is that U.S. generally accepted accounting principles (GAAP), promulgated by the Financial Accounting Standards Board (FASB) is firmly entrenched in U.S. investor protection laws and regulations such as the Securities Acts of 1933 and 1934, as well as
regulatory and governmental accounting. A shift from FASB to the International Accounting Standards Board (IASB) as the ultimate authority for U.S. GAAP would require legislative action at both the federal and state levels. Who knows what the result of that would be? Furthermore, the SEC has oversight over FASB. They do not have the equivalent weight of authority over IASB. These are thorny issues that must be addressed before IFRS can be fully adopted. Might there be a way around this quagmire?
HOW IT MIGHT WORK Under the plan outlined by the SEC staff, U.S. GAAP and FASB would continue to exist. IASB and FASB would finish the major projects in their Memorandum of Understanding. They would not begin work on any major new projects, but would establish a new priority list where FASB would work to converge existing U.S. GAAP to IFRS over a period of time for standards not currently on the IASB’s agenda. Note, however,
that this convergence process would not be like the joint convergence projects undertaken to date, where both FASB and IASB work to change their existing standards. Rather, FASB would be expected to converge (conform) its new standards to those of IASB. That’s the “convergence” piece in a nutshell. Under the “endorsements” piece, FASB would devise a process to become the leading U.S. participant in IASB standard setting, providing input into the standard-setting process, as well endorsing, implementing and screening new IASB standards and, if necessary, suggesting U.S. modifications when deemed in the best interests of U.S. capital markets and investor protection to do so. The ideal would be to incorporate new IASB standards into U.S. GAAP without modification. However, criteria would be established for consideration of endorsing or incorporating standards, and would give FASB the authority to recommend modifications or adjustments to IFRS before they become U.S. GAAP.
COULD IT BE THE SOLUTION? Before you add “condorsement” to your lexicon, be aware that the SEC has merely suggested it as a way around some thorny issues of IASB implementation in the United States. It is still very much subject to approval, and whether and how the concept might be implemented remains to be seen. On the face, however, it appears that “condorsement” provides a method of incorporating a single set of global accounting standards into U.S. capital markets, while still providing mechanisms to ensure that those standards are of high quality and provide sufficient investor protection, without unnecessarily high costs. Although it is still likely that IFRS adoption will become a reality for U.S. public companies, all of these developments have at least slowed the process. The latest estimates predict 2015 at the earliest. n See http://www.sec.gov/news/speech/2010/ spch120610pab.htm and http://www.sec.gov/ spotlight/globalaccountingstandards/ifrs-work-planpaper-052611.pdf.
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 Bill_Thomas@baylor.edu.
| SEPTEMBER/OCTOBER 2011
MAXiMize Your CoMPaNY’s exPosure
Your advertising message will reach the most influential CPAs, as well as the businesses and individual clients to whom they recommend products and services. start growing your business now by advertising in all of our official association magazines. Call today and ask about our package discounts.
Market to 75,000 CPAs And ACCounting ProfessionAls
FOR MORE INFORMATION Today’sCPA
Contact Advertising at 617.896.5344 or email email@example.com
| SEPTEMBER/OCTOBER 2011
Emerging Issues By James F. Reeves, CPA | Column Editor
New Normal Revisited Two years ago, we explored in this column a concept that Ian Davis, worldwide managing director at McKinsey & Co., referred to as The New Normal. Davis suggested that the economic downturn was not merely another periodic dip in the business cycle, but a fundamental change in the business landscape, a restructuring of the economic order, and that we would emerge from the economic downturn in a new place. While this was a sobering and thought-provoking view, Davis concluded that the new normal would not necessarily be a bad thing and in fact, would open up a world rich in possibilities for those who are prepared. Two years later, with 20-20 hindsight, do we believe Ian Davis was clairvoyant? Are we in a new place, a new economic order? Or could we be in a period of transition? Let’s take a quick tour of the CPA practice and regulatory environment to find out.
CPA PRACTICE ENVIRONMENT No doubt, many CPA firms across the country have experienced challenging times of late. According to an Accounting Today survey, Top 100 firms collectively reported a 2 percent aggregate revenue decline in 2010, including declines by three of the Big Four and 19 of the Top 25 firms. They managed their bottom lines like most businesses do during challenging economic times, by cutting expenses; 54 of the Top 100 firms, including 19 of Top 25, laid off staff, and 37 eliminated partner positions. Considering that only a few years before, double-digit revenue growth was common for firms of all sizes, this does sound like a new normal. Looking forward, however, firms are a bit more optimistic. Various surveys point to improving prospects for growth in 2011 and beyond. Fifty-seven percent of firms are expecting revenue growth in 2011 (PCPS/TSCPA MAP Survey), with fees and net income growing in the 3 to 4 percent range, according to a survey of firms by consultant Marc Rosenberg. Look across the practice landscape and you do see a
changing environment, with an intensifying level of merger and acquisition activity among firms of all sizes. Firms are looking at M&A as a source of expanded service offerings, economies of scale, geographic diversification, acquisition of talent, and certainly, as an ownership succession strategy. While the trade journals are quick to report the mega-mergers of regional firms, there are plenty of $10 million firms acquiring $1 million firms, as well as horizontal mergers of $1-2 million firms. And as the world continues to globalize, international M&A activity will begin to accelerate as well. As a result of firm consolidation and the economic developments over the past three years, firms are experiencing an increasingly competitive environment with downward pressure on fees being one of their biggest challenges. As a result of this increasingly competitive environment, firms are increasing their marketing spend and elevating their focus on practice development. A recent Rosenberg survey found that marketing and practice development ranked #1 in its list of Top 10 strategic trends. Similarly, the 2011 AICPA PCPS Top Issues survey showed that bringing in new clients and retaining existing clients is top of mind for firms of all sizes, and that fee pressure and pricing of services are not far behind.
RAPIDLY CHANGING REGULATORY ENVIRONMENT Also among the top issues cited by practitioners are keeping up with changing accounting and attestation standards, and the changes and complexity of the tax laws. Based on my personal interactions with practitioners, the evolution of accounting standards has become the top area of concern, if not fear. We are currently going down a path of convergence of selected FASB and IASB standards, although the convergence process is not hitting its milestones. On a parallel path, the SEC is scheduled to announce its position on IFRS for U.S. public companies by the end of the year. It could range from an outright requirement to adopt IFRS by a certain date, to an option to convert, leaving it up to individual registrants, or a hybrid approach by which U.S. generally accepted accounting principles (GAAP) would continue to exist, convergence would continue, and FASB would utilize an “endorsement” process to evaluate new standards issued by IASB for incorporation into GAAP, with or without modification (see the Accounting and Auditing column in this issue of Today’s CPA). Regardless of the SEC’s ultimate position on its IFRS, U.S. subsidiaries of foreignowned companies and U.S. companies with foreign subsidiaries are converting to IFRS in increasing numbers, creating many opportunities for CPAs. Clients have to be educated and new accounting policies drafted. Compensation and benefit plans may have to be restructured, loan covenants and contracts renegotiated, accounting systems overhauled, and owner/shareholder expectations managed. Tax planning will be significantly impacted as well, as the Internal Revenue Code contains hundreds of references to GAAP that will have to be re-evaluated. On a parallel path, the Financial Accounting Foundation (FAF) is evaluating a new standard-setting model for nonpublic companies that follow GAAP, with exceptions. One thing to keep in mind as this process unfolds is the demand for private company GAAP will likely become even more acute if the SEC mandates IFRS for public companies, consistent with other countries that are keeping national GAAP for private
James F. Reeves, CPA, is Senior Vice President, New Product Development at the Tax and Accounting business of Thomson Reuters. Contact him at firstname.lastname@example.org, or visit his blog at http://jamesfreeves.blogspot.com.
| SEPTEMBER/OCTOBER 2011
companies. It’s also worth noting that FAF is now including nonprofit entities in the scope of its deliberations, whereas the Blue Ribbon Panel specifically excluded nonprofits.
THE CHANGING TAX LANDSCAPE It increasingly appears that federal tax reform will be one of the front burner issues during the 2012 political season. Congress will be taking a critical look at the overall tax structure for corporations, individuals, and estates, as the “Bush tax cuts” are scheduled to expire once again at Dec. 31, 2012. It will also be looking at the compliance function (e.g., penalty provisions) as part of its ongoing quest to reduce the tax gap. This debate will be set against a backdrop of bringing down the deficit, making the U.S. more competitive in the global economy and stimulating job formation in the U.S. We can probably expect tax reform proposals to include noncontroversial simplification provisions like consolidating
child benefits, retirement benefits, and education benefits, simplifying the kiddie tax, and eliminating the individual and corporate AMT. They will hopefully address persistently troublesome areas like worker classification, the earned income credit, the myriad of phase outs, and neutralizing debt and equity financing of businesses. They will likely include base broadening, tax expenditure eliminating proposals similar to the ones suggested by the Deficit Commission et al. This will be the contentious part, as sacred cows like mortgage interest, state and local tax and charitable contribution deductions will be on the table, along with the exclusions for employer-provided health insurance and municipal bond interest. On the corporate side, tax expenditures include accelerated depreciation, the U.S. manufacturing deduction, the R&D credit, LIFO, the low income housing credit, and the deferral of CFC (foreign) income. Other contentious issues that have been floated
recently include taxing large, pass-through entities such as corporations, broadening the Social Security wage base, modifying rules on valuation discounts, and eliminating fossil fuel preferences.
THE MORE THINGS CHANGE … CPAs generally thrive during times of disruption in the status quo. Successful CPAs look at the problems their clients are experiencing at any point in time and see opportunities. For many clients, the volume of regulatory change is unsettling and the level of complexity overwhelming. For them, this is the new normal. For CPA firms, it should be marked by an increased demand for CPA services, a reversal of the downward pressure on fees, and hopefully a return to a period of double digit growth. As Ian Davis of McKinsey might say, this new normal will open up a world rich in possibilities for CPAs who are prepared. n
The answers are out there Every firm has its own set of challenges. If you’re looking for individualized support for your firm, CPA Mutual is here for you. CPA Mutual has provided risk management services to our member-owners for over 23 years. They all enjoy direct contact with us should the need for assistance arise. Whether its pre-claim assistance or avoidance, coverage questions on new services or clients, or engagement assistance, we are just a phone call away. No delays ... no wasted time. We’re ready to join your quest to make your firm a success – and to help you sleep at night.
let us help you find them 11801 Research Dr. • Alachua, FL 32615 (386) 418-4003 • (800) 543-3029 Fax: (386) 418-4004 • www.cpamutual.com Today’sCPA
| SEPTEMBER/OCTOBER 2011
Our business is taking care of your business. 11
Chapters By Rhonda Ledbetter | TSCPA Chapter Relations Representative
Outstanding Chapter Awards, 2010-2011 To inspire chapters in their continuing effort to better serve members, TSCPA bestows Outstanding Chapter Awards to the small- and medium-sized chapters. Selection is made by a group of past chapter presidents, who understand the work involved in successfully leading volunteers. Following is information about the chapters honored for the 2010-2011 year. OUTSTANDING SMALL CHAPTER: SAN ANGELO PRESIDENT: DOUGLAS W. TERRELL, CPA Recognizing that CPE is the benefit most utilized by its members, a chapter goal was set to increase the amount of courses provided. That goal was exceeded by offering 38 hours – 170 percent more than the previous year. Three new seminars were held, including a four-hour ethics course to help meet Texas State Board of Public Accountancy requirements. Reflecting the level of interest in being able to get their CPE locally, 27 percent of the individuals attending the annual eighthour tax update were new participants. To serve a wider range of members, CPE topics were broadened to appeal to those in areas other than public practice. The average attendance at chapter luncheon meetings (which always include at least one hour of CPE as part of the registration fee) increased almost 15 percent. At one luncheon, two hours of CPE were given for the regular $10 price. The result was 51 participants – the highest number at any chapter meeting in many years. Another meeting was sponsored by a local bank, so that lunch and an hour of CPE were no charge. To reach its goal of improving career awareness, the chapter added an element to an annual project. Members continue reaching out to area students during their formative years to spark interest in the skills needed as CPAs by serving as proctors for the annual 24 Challenge® Tournament. New during the 2010-11 year, the chapter provided plaques for teams to display at their school. They also added supporting material to the accounting careers presentation they make to the participants in their three groups: fourth, fifth and sixth grades. The goal of increased CPA-PAC contributions was met, with a 54 percent rise in the amount donated and a 69 percent jump in the number of contributors. This was achieved by establishing a chapter committee and providing CPA-PAC education presentations at chapter meetings.
OUTSTANDING MEDIUM-SIZED CHAPTER: CORPUS CHRISTI PRESIDENT: T. (TEE) HARDIE BOWMAN IV, CPA To meet the goal of encouraging participation in chapter events for networking and information sharing, the chapter partnered with a local bank to host a reception for CPA members. Another tactic was the task initiated by a board member who sent a personal invitation to each new member to attend a chapter event. Increasing the number of CPE offerings available locally was a goal met by working with Texas A&M University-Kingsville to hold a five-hour CPE program there and serve members in an outlying area of the chapter. A variety of projects helped meet the goal of strengthening relationships with students and faculty at the local colleges and universities. The chapter president developed and made a presentation for university accounting students about how to get a job. Board members made personal visits to local university presidents, business school deans, and career center/internship program directors to convey the chapter’s commitment to accounting programs and the desire to connect students with local jobs. The chapter also launched an online job bank for students, candidates and CPAs. Promotion of the service included an item in the area’s largest newspaper. Continuing to increase the visibility of CPAs in the area, chapter leaders worked with the Corpus Christi city manager to develop job descriptions for three city auditor staffers. Members met with City Council members, as well as county and district judges, to let them know what CPAs are doing for the community. n
HELP MAKE YOUR CHAPTER AWARD-WINNING Members are the key to – and the reason for – chapter success. Contact your local president or executive director and find out how you can get involved in making yours an award-winning chapter! You can get contact information through the TSCPA website at tscpa.org.
Rhonda Ledbetter is the TSCPA chapter relations representative. Contact her at 972-687-8508 or at email@example.com.
| SEPTEMBER/OCTOBER 2011
Newest Member Benefit Discount Tickets for TSCPA Members TSCPA is pleased to introduce its latest member benefit, discounted pro sports tickets! Currently, TSCPA has arranged deals with the San Antonio Spurs, Houston Rockets and Dallas Mavericks. To check out the discounts, please visit the Member Benefits Marketplace at tscpa.org. Stay tuned for more ticket packages on the way. Becker CPA Review Direct Bill Program
What can you expect from TSCPA besides Personal and Career Development Cutting-Edge Professional Information and CPE Enhancing the Image of the CPA Profession Recruiting New Members to the Profession Protecting the CPA Certificate You can expect special deals and discounts
full four-part CPA review course www.beckercpa.com/tscpa Texans Credit Union Full service financial institution 800-843-5295, www.texanscu.org Paychex Partner Program Payroll processing 877-264-2615 ProPay Discounts on credit card processing 888-227-9856 Tech Depot Discounts on computer and technical products 888-289-6424 Office Depot Discounts on office supplies 973-594-3527 FedEx Office Discounted pricing on most services, including digital printing and copying 646-302-9242 Infinet, Inc. AntiSpam/AntiVirus Protection 214-446-0089 Accurate Forms & Supplies Discounts on computer supplies and tax forms 800-777-0072 Nova Information Systems Discounts on payment processing services 800-546-1831 Monroe Systems for Business Discounts on calculators and other supplies www.monroe-systems.com Bank of America TSCPA credit card programs – Platinum MasterCard, CPA logo and other benefits 800-932-2775 CPA Exam Review Discounts For a complete list of exam review discounts available, visit the Member Benefits Marketplace at tscpa.org.
