Today's CPA Sept/Oct 2012

Today’sCPA SEPT/OCT 2012

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 ABCs of

INVESTING FOR HIGHER EDUCATION Reporting Comprehensive Income: The Time to Change is Here Not-For-Profit Mergers and Acquisitions 2012 Annual Meeting of Members

Also: Outstanding Chapters

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Copyright © 2012 American Institute of CPAs. All rights reserved.

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Contents

CHAIRMAN

SEPTEMBER/ OCTOBER 2012

VOLUME 40, NUMBER 2

Fred Timmons, CPA

EXECUTIVE DIRECTOR/CEO John Sharbaugh, CAE

EDITORIAL BOARD CHAIRMAN Arthur Agulnek, CPA

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Staff MANAGING EDITOR DeLynn Deakins ddeakins@tscpa.net 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 whardin@tscpa.net

CONTRIBUTORS Ali Allie, Melinda Bentley; Jerry Cross, CPA; Anne Davis, ABC; Donna Fritz; Chrissy Jones, AICPA; Rhonda Ledbetter; Craig Nauta; Kim Newlin; Catherine Raffetto; Katey Selph; Patty Wyatt

DIRECTOR, MARKETING & COMMUNICATIONS Janet Overton Design/Production/Advertising The Warren Group thewarrengroup.com custompubs@thewarrengroup.com

CLASSIFIED Donna Fritz Texas Society of CPAs 14651 Dallas Parkway, Suite 700 Dallas, Texas 75254-7408 972-687-8501 dfritz@tscpa.net

Editorial Board Arthur Agulnek, CPA-Dallas; Kristan Allen, CPA-Houston; James Danford, CPAFort Worth; Greta Hicks, CPA-Houston; Baria Jaroudi, CPA-Houston; Tony Katz, CPA-Dallas; Jeffrey Liggitt, CPA-Dallas; Mano Mahadeva, CPA-Dallas; Alyssa Martin; CPA-Dallas; Dawne Meijer, CPA-Houston; Ty Moore, CPA-Houston; Jan Taylor Morris, CPA-Houston; Winford Paschall, CPA-Fort Worth; Marshall Pitman, CPA-San Antonio; Mattie Porter, CPA-Houston; Kamala Raghavan, CPA-Houston; James Reeves, CPA-Fort Worth; Barbara Scofield, CPA-Permian Basin; Brinn Serbanic, CPA-East Texas; Paul Willey, CPA-Dallas. © 2012, 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.

Today’sCPA

| SEPTEMBER/OCTOBER 2012

36

14

cover story

columns

24 The ABCs of Investing for Higher Education

5 Chairman’s & Executive Director’s Message

Smart investing now to provide for higher education.

society features 13 Spotlight on CPAs

Following the Money

20 Capitol Interest

A Look into the Future

technical articles 28 CPE: Reporting Comprehensive Income – The Time to Change is Here

A primer on the history of comprehensive income, and how to correctly report it now.

Focusing on the Interests of the Profession and Public

6 Tax Topics

Integrity, Objectivity and Competence

8 Business Perspectives

Good Grief, it is That Time Again

9 Accounting and Auditing

Lease Proposal Gets an Update

10 Emerging Issues Reimagine …

12 Chapters

Outstanding Chapter Awards – 2011-2012

departments 14 Take Note

36 Not-for-Profit Mergers and Acquisitions

17 TSCPA’s Annual Meeting of Members

42 CPE Calendar

How to proceed when two not-for-profits merge operations.

44 Classifieds

3

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Chairman’s & Executive Director’s Message

By Fred Timmons, CPA | TSCPA Chairman & John Sharbaugh, CAE | TSCPA Executive Director/CEO

Focusing on the Interests of the Profession and Public Since Texas is such a large state with a rich history, and TSCPA is one of the largest state CPA societies in the U.S., we have a unique opportunity to exercise our influence and help protect the interests of the accounting profession and the public. These are important goals for TSCPA. To that end, the Society becomes involved in supporting initiatives and programs that serve the cause of the accounting profession and the public interest.