FedEx Shipping Discounts on select FedEx shipping services Passcode: 4R9TJP 1-800-MEMBERS InterCall Exclusive rates on audio and web conferencing services. 1-800-636-2377 Subscription Services Discounts on magazine subscriptions 800-603-5602 CareerBank.com Online career center for accounting and finance professionals tscpa.careerbank.com Framing Success Discounts on professional framing of all certificates 800-677-3726 Marsh Affinity Group Services TSCPA Insurance Trust offering a variety of insurance plans, including TSCPA-sponsored professional liability insurance 800-262-7689 Liberty Mutual Homeowners and auto insurance - ID number: 7026 800-524-9400 AXA Equitable TSCPA Members’ Retirement Program – Members are waived $25 enrollment fee. 800-523-1125, www.axa-equitable.com/mrp Hertz Discounts on car rentals - ID number: 1041643 800-654-2200, www.hertz.com La Quinta Inns and Suites Ten percent off standard room rates. Discount code: TXSCPA 800-531-5900, www.lq.com Quest Membership Program Save 50 percent on your next hotel bill 800-STAY450
Please visit the Member Benefits Marketplace at tscpa.org for complete information and links to each of our Member Discount Programs. 46
Questions? Contact the Member Benefits Administrator at 1-800-428-0272 ext. 216 or firstname.lastname@example.org.
Spotlight on CPAs By Anne McDonald Davis, ABC
A Marine’s Story – Houston CPA Works to Preserve the Memory of a Fallen Comrade Like other American men of his generation, David Leon Nelson, CPA-Houston, came of age in the shadow of the Vietnam War. A lifetime later, after a long satisfying career, 44 years of marriage, two daughters raised, Nelson still finds himself looking back at that turning point in his young life. In particular, Nelson was haunted by the death of his high school senior class president during combat on the Laotian border. Like Nelson, Lee Roy Herron signed up for Marine David Nelson, Corps officer training. CPA-Houston But their paths diverged. Nelson chose the Corps’ law program and served as a JAG officer in Okinawa away from the conflict until the war’s end in 1973. Herron was determined to join the infantry and fight. He died just two months into his tour of duty in Vietnam. “Lee Roy wanted to be on the front lines, felt called to it, but I think I was more useful as a JAG officer than I would have been in the infantry,” Nelson explains somberly. “But I’ve always felt kind of bad that he did what he did and I made a safer choice … even though I certainly did not want to go to Vietnam.” Although Nelson mourned his friend’s death at the time, it would be almost three decades before he discovered that Lee Roy’s sacrifice had not been in vain. As it turns out, the courageous young lieutenant saved many lives that fateful day in February 1969. In recognition of his selfless heroism, he had been posthumously awarded the Navy Cross, second only to the Medal of Honor. Nelson said he had no idea, “and I figured that if I didn’t know about it, most of our classmates and other people in our hometown of Lubbock probably didn’t
either.” This didn’t sit well with him. So for the next 14 years, the Houston CPA began something of a crusade to preserve Lee Roy’s memory. He was determined to learn the details of what happened and to make every effort to see that Lee Roy finally received the long deserved recognition that was absent during the Vietnam War. “I consider it a black mark on our country that we didn’t honor those soldiers when they came back,” Nelson asserts. “I can’t understand people who would actually look down on someone who served their country.” With other members of his old high school class, Nelson helped establish the Lee Roy Herron Scholarship at the Vietnam Center of Texas Tech University. To date, the endowed fund stands at a quarter of a million dollars. He smiles, “this really pleased Lee Roy’s family, especially his mother.” Nelson’s mission to bring Lee Roy’s heroism to the attention of his home town took on a bigger life the day the ceremony took place at Tech to announce the scholarship. A professor at the medical school was in attendance. As a former Marine, Randolph Schiffer felt compelled to join those honoring the fallen Marine, and even became a contributor to the fund. He also became determined to talk Nelson into co-authoring a book about Lee Roy; in 2005, they began the long process of writing and publishing. Before the effort was complete, Nelson would comb through military archives, visit the homes of friends and family back in west Texas, and even travel to battle sites
David and Lee Roy: A Vietnam Story by David L. Nelson and Randolph B. Schiffer is being published by Texas Tech University Press
in Vietnam. At press time, David and Lee Roy: A Vietnam Story was scheduled for release in September by Texas Tech University Press.
THE LIFE THAT WENT ON David Nelson didn’t start out to be a CPA or a Marine. As a boy, he was planning on becoming an atomic scientist and solving all the world’s energy problems. Unfortunately, his big scientific discovery was that he didn’t like physics. Not at all. So when he found out he had a shot at the Naval Academy, he figured that was his destiny. “Then I flunked the physical because I didn’t have 20/20 vision,” chuckles Nelson ruefully. So Nelson enrolled in nearby Texas Tech University and began considering a legal career. But seven years seemed like a long time to study, and Nelson’s brother James, an accounting major, convinced him to give
| SEPTEMBER/OCTOBER 2011
that a try. Right away, the college student discovered that tax accounting fascinated him – like a giant puzzle. He started taking all the tax courses that were available. But the war in southeast Asia still loomed. Nelson recalls, “Lyndon Johnson had been talking about ending the draft in 1964. When I first started at Tech, I didn’t think I needed to do anything. I thought … this war in this little country, surely it will be over by the time I graduate. Then they sent in several hundred thousand more troops.” So his junior year, Nelson enrolled in the Marine Corps law program. He graduated with an accounting degree from Texas Tech and then from the SMU School of Law in 1970. (He actually passed the bar and the CPA exam within a few months of one another.) At that point, Ernst & Ernst in Houston came calling, along with some big oil
companies. Nelson picked Ernst and went on staff for several months before going on active duty in the Marine Corps. “Ernst was good to me, gave me a threeyear leave of absence. They even sent me a $50 bonus every Christmas just like the other employees,” he grins. Nelson was equally loyal and stayed on and became a tax partner in 1981. For the next 10 years, he developed his tax accounting career, eventually leaving to serve as vice president and grant director for Houston Endowment, the largest private foundation in Texas. Over the years, he gave a number of speeches and wrote articles for TSCPA on tax-exempt organizations, estate, gift and trust taxation. Today, Nelson refers to himself as “semiretired” and still does some tax consulting. In addition to having the flexibility to
Bigger is Better
write his book, he enjoys spending time with his wife, Martie, who he met at Tech, and their two daughters, Amy and Rachel. He continues to add to his considerable collection of records from the ’50s and ’60s. “None of the music today is that good,” he insists. Nelson has also become quite the late-in-life athlete. He used to enjoy free throw shooting in high school and now participates in the Texas Senior Games, winning a silver medal in 2009, a bronze in 2010 and this year, the gold. “Twenty-two out of 25 free throws,” he specifies proudly. As he looks back on his life and on the life of his brave friend, Nelson is somewhat at a loss. “God moves in mysterious ways,” he concludes quietly. “I also believe that saying about when God closes one door, he opens another. I walked through the other door.” n
Accounting Practice Sales is North America’s leader in sales because we know how to navigate today’s tricky financial market. When you decide to sell your practice, remember APS got to be the biggest because we earned it. We are the best at what we do! Bigger is Better! Call A Texas CPA Today! North Texas The Holmes Group Toll-Free 1-800-397-0249 email@example.com Central & West Texas Bill Anecelle Toll-Free 1-866-809-8705 firstname.lastname@example.org Southeast Texas Gary & Wade Holmes Toll-Free 1-888-847-1040 email@example.com www.AccountingPracticeSales.com
NORTH AMERICA'S LEADER IN PRACTICE SALES
| SEPTEMBER/OCTOBER 2011
Take Note New for Members: Rising Stars Program
TSCPA is pleased to introduce the new Rising Stars Recognition Program. The purpose of this new program is to recognize CPA members age 40 and under who have proven to be innovative leaders through: • TSCPA volunteer activities, • accounting profession activities, and • charitable activities. The program gives TSCPA the opportunity to strengthen the Society’s leadership pipeline by recognizing up and coming leaders. Anyone can nominate a Rising Star, but only TSCPA members are eligible to receive the honor. Potential Rising Star recipients must be age 40 and under as of the end of the current fiscal year, which is May 31, 2012. The deadline to submit nominations is Oct. 25, 2011, as nominees must first be confirmed to be eligible, and then must complete and submit a profile form no later than Nov. 15, 2011. More information about the program is posted on the TSCPA website, along with a link to the nomination form. Go to the Young CPAs Community on the website at http://www.tscpa.org/ Content/51487.aspx and log in as a member.
TSCPA’s Information Technology Community
The TSCPA Information Technology Community on the website provides members with a resource that addresses strategic technology needs. The community includes several neighborhoods. Each neighborhood was created to share information regarding a particular issue. They include: • ERP – for information and answers to questions on enterprise resource planning systems; • Excel – pivot points, macros, formulas, and more; • GRC – assistance with issues related to governance, risk and compliance; • Implementing Technology – learn what’s new and tips for implementing a new system; • Security – in the age of hacking, phishing, identity theft, and DOS attacks, assistance is available here; • Social Media – how to use social media tools for business purposes.
The neighborhoods provide members with a library of articles, videos and/or links to articles, videos, and more. There may also be a listing of coming events that offer educational opportunities related to that issue. In addition, the neighborhoods offer a place online to get together with other CPAs who have experience and expertise on issues and are willing to answer questions. Just click on the “Ask a Question” link on [Comments] to take advantage of the networking opportunity. To visit the community, go to tscpa. org and under Resource Center, scroll down to Member Communities, select Information Technology Community, and log in as a member.
Accountants Confidential Assistance Network
All individuals planning to become CPAs in Texas are subject to a background check during the certification process. Applicants who have previous alcohol or drug law enforcement issues may be referred to TSCPA’s Accountants Confidential Assistance Network (ACAN); this does not preclude you from becoming a CPA. If you have something on your record and you’d like to learn more about the ACAN process, please call: 866-766-ACAN. You can also contact Craig Nauta at firstname.lastname@example.org. To learn more about the services provided by the program, please go to the website at tscpa.org/resource/peerasst.
Fall Membership Recruitment Campaign
TSCPA’s fall recruitment campaign is just around the corner. The campaign will target about 2,500 non-member CPAs and will begin in mid-September and run until December. As a member of TSCPA, you understand the value of being part of our professional community of more than 29,000 members. Help us grow by recruiting non-member CPAs you may know. TSCPA and your chapter will send additional information and details about the fall recruitment efforts in the weeks ahead. To learn more, please visit the Join TSCPA section of the website at tscpa.org, and contact your chapter to see how you can assist in the local recruiting efforts.
TSCPA Membership Renewal for 2011-2012
If you haven’t already done so, now is the time to renew your TSCPA membership for 2011-2012. Dues statements were sent to members via e-mail or regular mail. You can pay your dues online at tscpa.org or if you received a statement through regular mail, you can renew using the statement that was mailed to you. For questions, please contact Rosa Castillo in Member Services. She can be reached at email@example.com or at 800-4280272, ext. 260 (972-687-8560 in Dallas). Don’t let your TSCPA membership lapse – renew today!
What’s New on the TSCPA Website
Go to tscpa.org to learn more about … Chairman’s Blog You can follow TSCPA’s 2011-12 Chairman Donna Wesling, CPA-Austin, on her blog. The new blog – Donna’s Diary – is available from the home page on the website at tscpa. org. It can also be accessed directly at this link: www.tscpachairman.typepad.com. Videos of Interviews with Donna Wesling, Michael Brown and John Sharbaugh Watch videos of interviews with TSCPA Chairman Donna Wesling, CPA-Austin, Michael Brown, CPA-Central Texas, and TSCPA Executive Director/CEO John Sharbaugh, CAE, at the CPA Horizons 2025 – Dallas Future Forum. They provide their perspectives for this AICPA project that is designed to gain insights on the major trends and vision for the CPA profession in 2025. Link to the videos from the TSCPA News and Publications area of the website at www.tscpa.org/Content/ resource/news.aspx.
| SEPTEMBER/OCTOBER 2011
Resource for Members: CPE Programs and a New Free Member Benefit – The ACPEN Databank TSCPA offers members an extensive and comprehensive slate of timely and relevant continuing professional education programs from leading educators. The programs provide members with the most current and updated accounting profession information. They’re available in convenient and flexible formats, including traditional live and in-person events, webcasts, webinars, online self-study, satellite broadcasts, podcasts, on-site programs, and more. With the TSCPA CPE Personal Assistant, members can manage and monitor CPE courses and credits. It’s an online tool that can be used to track, maintain and update CPE records. TSCPA also recently launched a new benefit in cooperation with Accounting CPE Network (ACPEN). ACPEN, a leader in Internet-based video CPE programming, is offering the new ACPEN Databank and TSCPA members can use it – for free. The Databank is a professional information research tool that has short, non-CPE 10-20 minute video clips available on demand. It helps enable users to solve real practice problems, when needed, by searching by title, or by using keywords to access a list of specific discussions by ACPEN’s national industry experts addressing particular topics. The experts address a very narrow subject and then make it available to CPAs just when they need it. The experts also review all the video clips to make sure the information presented in the clips is current, up-to-date and relevant to CPAs. Users can search by program title, such as “Annual Tax Update” or “Not-for-Profit Update.” Or by using keywords, such as “IRS Form 990, Schedule J,” the viewer can access a list of specific discussions by experts addressing their particular practice interest. This new tool allows CPAs to greatly expand their research capability since they now have access to information on specific practice concerns and issues. In summary, the Databank: • is a free benefit for TSCPA members; • provides free access to ACPEN information based on specific titles or key word searches;
Lost your enthusiasm for doing those Business Personal Property tax renditions?
• offers a selection of video clips based on assorted speakers and panel discussions; • is a dynamic, video-based research tool; • has unlimited on-demand access when and as needed; and • is a new and exciting application of technology that makes critical professional information instantly accessible. It is important to note that users DO NOT RECEIVE CPE credit when using the Databank. Instead, users have useful sources of information to help improve their efficiency and productivity. It’s a new, free benefit for TSCPA members. For more details about the Databank, please visit the TSCPA website at tscpa.org/Content/cpe/ACPENDataBank.aspx and log in as a member. To access information and choose from the extensive selection of programs that TSCPA offers for CPE credit, go to the CPE section of the website at tscpa.org/Content/cpe.aspx or contact the CPE department at 800-428-0272 or 972-687-8500 in Dallas.
Put a smile on your face by using Personal Property Pro software!
Download the Demo today!
Automates & Generates Returns for TX-OK-FL Includes FMV Calculations & Freeport Exemption! State Approved Forms For All 254 Texas Counties!
It’s About Time.
| SEPTEMBER/OCTOBER 2011
By Rhonda Ledbetter | TSCPA Chapter Relations Representative
TSCPA’s 2011-2012 Chairman Donna Wesling, CPA-Austin.
Fort Worth, Texas skyline.
TSCPA’s Annual Meeting of Members TSCPA members, families and friends gathered in Fort Worth, the city of cowboys and culture, for the 2011 Annual Meeting of Members and Board of Directors Meeting. Participants enjoyed the unmistakable mix of preserved western heritage and unrivaled artistic offerings. YEAR IN REVIEW
Immediate Past Chairman Jeff Gregg, CPA-Wichita Falls, kicked off the meeting with highlights of achievements during the year. Just a few of those were the following. • A new three-year strategic plan was developed over several months, with input from chapter leaders and executive directors, as well as individual members, the board of directors and staff directors.
EXECUTIVE BOARD 2011-2012 Donna Wesling, CPA-Austin Chairman
Fred Timmons, CPA-San Antonio Chairman-elect Tracy Stewart, CPA-Brazos Valley Treasurer Stephen Parker, CPA-Houston Treasurer-elect Dora Jean Dyson, CPA-Central Texas Secretary Sandy Brown, CPA-Brazos Valley Jesse Dominguez, CPA-Austin
• TSCPA, in cooperation with Accounting CPE Network (ACPEN) created a new member benefit: the ACPEN Databank, a professional information research tool that includes short 10-20 minute nonCPE video clips available anytime. • An information technology online community was created as an exclusive member benefit. Willie Hornberger, CPA-Dallas Charlotte Jungen, CPA-Southeast Texas
• Volunteers and staff were deeply involved in monitoring the thousands of bills filed for consideration by the 82nd Texas Legislature during the regular and special sessions, and taking action on those most relevant to CPAs. See the Capitol Interest article in the July/August issue of this magazine for more information. • An Ethics Task Force was created to examine the role of the TSCPA Professional Ethics Committee as it relates to both AICPA under joint ethics enforcement and the Texas State Board of Public Accountancy (TSBPA), to promote professionalism. • Several projects for members in business and industry were implemented. More information is in the next part of this article.
Mark Lee, CPA-Houston
For details about these and a wealth of other projects, please refer to the “Year in Review” article in the May/June issue of Today’s CPA.
Jim Oliver, CPA-San Antonio
Kathy Kapka, CPA-East Texas
Keith Reeger, CPA-South Plains Lei Testa, CPA-Fort Worth Jeff Gregg, CPA-Wichita Falls Immediate Past Chairman John Sharbaugh, CAE Executive Director/CEO
U.S. Rep. Mike Conaway, CPA-Permian Basin, shared information about the federal budget issues that Congress is wrestling with and their long-term impact on the nation’s financial future. He emphasized that the focus must be on fixing the roots of the problem, federal spending and unlimited entitlements. In terms of where we are now, he opened his presentation by providing statistics from the 2009-2010 fiscal year, spotlighting
| SEPTEMBER/OCTOBER 2011
the dollar amount borrowed and the total federal debt. He pointed out that mandatory expenditures on programs such as Social Security (the largest segment), Medicare and Medicaid constituted more than half of the federal spending for the year. A graph was shown illustrating total federal revenues and outlays as a percentage of gross domestic product (GDP) for the last 40 years and a baseline projection to the year 2021. The next segment addressed where the nation is headed if changes are not made. He stated that tax revenues are expected to remain flat, at roughly 19 percent of GDP. Federal spending is headed sharply higher and is expected to be more than 25 percent of GDP by 2035. Public spending on healthcare and pensions is set to gradually consume all federal revenues by midcentury. The federal debt is projected to increase to 400 percent of GDP by 2050. He outlined details about how the House of Representatives proposed 2012 budget aims to avoid future fiscal calamity through difficult choices now, such as reducing the size and scope of the government. He demonstrated that although the spending/debt problem was severe, it could be brought under control by making changes now.
BUSINESS AND INDUSTRY The chair of TSCPA’s Business and Industry Committee, Bill Moss, CPADallas, shared ways that TSCPA is offering more services than ever to help these individuals – who comprise more than 40 percent of the Society’s membership – be better at what they do. The challenge is that they work at a tremendous range of businesses. That is the key factor in designing programs and benefits that will help the greatest number of members while making the most efficient use of TSCPA resources. The first step is learning what members need. Moss explained that surveys are useful, but the best information is obtained personto-person. During the year, the committee hosted seven town hall meetings around the state to have an opportunity to talk directly with members about the perks currently available through TSCPA and to get details from them about additional things they
| SEPTEMBER/OCTOBER 2011
Bob Owen, CPA-Dallas, and Leroy Bolt, CPA-Abilene. need or tweaks that can be made. From this input, TSCPA has created new programs and services, and enhanced existing ones. A rich array of offerings is provided online through the members-only Business & Industry Center at the TSCPA website. A virtual tour makes first-time users instant experts on all that the center offers. Highlights include a guide for those considering a career move from public accounting to industry, complete with insights from others who have been there. A core feature of the center is the collection of “neighborhoods,” which cover both job functions (CFO) and industries (e.g., energy). The constantly-updated Knowledge Library is specifically for members in this area. And, members can access the Industry Institute Webcast Catalog, provided by the TSCPA CPE Foundation and the Accounting CPE Network (ACPEN). A project for the new TSCPA year is creation of webinars from presentations at industry CPE conferences. The committee will continue to explore new ways to serve members.
REGULATORY AND LEGISLATIVE Highlights from the regular and special sessions of the 82nd Texas Legislature were provided by Legislative Advisory Committee Chair Leroy Bolt, CPA-Abilene, and Managing Director for Regulation and Legislation, Bob Owen, CPA-Dallas. TSCPA plays a role in the legislative process thanks to volunteers’ tireless dedication to many tasks before, during and after each session. They are deserving of all members’ appreciation.
Despite the hard work of many involved, the Society had mixed results in achieving the objectives in the legislative agenda outlined at the Midyear Board of Directors Meeting. Efforts to transfer fifth-year scholarship funds to the Texas State Board of Public Accountancy were successful, but the bill making modest changes to the Texas Public Accountancy Act died in the Calendars Committee in the House after passing the Senate. And, after much effort and almost success, the schedule for TSBPA sunset review remained exactly where it was before the session started. Please see the Capitol Interest article in the July/August issue of this publication for details.
ACCOUNTING EDUCATION FOUNDATION The president of the Accounting Education Foundation (AEF) Board of Trustees, Rosie Morris, CPA-Austin, presented an update on the work of the AEF to provide financial assistance to students and the educators who are preparing them for a career in accounting. Two individuals were selected as Kenneth Hurst Fellows for 2010-2011, recognizing their longtime contributions to, and support of, the AEF: Jacob Bezner, CPA-Dallas and Bette Williams, CPA-Austin. Morris reminded the audience of the opportunity to fund a one-year scholarship, which can be named for an individual or a company, through a $1,500 donation. The donor may choose the university and student from the scholarship recipients selected by the Scholarship Committee. She also spotlighted two endowed scholarships,
Take Note BUSINESS MATTERS
Wichita Falls Chapter members Jeff Gregg, CPA; Kelly Parr, CPA; Jerry McGee, CPA; and Jeffery Morton, CPA. named for Jerry & Roslyn Love and James A. & Charlotte Ann Smith. Those are established through an endowment of $30,000 payable over five years. The silent auction held raised $13,500 for the work of the Foundation, which includes $1,500 scholarships for senior and graduate accounting students at participating Texas universities.
SPECIAL RECOGNITION AWARDS
The Special Recognition Award is presented by the TSCPA chairman to honor TSCPA members who have performed an extraordinary service to the Society in a given year. Tee Bowman, CPA-Corpus Christi Jim Ingram, IV, CPA-Brazos Valley Billy Kelley, CPA-Permian Basin Tony Ross, CPA-Austin Wendi Taber, CPA-San Antonio
CHAIRMAN’S CITATION Patty Wyatt
The following awards were presented to chapters for their work encouraging members to donate to CPA-PAC. Highest Percentage of Fund-Raising Goal Large Chapter – Dallas Medium-sized Chapter – South Plains Small Chapter – Victoria Highest Percent Increase in Members Contributing Large Chapter – Fort Worth Medium-sized Chapter – South Plains Small Chapter – Victoria
Guest speaker Joe Gerstandt presented a new perspective on diversity: the value of including those with different viewpoints in decision-making. He began with a story about how the commission investigating the events that led to the NASA Challenger tragedy found that the organization’s culture was one of the causes and that group-think led to the exclusion of dissenting viewpoints. His focus was on the value of differences, and how good working relationships have those as well as commonalities. Explaining that inclusion is the ability to include difference and utilize the increased resources it brings, he talked about its importance in problem-solving and the integration of networks among those with diverse outlooks. Through audience participation, he made a point about how life experiences can provide diverse perspectives as much as the more visible and commonly-thoughtof factors such as culture, age, geographic location, etc. He presented a model of four thinking styles, each of which adds value to the work of groups. Referring to statements in a variety of scholarly publications, there was acknowledgement that inconvenient dissent can trigger negative group reactions but also that, when solving problems as a group, diversity can trump ability. He zeroed in on the sweet spot in between dysfunctional disagreement (which is evidenced by usagainst-them thinking and a lack of trust) and, less-often acknowledged, dysfunctional agreement (lack of honesty, meeting after the meeting to get to the truth). After finding that spot, results include constructive disagreement, solutions to problems, empathy, and thinking in terms of “we.”
2010-2011 Treasurer Rick Baumeister, CPA-Fort Worth, presented the year-end financial report, stating that both the Society and the CPE Foundation ended the year with better-than-anticipated results. 2011-2012 Treasurer Tracy Stewart, CPA-Brazos Valley, presented the new year’s budget, which was approved. Business conducted for other TSCPA entities included: • election of directors of the Accountancy Museum of the Texas Society of CPAs, Inc., • the annual meeting of the TSCPA CPE Foundation; and • the annual meeting of the Peer Assistance Foundation.
PLANNING FOR THE NEW YEAR
2011-2012 Chairman Donna Wesling, CPA-Austin, talked about plans for the year and her theme: Strong. Diverse. United. She explained that she chose it because TSCPA is a strong organization, made up of a diverse group of professionals, united by a common goal to create the driving force that protects and promotes the profession. TSCPA’s strength comes from the fact that it speaks on behalf of 29,000 members. Members volunteer their talent and time to work on more than 40 committees that protect and promote the CPA profession. The Society is diverse in a variety of ways. Two of those are gender and ethnicity. But diversity also comes from the areas in which CPAs work. They are controllers, CFOs, public practitioners, investment advisors, financial planners, consultants, and more. They do business in companies ranging in size from large international firms to soleproprietor offices. However, the members are united because they all share the certified public accountant designation. TSCPA efforts on behalf of the profession are united under a strategic plan developed with input from members and leaders across the state. The current plan took effect in June and will guide the organization for three years. The four focus areas are: • Professional Competency; • Advocacy; • Operational Excellence; and • Recruitment and Retention.
| SEPTEMBER/OCTOBER 2011
Read more about the new strategic plan objectives in the Chairman’s and Executive Director’s Message in this issue of Today’s CPA. Wesling talked about getting young CPAs in the Society more involved, one of her main objectives for the year. She worked with state and chapter leaders to appoint a member under the age of 40 on most TSCPA committees, and was delighted by the enthusiasm and willingness to get involved that the nominees expressed. Another project for young CPAs is TSCPA’s Rising Stars program, set to kick off in late summer. The intention is to recognize TSCPA CPA members age 40 and under who have proven to be innovative leaders within the profession and in their community. She closed by urging members to become involved in shaping their future through the AICPA Horizons 2025 project. Building on the CPA Vision, which began in 1998 and created a vision for 2011, this project looks toward the year 2025. Wesling participated in a future forum held in Dallas, one of eight around the country, designed to engage CPAs person-to-person and get insights on major trends for the CPA profession. She encouraged TSCPA members to complete the CPA Horizons 2025 online survey or participate in an online discussion. You can view speakers’ PowerPoint presentations by going to the TSCPA website at tscpa.org/Content/51914.aspx.
FUTURE SITES In 2012, the Annual Meeting of Members and Board of Directors Meeting will again be held in Texas, at the Omni Corpus Christi Bayfront Tower, June 29-30. Las Vegas is the site for the 2013 event.
PLEASE SEE THE CHAPTERS COLUMN IN THIS ISSUE FOR INFORMATION ABOUT THE RECIPIENTS OF THE OUTSTANDING CHAPTER AWARDS.
CHAPTER CHALLENGE GOLF TOURNAMENT
TSCPA Chairman Donna Wesling, CPA-Austin.
The winning teams are listed in order by score, starting with first place: Dallas Chapter – Jerry Cross, CPA; John Eads, CPA; Hank Pearson, CPA; Bob Warren, CPA; Dave Stubblefield Panhandle Chapter – John Doucette, CPA; Mike Young, CPA Rio Grande Valley Chapter – Randy Sweeten CPA Central Texas Chapter – Alton Thiele, CPA; Twyla Thiele San Antonio Chapter – Fred Timmons, CPA; Bill Patton, CPA Houston Chapter – Brian Jones, CPA; Mark Lee, CPA Austin Chapter – Jesse Dominquez, CPA, Joyce Smith, CPA; Rick Smith, Donna Wesling, CPA; Steve Wesling South Plains Chapter – Kent Payne, CPA Fort Worth Chapter – Steve Newcom, CPA
TSCPA 2010-2011 AWARD RECIPIENTS
Leroy Bolt, CPA-Abilene, was recognized for Meritorious Service to the Accounting Profession in Texas. This award is regarded as the highest honor bestowed by TSCPA, given for leadership and service. Bolt has been a TSCPA member since 1978 and has served the Society and the Abilene Chapter in a variety of roles, including as an active participant in TSCPA’s regulatory and legislative initiatives and on several state committees that act on behalf of the CPA profession in Texas. Bolt has served on the Executive Board and Board of Directors for the Society and was the Abilene Chapter president in 1989-90. Jim Oliver, CPA-San Antonio, was given the Distinguished Public Service award. The recipient for this recognition is selected based on outstanding charitable, community and/or civic activities and other public service unrelated to the regular duties performed as a TSCPA member. Oliver is dedicated to service to his profession and his community. He has been involved in TSCPA and the San Antonio Chapter in a variety of roles, including chapter president in 1992-93. He is an active member of his church where he has served as deacon. In addition to being an advisor for various charitable organizations and private foundations, he has also served as a correspondent for local radio and television programs to share financial information with the public. Bob Clyde, CPA-Dallas, Melanie Thompson, CPA-San Antonio, and Claude Wilson, CPA-Dallas, were elected as Honorary Fellows. Included in the criteria to be considered is leadership in the Texas Society of CPAs on a consistent basis for a number of years. They joined the Society in 1962, 1978 and 1965, respectively. Each has served the organization as its top elected leader, as well as on additional Executive Boards, various Society committees and councils. Clyde was president of the Dallas Chapter in the 198687 year and Thompson served the Corpus Christi Chapter as president in 1987-88. Melanie C. Geist, CPA-San Antonio, was named Young CPA of the Year. This award recognizes a CPA who is age 39 or under, and who has made significant contributions to the accounting profession and the community. After becoming certified and joining TSCPA in 2004, Geist joined the San Antonio Chapter’s New CPA Involvement Committee and volunteered to help design a chapter leadership development program. She is on the board of directors for TSCPA and the chapter. She has a history of service in the Peace Corps and continues to live a life of service in her church, her work, and her community. Ed Polansky, CPA-San Antonio, received the award for Outstanding Committee Chair. He has been chairman of the Federal Tax Policy Committee since 2009. Under his dedicated direction, the committee has issued several letters, comments, a white paper, and blog posts regarding federal tax matters. His commitment of both time and energy to the work of the committee is deserving of recognition.