In this issue of Today’s CPA, we would like to share information about several of the initiatives and programs TSCPA is supporting. One is the Comeback America Initiative (CAI). This initiative emphasizes various policy, operational and political reforms that are needed to put the U.S. government on a more prudent and sustainable fiscal path. The Hon. David M. Walker is the CEO and founder of CAI. Walker previously served as the seventh Comptroller General of the United States and head of the U.S. Government Accountability Office (GAO) for almost 10 years. He also has over 20 years of private sector experience.

In Walker’s role at CAI, he leads the organization’s efforts to promote fiscal responsibility by engaging the public and assisting policymakers on a non-partisan basis to help achieve solutions to America’s federal, state and local fiscal imbalances.

CAI is planning to develop online, on-air, publication and other communication

activities, as well as participate in town hall forums and use other public events, including the “$10 Million a Minute Bus Tour.” The bus tour will stop in over a dozen states in an effort to bring national attention to the economic and fiscal challenges facing our nation. The tour will stop in Dallas on Friday, Sept. 28, 2012. TSCPA will keep you informed on the outcome of the event.

In addition, AICPA is working on projects to engage policymakers and citizens in a dialog that highlights the fiscal health of the U.S. and make it a national priority. In a new effort titled, “What’s at Stake? A CPA’s Insights into the Federal Government’s Finances,” AICPA has produced a 10-minute video and non-partisan collateral material that objectively offers guidance on how the data in the U.S. government’s financial statements can be used for greater understanding of the fiscal condition of the country. AICPA is seeking to call attention to how and why our financial sustainability is at stake.

TSCPA and AICPA also continue work on the 360 Degrees of Financial Literacy program. Through this program, CPAs are encouraged to take a leadership role in helping educate the public on tax and financial planning issues. TSCPA created a website for consumers, which is available at ValueYourMoney.org. Looking toward

Fred Timmons can be contacted at ftimmons@tbsacpa.com. John Sharbaugh can be contacted at jsharbaugh@tscpa.net.

Today’sCPA

| SEPTEMBER/OCTOBER 2012

Editor’s Note: In each issue of Today’s CPA during his year as TSCPA chairman, Fred Timmons would like to share interesting stories or facts about Texas. He studied Texas history in school and here are some facts about the state that you may not know: 1. Texas has more counties (254) than any other state. Forty-one counties in Texas are each larger than Rhode Island. Rockwall County is the smallest county at 147 square miles.

Brewster County is the largest at 6,204 square miles. Angelina County is the only one named for a woman.

2. The Lone Star Flag became the official flag of Texas in 1933. The blue stands for loyalty, the white for strength and the red represents bravery. The single star on the Texas flag became the symbol and nickname of the Lone Star State.

3. The state song of Texas is “Texas, Our Texas” and was adopted by the Legislature in 1929.

the future of the CPA profession, TSCPA is involved with an initiative called the Accounting Pilot and Bridge Project (APBP). The purpose of this project is to improve high school accounting education by offering a college-level accounting course. In some states, college credit is given to students who take a college-level accounting course and pass a rigorous qualifying exam. To support the project, the APBP course was held at TSCPA’s Houston Chapter office on July 9-11, 2012. You can read more in the Take Note section of this Today’s CPA issue.

As CPAs, TSCPA members are uniquely qualified to assist the public and policymakers in understanding complex financial issues. It is also important to ensure the profession has a sufficient number of qualified accounting students and candidates who will become CPAs in the future. We encourage all TSCPA members to exercise their influence and become involved in efforts supporting the profession and the public interests at a national, state and/or local level.

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5

Tax Topics

By Greta Hicks, CPA | Column Editor

Integrity, Objectivity and Competence If you, as a CPA, perform non-attest services, are you required to be in compliance with the Texas State Board of Public Accountancy (TSBPA) Rules of Professional Conduct, the American Institute of CPAs (AICPA) Rules of Professional Conduct, and/or the U.S. Treasury Circular 230? The answers are “yes,” “no” and “maybe.”

TSBPA, Part 22, Rule §501.53(c) states, in part: “The following rules of professional conduct shall apply to and be required to be observed by certificate or registration holders when not employed in the client practice of public accountancy: §501.73 relating to Integrity and Objectivity and §501.74 relating to Competence …”

Title 31 U.S.C. §330, Practice before the Department of Treasury, states … “the Secretary of the Treasury may – before admitting a representative to practice, require that the representative demonstrate: • good character; • good reputation; • necessary qualifications to enable the representative to provide to persons valuable service; and • competency to advise and assist persons in presenting their cases.”