Rhonda Ledbetter is the TSCPA chapter relations representative. Contact her at 972-687-8508 or at firstname.lastname@example.org.
| SEPTEMBER/OCTOBER 2011
Capitol Interest By Bob Owen, CPA | TSCPA Managing Director, Regulation and Legislation
Legislative Advocacy The 82nd Texas Legislature has finished meeting for this biennium, wrapping up the special session on June 29, 2011. While the special session was called primarily to balance the budget, a number of additional items were placed on the agenda by Gov. Rick Perry. Congressional redistricting, prohibitions against sanctuary cities, health care containment costs, reform of the Texas Windstorm Insurance Association, and restrictions on Transportation Safety Agent patdowns were all addressed by the special session. A so-called balanced budget was passed, or at least one that should last until the legislators convene for the 83rd Texas Legislative session in January 2013. Just like this session, the next session will likely have to deal with a supplemental appropriations bill in order for Texas to pay all the bills through Aug. 31, 2013. Although there were no separate franchise tax bills passed by the legislature, several franchise tax issues were included in the budget bills: • the $1 million minimum revenue threshold was extended for two years until Dec. 31, 2013; • use of pre-margin tax credits that were set to expire were extended until Dec. 31, 2016; • apparel rental companies with SIC codes of 5999 or 7299 are now considered retailers, allowing them to take advantage of the .5 percent tax rate; • qualified live entertainment companies are allowed to exclude payments to live entertainers from total revenue; and • qualified courier and logistics companies are allowed to exclude subcontracting payments for delivery services from total revenue. The fiscal matters bill passed during the special session also included the complete text of previously passed HB 2403 by CPA Rep. John Otto (R-Dayton). HB 2403, the so-called Amazon bill requiring retailers with any operations in Texas, even through affiliates, to collect Texas sales taxes was
passed by the legislature in regular session but was vetoed by Perry. It was passed again as part of SB 1 by Sen. Robert Duncan (R-Lubbock) during the special session. It’s over; now it all starts over again. With the session done, the candidates return to the serious business of fundraising. The week before the special session was adjourned, we received no less than 10 invitations to fundraisers, all taking place the same week of adjournment. In case you’ve forgotten, all legislative efforts start on the campaign trail. Those individuals and organizations who hope to have some influence during the legislative session need to exert some influence during the campaign season. That means grassroots action. Grassroots political action is a vital part of any legislative effort, including TSCPA’s. While actions by our lobbyists and staff during a session are important, there is no substitute for the powerful influence of constituent communications with legislators before and during a session. CPAs make particularly good active constituents because of the substantial respect legislators have for the profession and because CPAs are an economic force in each lawmaker’s district. CPAs also have the ability to explain the impact of accounting and tax issues to legislators. When candidates run for office, either for re-election or as a legislator wannabe, they need two kinds of help – personal and financial. It is during these campaigns that CPAs have the opportunity to cement existing relationships or establish new ones.
If you already have a relationship with a legislator or candidate, helping with his/ her campaign will keep the relationship current. If you don’t know your state representative or state senator, campaign time gives you a wonderful opportunity to begin a relationship. Once relationships are established, CPAs can find opportunities to offer insights and professional advice on tax and financial issues faced by the successful candidate. If you have a relationship with a legislator or statewide office holder, TSCPA can use your help. Sometimes that help is just by giving us insight into the legislator and his/her district. Sometimes that help is asking you to make a contact in support or opposition to some specific legislation. If you are willing to develop a relationship with your representative or senator, you can be helpful too. Whether the relationship is existing or potential, please volunteer to participate in TSCPA’s Key Person Program. You can contact Linda Messing at email@example.com to get involved. Being a Key Person is seldom timeconsuming once you have developed the relationship with the legislator. Whenever you are asked to contact a legislator on TSCPA’s behalf, you will be given very specific information, and will have either a Legislative Regional Coordinator or TSCPA staff person available to provide help and support. There is no single element of our legislative strategy that is more important or more effective than our Key Person contacts. You will find participation interesting and rewarding, and you will benefit all TSCPA members. While personal relationships are important, so are organizational relationships. TSCPA staff and legislative consultants also develop relationships with legislators, and TSCPA as an organization must be recognized by legislators. Just like an individual, an organization has the best opportunity to develop lines of communication during the campaign season. One of the easiest and effective ways
| SEPTEMBER/OCTOBER 2011
to start and continue the organization’s relationships with candidates is through campaign contributions. It’s expensive to run for any legislative or statewide office, and very few candidates have the financial resources to self-fund a campaign. While neither candidates nor constituents like it, political fundraising is a necessity. That’s why TSCPA has established a political action committee, the TSCPA CPA-PAC. When campaign contributions are made from the CPAPAC, it helps establish the organization’s relationship with candidates. Individual CPAs deliver these CPA-PAC checks, giving us both organizational and personal recognition. The law does not allow TSCPA dues to be used for political campaigns. The CPAPAC is the only source of funds available for this important TSCPA advocacy activity. Contributions to the CPA-PAC are allocated 75 percent to local legislative candidates, and 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, currently chaired by Brad Brown, CPA-Southeast Texas. The vast majority of you reading this article should be offering your thanks to the small minority of our members who contribute to the CPA-PAC. Legislative and regulatory advocacy is one of the significant advantages of belonging to TSCPA. CPAs are a creation of the legislature; regulated under the Accountancy Act by the Texas State Board of Public Accountancy. TSCPA is the only organization advocating exclusively on behalf of Texas CPAs in every type of accounting practice or employment. More members need to participate so TSCPA can maintain its organizational relationships with current legislators and develop those relationships with new ones. You can contribute to the CPA-PAC online at www.txcpapac.org. Contributors to the CPA-PAC receive the weekly insider newsletter Last Week
| SEPTEMBER/OCTOBER 2011
in the Legislature every Friday during the legislative session. The newsletter offers information and commentary on legislation of interest to CPAs and other Austin happenings with insight and good humor. During the last legislative session, legislation was offered that would have made it much easier for non-CPAs to claim CPA-like expertise, undermining the extensive education and certification required of CPAs. TSCPA was the only organization advocating against this bill on behalf of CPAs. The bill was substantially revised to eliminate TSCPA’s objections before it died waiting for a vote at the end of the session. Every legislative session, there are bills that would adversely affect the profession or the public’s ability to have
access to qualified professional accounting services. TSCPA is the only organization monitoring bills and taking action when appropriate. Advocacy is not cheap, but it’s not expensive either. For a modest investment of time and money, individuals and organizations can have good access to legislators, the opportunity to give input and the chance to be heard on issues important to CPAs. As more and more CPAs agree to participate, the time and money investment can be made very manageable for all CPAs. n • About the Author: Bob Owen, CPA, is TSCPA’s managing director of regulation and legislation. Contact him at bowen@ tscpa.net.
Law Office of
antOniO viLLeda Can assist in the following tax or bankruptcy cases: • iRS COntROveRSieS • iRS OFFeRS/inStaLLMentS • CRiMinaL taX CaSeS • State taX COntROveRSieS • BUSineSS BanKRUPtCieS. 28 years experience hablamos español 2 LOCatiOnS. HOUStOn and MCaLLen 5414 n. 10tH Mcallen, texas 78504 956-631-9100
2909 Hillcroft Suite 350 Houston, texas 77057 713-300-3945
antonio villeda attorney/CPa Board Certified in Business Bankruptcy by the texas Board of Legal Specialization and nationally by the aBi
firstname.lastname@example.org www.mybusinesslawyer.net *Meeting with attorney by appointment only and there will be a consultation charge
THE DODD-FRANK WALL STREET REFORM AND CONSUMER PROTECTION ACT:
WHAT’S IN IT FOR CPAS?
| SEPTEMBER/OCTOBER 2011
BY LYNN BIBLE, PH.D., CPA; KATHY S. MOFFEIT, PH.D., CPA (INACTIVE); AND CHRISTINE A. SWANSON, CPA
The Dodd-Frank Wall Street Reform and Consumer Protection Act (the Act) impacts almost every American in some form. CPAs should be aware of its provisions and how it affects their company, their audit client or their bank. Officially, the Act was ratified “To promote the financial stability of the United States by improving accountability and transparency in the financial system, to end “too big to fail,” to protect the American taxpayer by ending bailouts, to protect consumers from abusive financial practices, and for other purposes.” (Public Law 111-203, 111th Congress) The Act consists of 16 titles, over 200 rule-making provisions, establishes or merges numerous agencies, and increases government oversight within the banking and financial services sector and publicly-traded companies. A complete summary of the Act is prohibitive due to its sheer volume. Instead, this article discusses some important issues and changes that CPAs should know about, specifically within Titles IV, VI, IX, XI and XIV. Some CPAs could be affected by Title VII, which contains provisions for the regulation of swap
| SEPTEMBER/OCTOBER 2011
markets, including over-the-counter and security-based swaps, but the substantial details of that Title are not discussed in this article.
AN ACCREDITED INVESTOR
Section 413 Adjusting the Accredited Investor Standard in Title IV “Private Fund Investment Advisers Registration Act of 2010” amends the definition of net worth for accredited investors. Rule 501 of Regulation D of the Securities Act of
1933 defines who or which entities may be considered an accredited investor when purchasing securities that are not registered under the Act. Individuals can meet the accredited investor standard either through net worth or income. The net worth standard was defined as any natural person whose individual or joint net worth exceeded $1,000,000 at the time of purchase. The Act now excludes the value of one’s primary residence from the $1,000,000 net worth calculation. Additionally, the Securities and Exchange Commission (SEC) may further revise the definition of the term “accredited investor” and after four years, must increase the $1,000,000 net worth threshold in an amount to be determined. Institutions selling securities not registered under the Securities Act of 1933 Regulation D will feel the impact of this change as there will be far fewer investors able to meet the accreditation standard than before, making it increasingly more difficult to raise equity in the current economy. continued on next page
Dodd-Frank continued from previous page
IMPROVEMENTS TO BANKS AND OTHER DEPOSITORY INSTITUTIONS
The standards have changed from “adequately” capitalized and managed to “well” capitalized and managed.
is to eliminate “sweetheart deals” between insiders and institutions. While it is unclear how many banking institutions have engaged in this practice, shareholders now have some protection against these types of transactions that ultimately reduce capital. Third, Section 616 Regulations Regarding Capital Levels now requires federal banking agencies to tie capital levels to the economy. The amount of capital for bank holding companies, savings and loans holding companies, and insured depository institutions will increase in an expanding economy and decrease in a contracting one. This is a benefit to institutions in that it will help provide a capital “war chest” during an economic upturn and help ease the hardships faced during an economic downturn. Finally, Section 619 Prohibitions on Proprietary Trading and Certain Relationships with Hedge Funds and Private Equity Funds (also known as the Volcker Rule) is considered a key component in strengthening the financial system by restricting certain types of risk-taking activities by federally insured banking entities. The Financial Stability Oversight Council (FSOC), established under the Act, released a study on how to best implement this section. On the FSOC website (www.treasury.gov/initiatives/ Pages/FSOC-index.aspx), their report states: “The Volcker Rule prohibits banking entities, which benefit from federal insurance on customer deposits or access to the discount window, from engaging in proprietary trading and from investing in or sponsoring hedge funds and private equity funds, subject to certain exceptions. The proprietary trading provisions prohibit a banking entity from engaging in trading activity in which it acts as a principal in order to profit from near-term price movements. The hedge fund and private equity fund provisions generally prohibit a banking entity from investing in, or having certain relationships with, any fund that is structured under exclusions commonly used by hedge funds and private equity funds under the Investment Company Act of 1940.” Some larger banks and non-bank financial institutions are already disassociating themselves from their proprietary trading units. Other smaller banks may eliminate proprietary trading all together. During an
Title VI has several ramifications for CPAs in the banking community, as well as CPAs in companies that deal with banks. First, in Section 607 Standards for Interstate Acquisitions, the standards have changed from “adequately” capitalized and managed to “well” capitalized and managed. This change means that banks engaging in interstate acquisition and mergers must generally maintain a Tier 1 ratio of 6 percent versus 4 percent, a Total Capital ratio of 10 percent versus 8 percent, and a Leverage ratio of 5 percent versus 3 - 4 percent. This will require banks to accumulate additional capital to maintain these ratios. The current depressed economic environment will make this difficult since many banks have sustained losses and their access to capital markets has been severely diminished. This places a
heavier burden on banks engaging in mergers and acquisitions and on CPAs charged with ensuring their company or client maintains the required ratios. The standards have changed from “adequately” capitalized and managed to “well” capitalized and managed. Second, Section 615 Limitation on Purchases of Assets from Insiders prohibits the sale of assets between a banking institution and an executive officer, director or principal shareholder unless two conditions are met: “(A) the transaction is on market terms; and (B) if the transaction represents more than 10 percent of the capital stock and surplus of the insured depository institution, the transaction has been approved in advance by a majority of the members of the board of directors of the insured depository institution who do not have an interest in the transaction.” (§615) The purpose of this addition to the rules
| SEPTEMBER/OCTOBER 2011
interview by Floyd Norris of The New York Times, Paul Volcker, former Chairman of the Federal Reserve, was asked why proprietary trading activities were being restricted since the financial crisis was the result of bad loans and inadequate securitizations of those loans. Volcker stated that such activities have caused a liquidity crisis here in the U.S. that brought down Bear Sterns and France’s Société Générale (The New York Times, Jan. 20, 2011). While the current financial crisis is not directly caused by proprietary trading, this move has the means to prevent any further liquidity crises from threatening the economy. The new rule will help reduce risky proprietary trading activity for institutions that are backed by the FDIC and consequently for bank shareholders who invest in these institutions.
Title IX Section 941 Regulation of Credit Risk Retention in Subtitle D adds new regulation requirements that “prohibit a securitizer from directly or indirectly hedging or otherwise transferring the credit risk that the securitizer is required to retain with respect to an asset.” (§941) The retained amount required for the securitizer is at least 5 percent of the credit risk of the asset that is (1) not a qualified residential mortgage or (2) is a qualified residential mortgage but with one or more of the assets collateralizing the security not being a qualified residential mortgage. New rules are also being developed that will require any issuer of an asset-backed security to review the underlying assets that securitize the issuance. This will require issuers to spend more time and resources to adhere to these requirements. Studies are underway to evaluate the macroeconomic effects of the requirements dealing with the impact of this subtitle’s rules. A draft of a staff report from the Committee on Financial Services states that the committee plans to monitor the development and implementation of the rules (http:// financialservices.house.gov). By requiring issuers to retain a small ownership in their asset-backed securities, this subtitle will ensure issuers have a stake with regard to these securities.
| SEPTEMBER/OCTOBER 2011
NEW DISCLOSURE REQUIREMENTS FOR EXECUTIVE COMPENSATION
Title IX, Subtitle E Accountability and Executive Compensations provides that at least once every three years, a separate resolution is included in the proxy statement (or authorization for an annual meeting of the shareholders) that provides shareholders with the opportunity to vote on executive compensation including golden parachute compensation. These shareholder votes are non-binding and therefore may not overrule the decision made by the issuer or the Board of Directors of the issuer. Also, at least every six years, the proxy must include a separate resolution subject to the shareholder vote to determine if the vote on executive compensation discussed above will be taken every year, every two years, or every three years. When shareholders are asked to approve an acquisition, merger, sale or consolidation, the proxy statement must disclose any agreements with named executives about current, deferred or contingent compensation relating to the acquisition, merger, sale or consolidation. Any executive agreement is also subject to a non-binding shareholder vote. (§951) The SEC was directed to establish a new rule that would direct the national securities exchanges and associations to prohibit the listing of any equity security of an issuer (with certain exceptions) who does not have an independent compensation committee. This committee may select a compensation consultant, an attorney, or another adviser. When this rule goes into effect, proxy statements should disclose information about whether the services of a compensation consultant were retained, whether any issues of conflict of interest arose, and if so what they were and how they were addressed. (§952) Additionally, the Act requires pay versus performance disclosures in a proxy statement showing the relationship between executive compensation paid and the financial performance of the issuer, as well as disclosing (1) the median pay of all employees excluding the CEO, (2) the CEO’s annual total compensation, and (3) the ratio of these two measures. (§953)
Section 954 Recovery of Erroneously Awarded Compensation amends The Securities Exchange Act of 1934 to include a “clawback” feature, which requires companies to develop and implement policies to disclose their incentive-based compensation based on financial information. If a company restates its financial information on which the compensation is based, the company will be able to recover the difference between the incentive-based compensation paid to current and past executives and that which would have been paid based on the restated information. The company may recover the erroneous compensation during the three years before the restatement date. The SEC will monitor these requirements carefully and prohibit an issuer’s listing on the national securities exchanges/associations if the issuer is not in compliance.
EMERGENCY LENDING Title XI is especially important to CPAs in the banking industry and also to anyone interested in the financial stability of the U.S. Section 1101 Federal Reserve Act Amendments on Emergency Lending Authority amends the Federal Reserve Act to include procedures for establishing regulations that will determine the purpose of any emergency lending program and the qualifications for emergency funds. Once the regulations are in place, emergency lending programs will help provide liquidity for the financial system; however, the programs are prohibited from helping individual companies that are already insolvent. A Federal Reserve Bank will determine the lendable value of the collateralized assets for a financial institution seeking assistance from an emergency lending program. Within seven days of the inception of the loan, the Federal Reserve Board must provide the pertinent loan details to the appropriate House and Senate committees. Once every 30 days, the Federal Reserve Board must provide written updates that detail the current valuation of the collateral, the amount of revenues received, and the expected final cost to taxpayers. Section 1104 Liquidity Event Determination provides the requirements for determining if a liquidity event has occurred. A liquidity event is defined as: continued on next page
Dodd-Frank continued from previous page
• an exceptional and broad reduction in the general ability of financial market participants to sell financial assets without an unusual and significant discount; • or to borrow using financial assets as collateral without an unusual and significant increase in margin; • or an unusual and significant reduction in the ability of financial market participants to obtain unsecured credit. (§1104)
A QUALIFIED MORTGAGE IS DEFINED AS: Any residential mortgage loan – • for which the regular periodic payments for the loan may not result in an increase of the principal balance; or except as provided in subparagraph (E), allow the consumer to defer repayment of principal; • except as provided in subparagraph (E), the terms of which do not result in a balloon payment, where a balloon payment is a scheduled payment that is more than twice as large as the average of earlier scheduled payments; • for which the income and financial resources relied upon to qualify the obligors on the loan are verified and documented; • in the case of a fixed rate loan, for which the underwriting process is based on a payment schedule that fully amortizes the loan over the loan term and takes into account all applicable taxes, insurance, and assessments; • in the case of an adjustable rate loan, for which the underwriting is based on the maximum rate permitted under the loan during the first five years, and a payment schedule that fully amortizes the loan over the loan term and takes into account all applicable taxes, insurance, and assessments; • that complies with any guidelines or regulations established by the [Federal Reserve] Board relating to ratios of total monthly debt to monthly income or alternative measures of ability to pay regular expenses after payment of total monthly debt, taking into account the income levels of the borrower and such other factors as the Board may determine relevant and consistent with the purposes described in paragraph (3)(B)(i); • for which the total points and fees (as defined in subparagraph (C)) payable in connection with the loan do not exceed 3 percent of the total loan amount; • for which the term of the loan does not exceed 30 years, except as such term may be extended under paragraph (3), such as in high-cost areas; and • in the case of a reverse mortgage (except for the purposes of subsection (a) of section 129C, to the extent that such mortgages are exempt altogether from those requirements), a reverse mortgage which meets the standards for a qualified mortgage, as set by the Board in rules that are consistent with the purposes of this subsection. (§1403)
Both the FDIC and the Board of Governors must determine if an event exists that would warrant the use of funds obtained from the program. The determination will be based on evidence that a liquidity event actually exists, that the financial stability of the U.S. would be seriously affected if no action was taken, and the action is necessary to avoid or mitigate adverse effects to the U.S. financial system or the economy. The Secretary of the Treasury may request written documentation proving that a liquidity event has occurred.
CPAs who are involved in real estate transactions will be interested in the provisions of Title XIV Section 1402 Duty of Care. Mortgage originators are required to be qualified, licensed and registered (when required). Originators must also include a unique identifier as provided by the Nationwide Mortgage Licensing System and Registry on all loan documents. This provision will ensure that originators have the proper training and their actions can be monitored. Section 1403 Prohibition on Steering Incentives restricts the amount of fees that the mortgage originator can receive from the lending institution. Prior to the Act, mortgage originators received up-front fees based on discount and origination points and other charges. Originators also received yield spread premiums, which is the money or rebate paid for giving a borrower a higher interest rate on a loan in exchange for lower up-front costs. This section prohibits the originator from receiving fees on anything except the principal balance of the loan. To replace the lost fee income, institutions are developing new pay structures to compensate mortgage originators, which may include a basic commission on the total amount of loans generated per month for example. Consumers will still pay the up-front and yield spread premiums to regulated institutions
| SEPTEMBER/OCTOBER 2011
Mortgage originators are required to be qualified, licensed and registered (when required). that, in turn, will compensate the originators. Additionally, the Federal Reserve Board will develop regulations to help prevent unscrupulous mortgage originators from pushing a consumer into a loan they lack the ability to repay or has predatory characteristics. Predatory characteristics include equity stripping, also known as equity skimming, in which a borrower facing foreclosure transfers title to their home (sometimes unknowingly) to a “rescue artist.” Other predatory characteristics include excessive fees and abusive terms. The Federal Reserve Board also prohibits abusive or unfair lending practices that promote discrimination based on race, ethnicity, gender or age. Additionally, mortgage originators cannot misrepresent credit history, availability of loans, appraisal value of the property or discourage the consumer from seeking better terms from another mortgage originator. Lastly, the regulation prohibits mortgage originators from steering consumers from a qualified to an unqualified mortgage. The above sections were initiated to ensure that mortgage originators do not initiate financing for individuals who do not have the ability to repay a loan, and ensure that originators do not take advantage of consumers. Section 1414 Additional Standards and Requirements prohibits prepayment penalties on unqualified mortgages and qualified mortgages that are (1) adjustable rate mortgages or (2) fixed rate mortgages with annual percentage rates greater than average prime offer rates at inception date ranging from 1.5 to 3.5 percentage points. The average prime offer rate will be published by the Federal Reserve Board on a regular basis. Other qualified mortgages can contain prepayment penalties; however, they cannot exceed certain thresholds. During the first year of the loan, the prepayment penalty cannot exceed 3 percent of the outstanding loan balance; during the second year, the penalty cannot exceed 2 percent of the outstanding loan balance; and during the third year, it
| SEPTEMBER/OCTOBER 2011
may not exceed 1 percent of the outstanding loan balance. After this three year phaseout period, no prepayment penalties can be assessed. Consumers will benefit from the removal of the prepayment penalty disincentive when refinancing or paying off mortgages. Section 1471 Property Appraisal Requirements notes that creditors may not extend financing for high-risk mortgages without obtaining a written appraisal. A high-risk mortgage is defined as a residential mortgage “that is not a qualified mortgage … and has an annual percentage rate that exceeds the average prime offer rate for a comparable transaction… .” (§1471) The certified or licensed appraiser must perform an interior inspection of the property so “ride-by” appraisals are no longer permitted for highrisk mortgages. A second appraisal, with the cost borne by the creditor, is required if the property has been sold within the last six months and the current sales price is higher than the prior sales price. The second appraisal should document the reason for the increased sales price, which may include improvements made to the property or a change in market conditions. Appraisals must be performed by a certified or licensed appraiser. An appraiser must be licensed/certified in the state in which the property is located, and the appraisal must be performed according to the Uniform Standards of Professional Appraisal Practice. A more comprehensive appraisal will provide better protection to shareholders of institutions that engage in high-risk mortgages. Section 1472 Appraisal Independence Requirements requires appraisers to be independent. Violation of independence can occur if “… a person with an interest in the underlying transaction compensates, coerces, extorts, colludes, instructs, induces, bribes, or intimidates …” (§1472) any person associated with the appraisal process. Misrepresentations impacting the appraised value, influencing the appraiser to appraise at a target
value, and threatening to withhold payment are also independence violations. However, persons with an interest in the transaction can ask for additional information to be considered or for the corrections of errors without violating independence. A conflict of interest may also be present if the appraiser or appraisal company has any direct or indirect interest in the transaction. Independence is important to protect the shareholders from appraisers and financial institutions working too closely together.
IMPACT OF THE LEGISLATION The Dodd-Frank Wall Street Reform and Consumer Protection Act contains farreaching legislation, some of which has not been included in this article. We researched sections of the Act that we believed had the most implications for CPAs in banking, real estate, private and public companies, as well as internal and external auditors. While the broad goal of the Act was to promote stability in the financial system by improving accountability and transparency, the Act also ends “too big to fail” for larger institutions, protects taxpayers by ending bailouts and protects consumers from abusive financial practices. CPAs should be aware of the provisions for expanded disclosure requirements of the Act as well. The impact of new rules and regulations has been felt. Only time will tell how successful the Act is in fulfilling its purpose of protecting both the economy and consumers. n About the Authors: Lynn Bible, Ph.D., CPA, is professor of accounting at Fayetteville State University in Fayetteville, NC. Kathy S. Moffeit, Ph.D., CPA (Inactive), is professor of accounting, and Christine A. Swanson, CPA, is an adjunct accounting instructor, both at the University of West Georgia in Carrollton.
Feature BY LADD A. HIRSCH
A Way Out for MINORITY INVESTORS in Private Texas Companies
A favorite Willie Nelson song cautions mothers not to let their babies grow up to be cowboys. If Willie had been asked to offer guidance to mothers of investors in private Texas companies, however, he might have changed his lyrics to sing, “Mamas don’t let your babies grow up to be minority shareholders in private Texas companies without a redemption agreement.” This new version of Willie’s hit song might have been a dud on country radio, but it would have been sage advice. An investor who buys a minority stake in a private Texas company without an exit strategy in place is likely to become locked in to the investment long after he/she desires to sell out. This situation arises because unless the minority investor obtains a redemption agreement (or some other contractual exit right) at the time he/she buys the stock, he/ she lacks the right to choose when he/she can later “monetize” the investment. In most
cases, no market exists for the minority shareholder’s stock in a private company, and there is no requirement for the company or any other investors to repurchase his/ her stock. The minority shareholder is stuck hoping for a liquidity event such as a sale of the business, a merger or an initial public offering (IPO). Fortunately, all hope is not lost for minority investors who do not obtain any
type of redemption agreement. Texas statutes and case law provide minority shareholders in private companies with exit rights if they can establish that they were “oppressed” by the conduct of the majority shareholder(s). In these limited circumstances, the minority shareholder may be able to secure a courtordered remedy that provides value for his/ her ownership interest in the company.
HOPE FOR THE LOCKED IN MINORITY INVESTOR How does a minority shareholder get sprung from the “jail” of his/her locked-in investment in a closely held (private) Texas company? This article answers that question and three other similar questions: when does a claim for minority shareholder oppression typically arise; what makes for a strong case of oppression by a minority shareholder; and what remedies are available to a minority shareholder who can show that he/she was
| SEPTEMBER/OCTOBER 2011
oppressed by the actions of the majority shareholder(s)? As a starting point, in specific, limited circumstances, an oppressed minority shareholder has a statutory right to relief from the majority shareholder’s oppressive actions. See Articles 7.05-7.06 of the Texas Business Corporation Act. Under this statute, Texas trial judges may appoint a receiver or other liquidation of the company upon a showing of “illegal, oppressive or fraudulent” conduct by the “directors or those in control.” Unfortunately, these statutory remedies are seen as harsh and are disfavored by trial courts. A private company that continues to function – particularly one that is profitable – is rarely viewed as properly subject to a receivership or liquidation. Instead, a court is far more likely to issue a preliminary injunction that preserves the status quo of existing management until a trial can be held on the merits of the minority shareholder’s claims. Due to the limited relief available to oppressed minority shareholders under Texas statutes, Texas case law has developed to offer additional remedies to minority shareholders when majority shareholders engage in oppressive conduct. Courts define “oppression” in this context as conduct by the majority shareholder(s) that substantially defeats the reasonable economic expectations of the minority shareholders under circumstances that were central to the minority shareholders’ decision to join the venture. One of the key Texas cases upholding a claim for minority shareholder oppression described improper, oppressive conduct by the majority shareholder as: “burdensome, harsh and wrongful conduct, a lack of probity and fair dealing in the affairs of the company to the prejudice of some of its members, or a visible departure from the standards of fair dealing and a violation of fair play on which every shareholder who entrusts his money to a company is entitled to rely.” Davis v. Sheerin, 754 S.W.2d 395 (Tex Ct. of App. – Houston [1st Dist.] 1988, writ denied). A very recent case upholding a claim for minority shareholder oppression was issued by the Dallas Court of Appeals in March 2011. Ritchie v. Rupe, No. 05-08-00615-CV (Tex. App.—Dallas Mar. 28, 2011), available
| SEPTEMBER/OCTOBER 2011
WHEN DOES A CLAIM FOR MINORITY SHAREHOLDER OPPRESSION ARISE? Most investors who make substantial investments in closely held companies in Texas are neither silent nor absent from the operations of the business. More often, they are active participants in the daily operations and governance of the company in which they invested. They also enjoy benefits from their active participation in the company, including compensation and perks. A claim for oppression therefore arises when the majority shareholder or control group exploits its power to remove those benefits in an effort to “squeeze out” or “freeze out” the minority shareholder. The following actions reflect squeezeout or freeze-out techniques by majority shareholders: • denying material information to the minority shareholder; • removing the minority shareholder from the board or as a manager, thereby removing him/her from any role in company management; • reducing the minority shareholder’s compensation (or reducing his/her bonus) or completely terminating his/her employment, thereby removing him/her from any ongoing role at the company; • declaring large bonuses after the minority shareholder is terminated to avoid distributing any of the company’s profits to him/her; • refusing to declare dividends or distribute the company’s profits; • siphoning off profits to the majority shareholder or control group in other ways, e.g., through perks; and • diluting the minority shareholder’s interest through inequitable means. As a final, significant act of oppression, the majority shareholder or control group may offer to buy out the minority shareholder’s ownership interest for an amount that is far below the true fair value of his/her interest. This lowball offer may be made after the majority shareholder has removed the minority shareholder from the
company’s management and eliminated or reduced his/her compensation and benefits. The majority’s tactics place the minority shareholder between a rock and a hard place. Once the freeze-out begins, the minority shareholder faces a Hobson’s choice of being deprived of all or most of the value of his/her investment on a current basis, or accepting the majority shareholder’s lowball buyout offer for all or most of the minority shareholder’s ownership interest in the company.