Circular 230 §10.2, Practice before the IRS (Internal Revenue Service) comprehends all matters connected with a presentation to the IRS or any of its officers or employees relating to a taxpayer’s rights, privileges or liabilities under laws or regulations administered by the IRS. Such presentations include, but are not limited to, preparing documents; filing documents; corresponding and communicating with the IRS; rendering written advice with respect to any entity, transaction, plan or arrangement, or other plan or arrangement having a potential for tax avoidance or evasion; and representing a client at conferences, hearings and meetings. Circular 230 §10.34 goes further to say that a practitioner may not willfully, recklessly or through gross incompetence sign a tax return or claim for refund that the practitioner knows, or reasonably should know, contains a position that lacks a reasonable basis; is an unreasonable position as described in Section 6694(a)(2) of the Internal Revenue Code; or is a willful attempt by the practitioner to understate the liability for tax or a reckless or intentional disregard of rules or regulations.

Circular 230 §10.29 addresses Conflicting Interests, as follows: (a) Except as provided by paragraph (b) of this Section, a

practitioner shall not represent a client before the IRS if the representation involves a conflict of interest; a conflict of interest exists if: (1) the representation of one client will be directly adverse to another client; or (2) there is a significant risk that the representation of one or more clients will be materially limited by the practitioner’s responsibilities to another client, a former client or a third person, or by a personal interest of the practitioner.

Paragraph (b) provides exceptions to the conflict of interest rules above. The practitioner may represent a client if: • the practitioner reasonably believes that the practitioner will be able to provide competent and diligent representation to each affected client; • the representation is not prohibited by law; and • each affected client waives the conflict of interest and gives informed consent, confirmed in writing by each affected client, at the time the existence of the conflict of interest is known by the practitioner; the confirmation may be made within a reasonable period of time after the informed consent, but in no event later than 30 days.

In addition, copies of the written consents must be retained by the practitioner for at least 36 months from the date of the conclusion of the representation of the affected clients, and the written consents must be provided to any officer or employee of the IRS on request.

AICPA has much to say regarding potential conflict of interests: “A conflict of interest may occur if a member performs a professional service for a client or employer and the member or his or her firm has a relationship with another person, entity, product or service that could, in the member’s professional judgment, be viewed by the client, employer or other appropriate parties as impairing the member’s objectivity. If the member believes that the professional service can be performed with objectivity, and the relationship is disclosed to and consent is obtained from such client, employer or other appropriate

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 gretahickscpa@yahoo.com or www.gretahicks.com.

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Today’sCPA

| SEPTEMBER/OCTOBER 2012

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parties, the rule shall not operate to prohibit the performance of the professional service. (Rule 102.03 102-2.)

As to the question of whether we are required to be in compliance with the AICPA Code of Professional Conduct, the answer is: Perhaps. In addition to avoiding conflict of interests, a member must maintain objectivity, integrity and due care. Per ET Section 55, Article IV .04: “Although members not in public practice cannot maintain the appearance of independence, they nevertheless have the responsibility to maintain objectivity in rendering professional services. Members employed by others to prepare financial statements or to perform auditing, tax or consulting services are charged with the same responsibility for objectivity as members in public practice and must be scrupulous in their application of generally accepted accounting principles and candid in all their dealings with members in public practice.” (Rules 102.04 102-3.)

In regards to Integrity and Objectivity, Rule 102.02 102-1 states that a member shall be considered to have knowingly misrepresented facts in violation of Rule 102 when he/she knowingly: • makes, or permits or directs another to make, materially false and misleading entries in an entity’s financial statements or records; or • fails to correct an entity’s financial statements or records that are materially false and misleading when he/she has the authority to record an entry; or • signs, or permits or directs another to sign, a document containing materially false and misleading information.