A CASE STUDY: THE SOFTWARE COMPANY CO-FOUNDER A recent case that we handled for a substantial minority shareholder provides a good example of a shareholder oppression claim. In this case, two men formed a startup computer software business in 1980 with the majority owner buying 53 percent of the stock and the minority buying 47 percent. Both parties were corporate officers as well as the only two board members, and they received virtually the same annual compensation for almost 26 years. During this 26-year time period, they retained almost all of the company’s profits and accumulated approximately $150 million in retained earnings, which they invested primarily in municipal bonds. Approximately 26 years after the two coowners formed the company, the minority shareholder contends that the majority shareholder began to engage in a series of oppressive actions toward the minority shareholder. These oppressive actions included all of the following: • reducing the minority shareholder’s compensation by 70 percent; • refusing to declare a large dividend requested by the minority owner; • concealing material information from the minority shareholder about financial matters affecting the company, including an Internal Revenue Service (IRS) audit and assessment of a $1.2 million penalty for excessive retained earnings; • engaging in self-dealing transactions such as billing personal trips to the company, selling himself a condominium owned by the company and making undisclosed charitable contributions with corporate funds; and continued on next page
Minority Investors continued from previous page
• making a lowball buyout offer to the minority shareholder that included large discounts for lack of marketability and control, which would result in payment to the minority shareholder of an amount that was approximately $40 million less than the fair value of his ownership interest. Based on these factual allegations, we asserted claims for the minority shareholder against the majority shareholder, which included shareholder oppression, malicious suppression of dividends, and fraud. As a remedy for ongoing oppression, we requested the jury to award a large mandatory dividend from the company’s stockpile of accumulated earnings and to distribute these funds to the two shareholders according to their ownership percentage (53/47). More specifically, we requested the jury to award a mandatory $90 million dividend to the company’s two shareholders. In defense of these claims, the majority shareholder relied on the business judgment rule (see sidebar on page 33) and the doctrine of ratification. The majority shareholder alleged that all of his actions were based on his reasonable business judgment, and he also argued that his conduct had been later ratified by the board (which he controlled). In response to the minority shareholder’s claims, the jury agreed with the minority
shareholder’s claims, rejected the majority shareholder’s defenses based on the business judgment rule and ratification, and concluded that the majority shareholder had used oppressive actions toward the minority shareholder. As a result, the jury awarded a mandatory dividend of $65 million at trial, which the trial court later increased to a total of $85 million (after a $5 million credit).
WHAT MAKES THIS A STRONG MINORITY SHAREHOLDER OPPRESSION CASE? In answering this question, it is important to appreciate that the court, not the jury, ultimately decides whether the majority shareholder’s actions toward the minority shareholder constituted oppression. In short, whether oppression exists is a legal question for the court, not a fact question for the jury. The jury will be asked whether certain acts of an allegedly oppressive nature took place, but the judge determines whether, in fact, the minority shareholder was oppressed. Further, once the trial judge determines that the majority shareholder’s actions were oppressive, the trial court also selects the proper remedy to redress the majority shareholder’s improper conduct. In the case we filed against the software company co-founder, the claim of shareholder oppression was an especially strong one for several reasons. Evidence of Squeeze Out. The majority shareholder had admitted in a letter that the company sent to the IRS to justify retaining its earnings that there was a secret plan to
“phase out” the minority shareholder from the business. Also, the severe pay cut of 70 percent that the majority shareholder imposed on the minority shareholder was never approved by the board, the minority shareholder never received a performance review, and the majority shareholder disregarded the company’s compensation practice for the past 25 years. Material Non-Disclosure. The majority shareholder secured the minority shareholder’s consent to retaining millions of dollars in earnings by concealing the plan to phase him out. The minority shareholder believed he was approving investment in the company’s growth when, in fact, he was acquiescing in the majority shareholder’s plan to use these retained earnings to buy out the minority shareholder’s ownership interest. Refusal to Declare Dividends. The majority shareholder refused to declare any of the large dividends that the minority shareholder requested after his compensation was cut. Lowball Buyout Offer. Finally, after cutting the minority shareholder’s pay and refusing to declare dividends, the majority shareholder made what the minority shareholder considered to be a lowball offer to redeem his stock. This buyout offer sought to impose large discounts on the value of the minority shareholder’s stock based on the lack of marketability and lack of control associated with the ownership of this stock. The jury found that this offer was an oppressive act because the discounts demanded by the majority shareholder were not applicable to his attempt to gain 100 percent ownership and control of all stock in the company (i.e., he was not a hypothetical or third-party buyer).
AVAILABLE REMEDIES FOR OPPRESSED MINORITY SHAREHOLDERS Once the trial court concludes that the majority shareholder has engaged in oppressive conduct, the court has broad equitable power to right the wrong. The court can direct the majority shareholder or control group to take actions such as the following: • reinstating the minority shareholder to the director and/or officer position from which he/she had been terminated –
Ladd A. Hirsch, is a business litigation partner with the Dallas office of Diamond McCarthy LLP, and he has extensive experience representing
clients in complex business disputes and arbitration proceedings. A substantial focus of his practice is handling business divorce litigation and disputes among the owners and investors in privately held Texas companies. Ladd can be reached at LHirsch@diamondmccarthy.com.
| SEPTEMBER/OCTOBER 2011
with reinstatement of salary and benefits; • requiring the majority shareholder to provide full disclosure of material information that was withheld from the minority shareholder; • requiring the majority shareholder to institute a dividend policy at the company that will permit the minority shareholder to receive his/her pro rata share of all amounts distributed by the company; • actually declaring a sizable dividend that will permit the minority shareholder to receive his/her pro rata share of the investment in the company; or • requiring the majority shareholder to buy out of the minority’s ownership interest in the company for its “fair value.” In a case of this nature, the oppressed minority shareholder most often seeks a buyout of his/her entire minority ownership interest for its fair value. Buyout statutes in a number of large, commercial states include a buyout remedy and use the term “fair value,” which is critically different from a fair market value calculation. When there is a court-ordered buyout of the minority shareholder’s stock for fair value based on a finding that the majority shareholder engaged in oppressive conduct, the fair value the majority shareholder is required to pay to the minority shareholder does not include discounts for lack of marketability or lack of control. By contrast, fair market value of a minority interest in a private company generally includes these discounts associated with minority ownership in closely held businesses.
THE ESCAPE HATCH IS OPEN With apologies to Willie Nelson, babies who grow up to be minority investors in private Texas companies may be able to escape their locked-in status even if they failed to obtain a redemption agreement at the time of their investment. Specifically, minority shareholders may be able to secure a buyout of their interest in the company or other equitable relief if they can show that the majority shareholder(s) engaged in improper conduct such as self-dealing. Once a majority shareholder has acted in his/her own selfinterest to harm the company, the business judgment rule is no longer a defense that will justify the business decisions. n
| SEPTEMBER/OCTOBER 2011
BUSINESS JUDGMENT RULE Most minority investors without a redemption agreement cannot secure a buyout when they disagree with business decisions made by the majority shareholder due to a rule of corporate law known as the business judgment rule. Under this rule, courts will not interfere with business decisions made by directors acting in good faith, with ordinary care and with no conflicts of interest. In public companies, officers and directors generally prevail when their decisions are challenged by shareholders who bring claims against them provided that the officers and directors acted in good faith (without any personal benefit or self-dealing) and they can present the court with a rational business purpose for their decisions. This dynamic changes in closely held companies as a number of courts have held that a greater degree of judicial scrutiny is required in private companies. One Texas commentator who writes in this area argues that the deference of the business judgment rule is inappropriate when the decisions of officers and directors are challenged in closely held Texas companies. See Prof. Douglas Moll: “Shareholder Oppression in Texas Close Corporations: Majority Rule (Still) Isn’t What it Used to Be,” Texas Journal of Business Law, Vol. 43, No. 1, p. 21 (Spring 2009). The upshot for minority investors is that an oppression claim against the majority shareholder has the best chance of defeating a business judgment rule defense when they can show that the majority shareholder engaged in misconduct, which constitutes a breach of fiduciary duty. The fiduciary duties of directors and officers under Texas law include the duty to act with loyalty (including acting in good faith), the duty of care and duty of obedience.
2011 TAX PRACTITIONER WORKSHOPS October, November and December General Income Tax (2 days - $275)
Advanced Income Tax (2 days - $275)
Fiduciary Income Tax (1 day - $215)
Texas State Tax Issues (1 day - $215)
Partnership Tax Issues (2 days - $405)
Ethics for CPAs & EAs (4 hours - $110)
Agricultural Tax Issues (1 day - $215) 16 Hrs CPE, 13.5 MCLE credit for 2-day workshop 8 Hrs CPE, 6.75 MCLE credit for 1-day workshop
for dates, times, and online registration
Sponsored by the Texas Extension Education Foundation, Inc.
CPE Article BY BRETT WILKINSON, PH.D., AND GIA CHEVIS, PH.D., CMA
CPE Self Study Curriculum: Tax Level: Basic Designed For: Tax Practitioners, Business & Industry Objectives: To provide an introduction to the principles and issues relating to transfer pricing; to highlight the interrelated nature of the tax, financial and managerial accounting in the transfer pricing domain. Key Topics: Transfer Pricing, Tax, Managerial Accounting Prerequisites: None Advanced Preparation: None 34
| SEPTEMBER/OCTOBER 2011
the Complex World of
TRANSFER PRICING On the surface, transfer pricing is simply the price at which two related entities or subunits of the same company exchange a good or service. Because such an intracompany transaction zeroes out upon consolidation with the parent, it can be tempting to treat the exchange price as an afterthought. Failure to give adequate attention to the transfer pricing issue, however, can be a costly mistake. This is because transfer pricing directly and significantly affects two major components of a company’s overall financial performance: the behavioral incentives of subunit managers and consolidated company taxes due. Through these two mechanisms, transfer pricing also affects other company functions: • choices regarding decentralization and organization structure; • choices regarding the location of subsidiaries and the extent of outsourcing; • performance evaluation and compensation system design; • segment reporting; • reporting of uncertain tax positions; • accounting information system design; • the need for and use of consultants; and • other related areas. Additionally, failure to intentionally address the issues can have very substantial tax consequences given the growing attention that the Internal Revenue Service (IRS) is paying toward transfer pricing practices. This article is the first in a series dedicated to discussing transfer pricing and its implications for companies. Here, we review the basics of transfer pricing and briefly discuss several major issues that confront
| SEPTEMBER/OCTOBER 2011
practitioners. Subsequent articles will build on this knowledge foundation and provide more detailed discussion of these technical areas. In the second article in the series, we will provide a more detailed review of applied transfer pricing practices. The third article will examine some contemporary developments, especially as they relate to intangibles. Our intention is to provide readers with an understanding of contemporary transfer pricing issues and to offer insights into the implications of transfer pricing for a variety of business contexts. Both corporate managers and their business advisors will benefit from a greater knowledge of this increasingly relevant area.
TRANSFER PRICING BASICS Transfer pricing issues arise as a result of the transactions that occur between related business entities. In a typical market-based transaction, when two unrelated entities exchange goods or services, the operation of the market establishes an appropriate price. When the entities are related, however, the transaction price directly impacts the allocation of the total profit between the two related entities. Concerns may therefore arise about the process by which such an exchange price is established. These concerns arise both in an internal context (with regard to manager incentives) and an external context (tax consequences). Where the managers of the two entities are compensated based on subunit-specific performance, a transfer induces competition between the managers. What is income for one manager is expense for the other; while one manager is motivated to maximize the transfer price, the other wants to minimize it. If managers are authorized to make continued on next page
Figure 1. Basic Transfer Pricing Scenario.
continued from previous page
Customers MakeCo (COGS = $40)
Good DistCo $TP
source and sale decisions, it is possible that they would take actions that maximize the performance of their subunit at the expense of the performance of the company overall. Where these entities are located in different taxing jurisdictions – for example, different countries or different states with different tax rates – substantial incentives exist for the parent organization to manipulate the transfer price to ensure that profits are located in the lower tax jurisdiction. This comes at the expense of the revenue stream of the higher tax state or country. In addition, the parent company’s desired profit allocation between subunits for tax purposes may conflict with the managers’ behavioral incentives. Tangible Goods Figure 1 illustrates a basic transfer pricing scenario involving a tangible good. In the example, MakeCo and DistCo are subunits of WholeCo. MakeCo produces finished items at a cost of $40 each, then ships the product to DistCo. In turn, DistCo markets and sells the product to consumers at a price of $75. It is quickly apparent that the margin of $35 for WholeCo will be divided between the two related subunits based on the transfer price of the finished item. If the transfer price is set at $73, $2 per unit of profit will accrue to DistCo with the remaining $33 being attributed to MakeCo. Conversely, if the transfer price is set at $42, MakeCo will report profit of $2 per unit with DistCo reporting $33 per unit profit. Establishing an objective, transparent transfer pricing process is thus critically important for proper performance evaluation of the subunit managers. If MakeCo and DistCo are in different tax jurisdictions, concern over the objectivity of the transfer
pricing process extends to the relevant tax authorities. The existence of an unrelatedparty external market for the finished item would help in establishing an objective price but such a market is frequently not available. As an applied example, consider the scenario that confronts the FIJI Water division of Roll International, and which became a source of tension between Roll and the Fiji government in 2008. Bottled water is manufactured in Fiji using local water and imported bottles, labels and other materials. Very little of the water is sold in-country; most of it is exported to the United States via a distribution center in California. The price at which the bottles of water are transferred between the Fijian subsidiary and the Californian distributor determines how much of Roll’s total margin on bottled water is taxed by the Fiji and U.S. governments, respectively. Although the ultimate selling price to consumers was up to $50 per carton, Roll used a transfer price of only $4 per carton. This implies a very high level of value added by the U.S. distributor and generated concern with the Fiji taxing authority.1 Fiji recently chose to impose export duties on the water, perhaps in an effort to make up what it continues to see as lost income tax revenue.2 Intangibles and Services Even greater complexity arises when the transferred item is an intangible or a service, not least because it is less likely that a comparable external market price exists. For example, suppose WholeCo also has a research subsidiary located in Ireland. IdeaCo develops valuable intellectual property (IP) that MakeCo incorporates into the finished manufactured product. It seems reasonable that MakeCo should pay IdeaCo a royalty charge for the use of the intangible. Establishing an appropriate transfer price for the IP is potentially more complicated than for the finished good. If MakeCo also contributes to the value of the intangible
| SEPTEMBER/OCTOBER 2011
Figure 2. Illustration of the Transaction.
(e.g., via an extensive marketing and branding campaign) or if MakeCo provided IdeaCo with assistance in developing the IP (e.g., by providing data on an earlier version of the IP), then even greater complexity arises. Figure 2 illustrates this transaction. Complexity can also arise when services are involved. For example, suppose the parent company WholeCo operates a centralized accounting service center as a way of consolidating activities and thus lowering total support costs. If they were independent entities, each subsidiary would have to purchase accounting services from third parties. If multiple tax jurisdictions are involved, it is possible
that WholeCo would have to charge the subsidiaries for accounting services for tax purposes. Given the business purpose of the consolidated support center and the subunit managers’ lack of choice about their service provider, WholeCo may decide not to allocate costs (i.e., charge fees) for performance evaluation purposes. The cost allocation is a transfer price and establishing an appropriate rate – whether
at cost or a higher amount – can require extensive analysis.
MAJOR TRANSFER PRICING ISSUES
Taxation With the increasing globalization of trade, transfer pricing has become a growing priority for both business and the IRS. continued on next page
Footnotes: 1. McMaster, J. and J. Nowak, “FIJI Water and corporate social responsibility–green makeover or “greenwashing?”, Ivey School of Business, 2009. 2. Schuker, L., “Island’s tax increase gives Fiji water a bitter taste,” WSJ.com, Nov. 29, 2010.
Helping You, and Your Clients, Find the Missing Pieces As a Certified Public Accountant, the ever-changing rules and regulations in your industry often seem like a puzzle where the pieces either don’t fit — or are missing. As a result, today — more than ever — you need trusted advice from an experienced expert, a partner, who shares your commitment to integrity and professionalism. As a full-service, Texas-based and business-oriented law firm, Looper Reed & McGraw also provides a broad range of services for the individual such as Estate Taxes and Planning, Trust Planning, Fiduciary Litigation, Probate Law, Guardianship, Taxation and Tax Litigation. Looper Reed & McGraw. Pursuing unrivaled results. lrmlaw.com | 888.863.7157
Houston | Dallas | Tyler
| SEPTEMBER/OCTOBER 2011
Transfer Pricing continued from previous page
Transfer pricing disputes are inherently costly and corporate executives routinely rank transfer pricing as one of their major concerns.3 Intangibles, in particular, introduce considerable complexity, and the IRS lists the transfer of intangibles offshore as a Tier 1 status issue.4 Consistent with this concern, the Obama Administration has recently identified the reform of transfer pricing, especially as it relates to intangibles, as a key element of its tax policy proposals.5 In 2007, the U.S. Treasury released a report discussing the international tax gap. Although the report noted that no IRS figures were available, it listed the findings of non-IRS research that suggest the annual tax gap associated with transfer pricing ranges from a low of $2.8 billion to a high of $53 billion.6 These are substantial numbers and explain why there is a growing interest at the IRS and Treasury level with regard to transfer pricing issues. Anecdotal evidence further reinforces the magnitude of the problem. For example, recent media reports highlight Google’s transfer pricing practices that have enabled the corporation to lower its effective tax rate on foreign income to 2.4 percent.7 Ultimately, the transfer pricing problem is an international one, but in the absence of a common world government, each individual country must establish its own set of rules governing transfer pricing. To facilitate some commonality between countries, the 33-member Organization for
Economic Cooperation and Development (OECD) has established a set of transfer pricing guidelines. According to the OECD, these are intended to provide guidance with regard to the application of the arm’s length principle, the notion that exchanges between related parties should equate to those that occur in a market setting. In the United States, the tax solution to the transfer pricing problem comes in the form of Section 482 of the Internal Revenue Code (IRC). This section extends considerable power to the tax authority to make broad reallocations of income and deductions between related entities when it is believed that such a reallocation is necessary either to: a. prevent tax evasion; or b. clearly reflect the income of the entities involved. Although the IRC provides no further details, the process is operationalized through the Treasury Regulations. These regulations state that the true taxable income of an entity should be determined by reference to the arm’s length standard. Because it would be almost impossible to find examples of identical transactions, the regulations state that “whether a transaction produces an arm’s length result generally will be determined by reference to the results of comparable transactions under comparable circumstances.”8 Identifying comparable transactions and comparable circumstances is highly problematic. To reduce some of the uncertainty, the Treasury Regulations
provide a series of methods that may be used in different settings to establish the appropriate transfer price. These include transfers of tangibles (Reg. 1.482-3), transfers of intangibles (Reg. 1.482-4), cost sharing arrangements (Reg. 1.482-7), and services (1.482-9T). Each of these identifies potential methods in deriving an appropriate transfer price. For example, the methods for transfer of tangibles include the comparable uncontrolled price, resale price, cost plus, comparable profits, and profit split methods. For intangibles, possible methods include the comparable uncontrolled transaction, comparable profits, and profit split methods. The regulations make it clear that there is no hierarchy of methods, but rather the best method for the individual setting under analysis should be chosen. Performance Evaluation and Compensation Transfer pricing also impacts the behavior of subunit managers because it directly impacts their subunit-income-based performance evaluation and compensation metrics. While there are many ways to set transfer prices, the policies can generally be categorized into a handful of types. Each type has advantages and disadvantages, so businesses need to carefully evaluate their particular situation to find the best fit. Likewise, companies can construct performance evaluation and compensation systems many different ways. Companies with extensive intracompany transactions need to pay particular attention to the interaction of these systems.
Impress the Big Dogs Nothing impresses management or clients like ﬁnding anomalies not previously detected. Identify control and transaction issues before they become a problem for your organization or client with IDEA® – Data Analysis Software.
Access and analyze large volumes of data in seconds to: Identify errors and detect fraud Extend your auditing capabilities Meet documentation standards For a free demonstration CD of IDEA, contact us at audimation.com or call 888-641-2800.
IDEA is a registered trademark of CaseWare International Inc.
| SEPTEMBER/OCTOBER 2011
For the selling subunit manager, the transfer price impacts his top line revenues; there is therefore a minimum transfer price he is willing to accept. If there is an active external market for the good or service to which the seller could otherwise sell his output, he will demand that the transfer price equal the going market rate. If the seller has unused capacity after satisfying external demand, or if there is no external market, he will demand a transfer price at least equal to the marginal cost of production. If he is evaluated relative to a required rate of return, he may demand a transfer price higher than the marginal cost to hit his profit targets. In contrast, for the buying subunit, the transfer price is an expense; this unit’s manager thus has a maximum transfer price she is willing to pay. If there is an active external market, then the buyer will not want to pay more internally than she could get the good or service for externally. Whether the purchase is made internally or externally, the buyer will not want to pay so much for the good or service that her margin is negative. There are three primary types of transfer pricing policies a company can choose: market-based, cost-based and negotiated. Under a market-based policy, the transfer price is automatically the external market price. This has the advantage of providing an objective, unrelated party standard for the transaction price. Additionally, it is easier for the parent organization to evaluate the subunits as stand-alone businesses if the external market is the benchmark. However, if the selling division has significant excess capacity, a market price will tend to continued on next page
Get More For Your Money Enjoy CPE savings for a full year!
Footnotes: 3. Anonymous. (2008). “Transfer pricing is the top issue in North American client service poll.” International Tax Review, 17, 17-18. 4. www.irs.gov/businesses/corporations/ article/0,,id=200567,00.html 5. Joint Committee on Taxation. (2010). Description of the revenue provisions contained in the President’s Fiscal Year 2011 budget proposal. Washington DC: U.S. Government Printing Office. 6. http://www.treas.gov/tigta/iereports/2009reports/2 009IER001fr.html#_ftn14 7. http://www.bloomberg.com/news/2010-10-21/ google-2-4-rate-shows-how-60-billion-u-s-revenuelost-to-tax-loopholes.html 8. Treasury Regulation §1.482-1(b).
| SEPTEMBER/OCTOBER 2011
Choose from a robust curriculum: • 30+ webcasts each month • 400+ hours of self-study Learn more at www.cpelink.com/valuepass or call 800-616-3822.
Financial Reporting Compliance with two important areas of U.S. GAAP can also be impacted by a company’s choices with respect to transfer pricing. The quantitative thresholds for identifying a reportable segment include both external and internal sales (ASC 28010-50-12); the chosen transfer price could impact which segments must be reported. Additionally, a company’s tax position must meet a more-likely-than-not threshold to recognize the impact of a tax position on the financial statements (ASC 740-10-256). Because of the taxation issues discussed above, a company’s transfer pricing choices may affect its tax reporting.
A BRIEF COURSE IN TRANSFER PRICING
Transfer Pricing continued from previous page
overstate the marginal cost to the overall company of satisfying the internal demand. Additionally, for many types of transferred items, including branded merchandise for distribution and many intangible assets, no external market exists. Under a cost-based policy, the parent company typically specifies what is included in the “cost” figure and what mark-up is added on top to arrive at the transfer price. This can be a useful method when no external market exists for the good. It can reduce incentives for the selling subunit to improve efficiencies, though, as the seller is essentially guaranteed cost coverage plus a profit margin. Additionally, the composition of the “cost” figure and the size of the “markup” can be the subjects of extensive judgment and debate. Finally, a cost-based policy tends to overstate the marginal cost of satisfying the internal demand when the seller has excess capacity; it tends to understate the marginal opportunity cost if an external market does exist. Some companies elect to not set a transfer pricing policy per se and instead choose a “policy” of letting the subunits negotiate with each other. Since the seller has a minimum price in mind and the buyer has a maximum one, the ultimate transfer price agreed upon will fall somewhere in that range. Such negotiations can take
time, however, and the resulting division of profitability may have more to do with managers’ negotiating skills than with the value of the transferred good or service. Operations Given the tax and performance evaluation issues discussed above, companies may make certain operational choices to minimize or optimize transfer pricing outcomes. Indeed, if the issues become too complex, companies may decide to outsource certain functions to unrelated parties to avoid having to contend with transfer pricing at all. Companies may consider tax-related transfer pricing rules and treaties when deciding whether to offshore or homeshore research facilities, manufacturing plants, distribution and licensing operations, shared service centers, and other functions. If a company is concerned that evaluation and compensation incentives may result in managers making suboptimal decisions, the company could choose to centralize source and sale decisions; i.e., could require the two subunits to transact with each other irrespective of their preferences. The company could also choose to change the organizational structure of the operation. For example, if it is critical that a product be manufactured in-house and sold only to the company’s own distribution unit, it may be better to evaluate the manufacturing division as a cost center focused on manufacturing efficiencies rather than as a profit center required to earn a rate of return on the assets employed.
As globalization continues to gather pace, transfer pricing issues are increasing in both number and complexity. Tax authorities across the globe are displaying a heightened sensitivity to the risk of revenue loss through intracompany pricing manipulations. However, transfer pricing is not solely an issue for tax personnel, nor is it an issue exclusively for companies with international operations. Any company that has subunits in different tax jurisdictions, including different states, needs to be aware of the complexities of transfer pricing regulation. Any company that evaluates managers on subunit profitability and has the potential for different units to trade with each other needs to be aware of the impact of transfer pricing on behavior and motivation. Because the potential costs (both internal and external) can be substantial, it is appropriate that managers and tax advisers familiarize themselves with the critical issues surrounding transfer pricing. Despite the sometimes overwhelming complexity, managers at all levels need at least some degree of transfer pricing awareness. The subsequent articles in this series are directed at providing a user-friendly grounding in the basics and contemporary developments in transfer pricing. Although there are no easy solutions, simply being aware of the issues places informed managers at a competitive advantage relative to those who merely relegate transfer pricing to a secondary tax role. n
Brett Wilkinson, Ph.D, is an associate professor in the Hankamer School of Business at Baylor University. Gia Chevis, Ph.D., CMA, is a clinical professor and director of the Graduate Program in Accounting in the Hankamer School of Business at Baylor University.
| SEPTEMBER/OCTOBER 2011
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 October 31, 2011, 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. Answers to last issue’s selfstudy exam: 1. b, 2. d, 3. c, 4. a, 5. d, 6. b, 7. c, 8. b, 9. a, 10. d. PARTICIPATION EVALUATION (Please check one.) 5=excellent 4=good 3=average 2=below average 1=poor 1. The authors’ knowledge of the subject is: 5__ 4__ 3__ 2__ 1__. 2. The comprehensiveness of the article is: 5__ 4__ 3__ 2__ 1__. 3. The article and exam were well suited to my background, education and experience: 5__ 4__ 3__ 2__ 1__. 4. My overall rating of this self-study exam is: 5__ 4__ 3__ 2__ 1__. 5. It took me___hours and___minutes to study the article and take the exam. Name _______________________________ Company/Firm________________________ Address (Where certificate should be mailed) ___________________________________ City/State/ZIP_________________________ Enclosed is my check for: ___ $10 (TSCPA member) ___ $20 (non-member) Please make checks payable to The Texas Society of CPAs. Signature____________________________ TSCPA Membership No._______________ After completing the exam, please mail this page (photocopies accepted) along with your check to: Today’s CPA; Self-Study Exam: TSCPA CPE Foundation Inc.; 14651 Dallas Parkway, Suite 700; Dallas, Texas 75254-7408. TSBPA Registered Sponsor #260.
| SEPTEMBER/OCTOBER 2011
Understanding the Complex World of Transfer Pricing 1 The term “transfer price” means: a. The tax rate at which income is transferred from businesses to the IRS. b. The price at which goods or services are transferred between related entities. c. The price used by customs and immigration to impose import duties. d. The price at which goods and services are sold to end consumers. 2 Transfer pricing is exclusively a tax issue for companies. a. True b False 3 The section of the Internal Revenue Code (IRC) that deals with transfer pricing is: a. Section 282 b. Section 382 c. Section 482 d. Section 842 4 The Treasury Regulations use which standard in order to determine the appropriate transfer price? a. The arm’s length standard b. The reflection of income standard c. The prevention of tax evasion standard d. The OECD standard 5 The Treasury Regulations provide a hierarchy of methods that should be used. a. True b. False
7 The subunit manager(s) who will be concerned with the transfer price is(are): a. The selling manager because the transfer price is revenue. b. The buying manager because the transfer price is expense. c. Both a and b d. Neither a nor b because the transfer price is eliminated upon consolidation. 8 The maximum transfer price acceptable in a negotiation between two subunits is set by: a. The selling manager b. The buying manager c. The parent company d. The external market 9 The three primary types of transfer pricing policies a company can choose are: a. Market-based, Benchmarked and Negotiated b. Cost-based, Negotiated and OECD c. Cost-based, Derived and Benchmarked d. Market-based, Cost-based and Negotiated 10 The quantitative criteria for identifying a reportable segment can be found in: a. ASC 740-10-25-6 b. ASC 280-10-50-12 c. ASC 605-10-25 d. ASC 705-10-25
6 The IRS has designated the transfer of intangibles offshore as what type of issue? a. Tier 1 b. Tier 2 c. Tier 3 d. Tier 4
CPE Calendar TSCPA Continuing Professional Education Programs OCTOBER MONDAY
5 Single Audits and Governmental Accounting Conference Austin CPE Credits: 18
Accounting and Finance for Construction Contractors Dallas CPE Credits: 8
17 Form 990: Answer to Unlocking the Tax Complexities San Antonio CPE Credits: 8
Accounting and Finance for Construction Contractors Houston CPE Credits: 8
18 Form 990: Answer to Unlocking the Tax Complexities Austin CPE Credits: 8
Tax Staff Training – Level 2 – Business Houston CPE Credits: 16
Frequent Frauds Found in Governments and Not-forProfits Houston CPE Credits: 8
LLC and Partnership Principles: An Introduction to Subchapter K Dallas CPE Credits: 8
Experienced Audit Staff Training – Level II Dallas CPE Credits: 16
Advanced Auditing of HUD Assisted Projects San Antonio CPE Credits: 8
Advanced Auditing of HUD Assisted Projects Austin CPE Credits: 8
Tax Staff Training Level 2 - Business Dallas CPE Credits: 16 Personal and Professional Ethics for Texas CPAs Houston CPE Credits: 4
Navigating the LLC and Partnership Allocations and Basis Minefield San Antonio CPE Credits: 8
Closely Held Business Taxation: 49 Practical Ways to Cut Taxes San Antonio CPE Credits: 8
Accounting Education Conference Austin CPE Credits: 14
Compilation and Review Annual Update: A Seminar Designed for Smaller Firms Fort Worth CPE Credits: 8 Internal Controls Design, Evaluation and Communication for Smaller Entities Dallas CPE Credits: 8
MBA in a Day! Dallas CPE Credits: 8 Federal Estate and Gift Tax Returns - Forms 706 and 709 Workshop Houston CPE Credits: 8
What You Need to Do Now in Estate Planning Under the New Tax Law Houston CPE Credits: 8 Partnership and LLC Update SATELLITE BROADCAST Various CPE Credits: 8
Personal and Professional Ethics for Texas CPAs Dallas CPE Credits: 4
Technology for CPAs: Don’t Get Left Behind Dallas CPE Credits: 8
Internal Control Deficiencies: Assessment and Reporting Under SAS 115 Fort Worth CPE Credits: 8 Technology for CPAs: Don’t Get Left Behind Houston CPE Credits: 8 IFRS Essentials With GAAP Comparison: Building a Solid Foundation Dallas CPE Credits: 16
31 The Complete Guide to Payroll Taxes and 1099 Issues Houston CPE Credits: 8 Federal Tax Update for the Year 2010-2011, Individual, Business and Corporate Dallas CPE Credits: 8
CPE Personal Assistant Be sure to use your CPE Personal Assistant on the TSCPA website. It’s an online tool TSCPA members can use to track, maintain and update their CPE records. You can access this tool by going to the CPE area of the TSCPA website (tscpa.org) and clicking on the Wizard. Today’sCPA
| SEPTEMBER/OCTOBER 2011
Federal Tax Update for the Year 2010-2011, Individual, Business and Corporate San Antonio CPE Credits: 8
The Top 50 Mistakes Practitioners Make and How to Fix Them: Dealing With the IRS Houston CPE Credits: 8
Federal Tax Update for the Year 2010-2011, Individual, Business and Corporate Houston CPE Credits: 8 The Complete Guide to Payroll Taxes and 1099 Issues Austin CPE Credits: 8
Personal and Professional Ethics for Texas CPAs Austin CPE Credits: 4 7 Advanced Update for Compilation, Review and Accounting Services Houston CPE Credits: 8
8 Buying and Selling Businesses: The CPA’s Role Houston CPE Credits: 8
Buying and Selling Businesses: The CPA’s Role Dallas CPE Credits: 8
Advanced Update for Compilation, Review and Accounting Services Dallas CPE Credits: 8
Compilation and Review Annual Update: A Seminar Designed for Smaller Firms Austin CPE Credits: 8
Form 990: Answer to Unlocking the Tax Complexities Dallas CPE Credits: 8 LLC and Partnership Principles: An Introduction to Subchapter K Houston CPE Credits: 8
2011 Not-for-Profit Accounting and Auditing Update and Reporting Issues Dallas CPE Credits: 8
OMB Circulars A-133, A-87 and The Compliance Supplement Dallas CPE Credits: 8
Compilation and Review Annual Update: A Seminar Designed for Smaller Firms San Antonio CPE Credits: 8
2011 Not-for-Profit Accounting and Auditing Update and Reporting Issues Houston CPE Credits: 8
Tax Accounting Methods SATELLITE BROADCAST Various CPE Credits: 8
Business Law Essentials for Accountants Houston CPE Credits: 8
4 Closely Held Business Taxation: 49 Practical Ways to Cut Taxes Houston CPE Credits: 8
Closely Held Business Taxation: 49 Practical Ways to Cut Taxes Dallas CPE Credits: 8
Business Law Essentials for Accountants Dallas CPE Credits: 8
The Top 50 Mistakes Practitioners Make and How to Fix Them: Dealing With the IRS Austin CPE Credits: 8
LLCs and Partnerships for the Sophisticated Practitioner Fort Worth CPE Credits: 8
The Complete Guide to Payroll Taxes and 1099 Issues Dallas CPE Credits: 8
11 The Top 50 Mistakes Practitioners Make and How to Fix Them: Dealing With the IRS Dallas CPE Credits: 8 Personal and Professional Ethics for Texas CPAs Dallas CPE Credits: 4
IFRS Essentials With GAAP Comparison: Building a Solid Foundation Houston CPE Credits: 16
17 Internal Control Deficiencies: Assessment and Reporting Under SAS 115 Dallas CPE Credits: 8
Annual Update for Accountants and Auditors Austin CPE Credits: 8
Annual Update for Accountants and Auditors San Antonio CPE Credits: 8
Internal Control Deficiencies: Assessment and Reporting Under SAS 115 Houston CPE Credits: 8
OMB Circulars A-133, A-87 and The Compliance Supplement Houston CPE Credits: 8
LLCs and Partnerships for the Sophisticated Practitioner Dallas CPE Credits: 8
Texas CPA Tax Institute Dallas CPE Credits: 18 Texas CPA Tax Institute San Antonio CPE Credits: 18 IFRS Essentials With GAAP Comparison: Building a Solid Foundation Fort Worth CPE Credits: 16 21 Personal and Professional Ethics for Texas CPAs Houston CPE Credits: 4
| SEPTEMBER/OCTOBER 2011
Positions Available Brown, Graham & Company, P.C. Texas Regional CPA Firm seeking Audit Managers/Seniors & Tax Managers/Seniors for Amarillo office. Texas CPA license and a minimum of 3 to 5 years CPA firm experience required. Competitive compensation and benefits with opportunity to advance for CPAs desiring challenging work in a family oriented firm while living in a great community. Send resume to: Firm Administrator P.O. Box 9297 Amarillo, TX 79105-9297 or e-mail: email@example.com Growing regional DFW CPA firm needs hands-on professional to oversee audits. Our firm has nonprofit and SEC public companies as clients. A qualified professional will have strong audit, accounting, 990 tax and financial reporting skills, strong technical skills, strong people skills to manage staff and clients, as well as the ability to get strong results. If you have a minimum of 3 years public audit experience, with at least 1 year as Senior and are looking for a challenging and diversified position with a growing firm, this is the opportunity for you. Must be a CPA candidate or licensed CPA. Pay structure commensurate with experience. Send resume to: firstname.lastname@example.org.
Practices For Sale Accounting Broker Acquisition Group 800-419-1223 X21 Accountingbroker.com Maximize Value When You Sell Your Firm Texas Practices Currently Available Through Accounting Practice Sales: $244,000 gross. Austin. Profitable CPA practice with 72% cash flow to owner. 80% tax and 20% accounting. TXC1043 $440,500 gross. Bell County. Well-established practice in desirable locations. Solid staff on board. TXC1030
$192,750 gross. Austin. Primarily business clients with the majority of revenue derived from monthly services. TXC1042
$200,000 gross. Fort Worth. Tax practice with good fees, strong cash flow and excellent growth potential. TXN1275
$233,488 gross. TX Panhandle/OK. Strong cash-flow. Large number of business clients. Building also available. TXW1004 $295,900 gross. TX Panhandle. Nice sized firm provides tax, accounting, payroll and consulting services. TXW1013
$131,000 gross. Keller. CPA practice in desirable area with many business clients. 60% tax and 40% accounting. TXN1268
$238,000 gross. Lubbock Metro area. Quality CPA firm with 45% accounting services and 55% tax prep. TXW1018 $167,000 gross. East Texas. Profitable practice with year-round income and strong cash flow to owner. TXN1231 $215,000 gross. East Texas. Well established. Great cash flow to owner. Partnership opportunity. TXN1249 $25,000 gross. Terrell-Kaufman Area. Turnkey tax practice with great potential for growth. Priced to move. TXN1254 $72,000 gross. Rotan. Quality CPA practice composed of 85% tax prep. Strong cash flow & growth potential. TXN1258 $95,000 gross. Kaufman Area. Highlyprofitable CPA practice with 70%+ cash flow to owner and quality clients. TXN1262 $174,000 gross. East Texas. Highly profitable with strong fees. Quality client base includes many businesses. TXN1264 $368,000 gross. North Dallas. 80% tax work, strong fee structure and experienced, qualified staff. TXN1266 $102,600 gross. Arlington. 80% bookkeeping and payroll services provide steady, yearround income. TXN1267 $338,000 gross. Duncanville. Long-term client base, tenured staff. About 75% of revenues from business clients. TXN1273 $48,000 gross. Fort Worth. Established CPA practice with solid fee structure. 67% tax prep and 33% accounting. TXN1270
$100,000 gross. Mesquite. Well-established with loyal clients. Evenly balanced (50/50) between tax and accounting. TXN1272 $408,000 gross. Garland. Well-established tax practice with long-term staff. Cash flow more than 50% of gross. TXN1269 $130,000 gross. Mt Pleasant/Sulfphur Springs Area. Quality CPA practice with 50% tax and 50% accounting. TXN1277 $677,000 gross. Richardson. 50% tax & 44% accounting. Highly profitable with cash flow of 50% of gross. TXN1276 $1,650,000 gross. Collin County. Exceptionally strong fees & cash flow of 74%! Revenues 64% audit & 31% tax. TXN1278 $98,000 gross. Garland. Well-established CPA practice with 85% tax work. Offering favorable financing terms. TXN1280 $240,000 gross. Downtown Dallas. Composed entirely of bookkeeping & payroll services. Solid cash flow. TXN1281 $155,430 gross. Alvin. Primarily tax work with a loyal client base that should allow for expansion of services. TXS1088 $238,700 gross. Bryan-College Station. Quality tax practice with loyal staff and potential for expanding services. TXS1093 $175,575 gross. West Houston. Specializing in helping small business owners. Virtual office. TXS1094 $178,000 gross. McAllen. Excellent cash flow to owner. Owner willing to sell building. TXS1095 $354,730 gross. Rio Grande Valley. Reputable firm with balanced service mix produces 70% cash flow. TXS1097
| SEPTEMBER/OCTOBER 2011
$63,000 gross. Brownsville. Highconcentration of tax work with 7 bookkeeping clients. Bilingual staff in place. TXS1100 $286,289 gross. Brazoria County. 70% tax & 30% bookkeeping. Located in desirable area with experienced staff. TXS1101 $101,363 gross. Corpus Christi Area. Revenues consist of 79% tax prep and 21% accounting/bookkeeping. TXS1103 $125,000 gross. Houston. 1/3 each: tax, annual bookkeeping & payroll/bookkeeping. Bilingual, well-trained staff. TXS1104 $285,480 gross. Conroe. Year round revenues include 50% tax, 25% bookkeeping, 5% reviews, & 20% other. TXS1106 ACCOUNTING PRACTICE SALES North America’s Leader in Practice Sales Toll Free 1-800-397-0249 See full listing details and inquire/register for free at www.accountingpracticesales.com
PRACTICES FOR SALE THROUGHOUT TEXAS … including Dallas $350,000; South of Dallas CPA $600,000+; Tyler area CPA $200,000+; Oklahoma City $250,000. Many others nationwide! We provide 10-year bank financing on ALL listings with PAS! Confidential, prompt, professional. Contact Leon Faris, CPA at Professional Accounting Sales, USA’s No. 1 accounting brokerage network. Phone 972-292-7172 or 800-729-9031. Visit our website at: www.cpasales.com
Practices Sought Local CPA firm is interested in paying a premium for CPA practices up to $1 million in San Antonio area. We will retain staff or partners or work with transitioning retiring partners. Please contact email@example.com. 210-366-9430. PRACTICES WANTED… Let our 28 years of CPA firm merger-acquisition experience work for you. We have hundreds of well qualified buyers anxiously seeking practices in the Austin, Dallas, Houston,
and San Antonio areas. We provide 10-year financing so you can cash out at closing! Confidential, prompt, professional. Contact Leon Faris, CPA at Professional Accounting Sales, USA’s No. 1 accounting brokerage network. Phone 972-292-7172 or 800-729-9031. Visit our website at: www.cpasales.com. BUYING OR SELLING? First talk with Texas CPAs who have the experience and knowledge to help with this big step. We know your concerns and what you are looking for. We can help with negotiations, details, financing, etc. Know your options. Visit www. accountingpracticesales.com for more information and current listings. Or call toll-free 800-397-0249. Confidential, no-obligation. We aren’t just a listing service. We work hard for you to obtain a professional and fair deal. ACCOUNTING PRACTICE SALES, INC. North America’s Leader in Practice Sales Classifieds continued on next page
TSCPA offers opportunities for members and non-members to advertise in the Classifieds section of Today’s CPA magazine. To request a classified ad, contact Donna Fritz at firstname.lastname@example.org or 800-428-0272, ext. 201 or in Dallas at 972-687-8501; fax 972-687-8601. Or write to: TSCPA, Today’s CPA Classified Ads, 14651 Dallas Pkwy, Suite 700, Dallas, TX 75254-7408. ALL CLASSIFIED ADS MUST BE PAID IN ADVANCE. MASTERCARD, VISA, AMERICAN EXPRESS, PERSONAL AND BUSINESS CHECKS ARE ACCEPTED. PLEASE CONTACT DONNA FRITZ FOR RATES AND MORE INFORMATION.
| SEPTEMBER/OCTOBER 2011
Today’s CPA AD INDEX
Classifieds Practices Sought
Accounting Broker Acquisition Group “Maximize Value When You Sell Your Firm” A Local Texas Corporation You Sell Your Firm Only Once! Will You Leave Money on the Table? Free Report: “Discover the 12 Irreversible Fatal Errors You Must Avoid When You Sell Your Firm!” We sell small & large CPA firms… 100 percent of our acquisition brokers are “Ex-Big Four” CPAs! We are the only firm of our type in the nation that can make this claim! Call now for your Free Report! 800-419-1223 x101 or send a quick e-mail to email@example.com
Need assistance with a Client’s Texas Sales Tax Issue/Problem? Audits? Refunds? Not permitted? We were trained by and worked for the Comptroller of Public Accounts. We know Sales Tax Law and Audit procedures. Your client has options. Michael J. Robertson, CPA Web page: Texas-SalesTax.com 817-478-5788 Fax: 817-478-8779
Software For Sale PROVEN OIL and GAS ACCOUNTING SYSTEM keeps getting better. Fast, easy to use. Developed for PC/network by CPA. Over 2,000 users. G/L, A/P, depletion, payroll, joint interest billing, revenue distribution, document imaging, and production management. WolfePak Software; 2901 S. First St., Abilene, TX 79605. 325-677-1543 or 800-299-1543. E-mail: firstname.lastname@example.org.
Accounting Practice Sales www.accountingpracticesales.com
Audimation Services, Inc www.audimation.com
CPA Mutual www.cpamutual.com
CPE Link www.cpelink.com
Goodman Financial www.goodmanfinancial.com
Law Office of Antonio Villeda m www.mybusinesslawyer.net
Looper, Reed, & McGraw P.C. www.lrmlaw.com
Marsh U.S. Consumer www.marshpm.com
Robert Half www.roberthalf.com/
| SEPTEMBER/OCTOBER 2011
When it comes to choosing legal guidance, rely on Strasburger to link their legal expertise to your tax, estate planning and employee benefit needs. • • • • • • • • •
International Tax State and Local Tax Property Tax Disputes & Litigation General Tax Planning Tax Controversy & Litigation Employee Benefits / Executive Compensation Estate Planning, Trusts & Probate Estate, Trust & Fiduciary Litigation Tax Exempt & Charitable Organizations
Strasburger ATTORNEYS AT LAW
www.strasburger.com Austin • Collin County • Dallas • Houston • San Antonio New York • Washington, D.C. • Mexico City - Strasburger & Price, SC
In this issue of Today’s CPA, learn about how the Dodd-Frank Act will affect CPAs; get a grip on the challenging world of transfer pricing;...