Examples where objectivity might be in question include: • a member has provided tax or personal financial planning (PFP) services for a married couple who is undergoing a divorce, and the member has been asked to provide the services for both parties during the divorce proceedings; • in connection with a PFP engagement, a member plans to suggest that the client invest in a business in which he/she has a financial interest; • a member provides tax or PFP services for several members of a family who may have opposing interests; • a member recommends or refers a client to a service bureau in which the member or partner(s) in the member’s firm hold material financial interest(s).

To read more on the AICPA ethics requirements, please go to their website at www.aicpa.org. In addition, see www.aicpa.org, ET Section 191 for examples of Ethics Rulings on Independence, Integrity and Objectivity.

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Today’sCPA

| SEPTEMBER/OCTOBER 2012

Choose from a robust curriculum of 30+ webcast topics each month and 1000+ hours of self-study. www.cpelink.com/value-pass or call 800-616-3822.

7

Business Perspectives

By Mano Mahadeva, CPA, MBA | Column Editor

Good Grief, it is That Time Again Budgets are not simply about numbers – budgeting is a process that calls for a series of actions to produce specific outcomes, with controls incorporated into the execution of those actions that maximize the chances of a company achieving its most profitable course of action. If this planning process is intelligently conceived and effectively administered, the budget becomes a creative tool for accomplishing management’s goals.

But for years, questions have persisted about the return on investment of traditional budgeting. Frustrations have been associated with complexity, gaming, faulty assumptions, the lack of time, an entitlement mentality, and the poor use of budgeting as a performance appraisal tool. Within the past few years, finance chiefs saw their carefully prepared budgets become meaningless as economic volatility rocked stock prices, commodity prices and exchange rates across the global markets.

As sales fell, spending had to be revised, creating worries about demand and when it would return to prerecession levels.

Certainly, newer and better ways of budgeting are needed. Today, we are more aware of how economic shocks, “black swan” events, and behavioral finance impact our budgetary assumptions.

Recessions, currency fluctuations, Greek debt downgrades, the presidential election, the “fiscal cliff,” the torrid weather … with all assumptions, it still comes down to our best educated guess. Yes, we need to be prepared to deal with uncertainty by understanding the effects and then finding ways to reasonably incorporate them into our future plans.

Many companies have found ways to improve their budgeting process. One such way is a use of rolling budgets; in effect, reassessing the company outlook more frequently, usually on a quarterly basis and at a summary level. The result is a current forecast, which reflects any or all material changes. Because of the frequency

of updates, managers need to be able to obtain and process information faster than before.

Yet another variation of budget planning and control is a company’s use of trend analysis. If the company gets off track, it makes operational and financial adjustments to get back on track. A detailed analysis which may display a negative opportunity in one division or product could provide positive opportunity in another division or product. This model of variance analysis provides lean and agile organizations the flexibility to redeploy resources in appropriate areas to meet company goals.

Unlike the traditional budget model, targets should not be fixed, but instead should be set relative to some benchmark, such as an industry, competitor or internal standard. Resources need to be provided within established parameters or as needed, but key employees should have wide discretion to use such allocated resources. Market intelligence, such as end-user profiles, demographics and cost and profitability information of products, needs to be available on a timely basis to enhance decision-making.

Company leadership must embrace and acquire appropriate technology to deliver key data to enable quick decisionmaking. Companies with sophisticated technology have adopted the traditional model, as well as that of the rolling approach. As an example, each quarter the rolling forecast is compared to the annual

plan. If adjustments are warranted, the outlook is modified. Using flexible budget, various scenarios are run to complement the adjusted outlook with a range of outcomes. The outcomes are then used to help management provide guidance to investors, as well as determine capacity issues and capital expenditures in the short and long term.

Intellectual capital, such as critical processes and key employees, helps create a competitive advantage within the industry. Key employees are capable of being responsible and can operate within a framework of clear principles and boundaries. If the organization is supportive and leaders are truly committed to change and adaptation, these employees should be asked to make value-creating decisions within given guidelines. This will be the ingredient that drives the organization toward superior performance.

The key to success is cumulativevalue creation that exceeds established benchmarks. Leaders should continue to challenge assumptions and coach managers, and should not intervene unless the benchmarks are not met. Trust teams to regulate performance; don’t micromanage them. Enhanced trust will result in greater focus, reduced fear, create a spirit of cooperation and learning, improve efficiency and enhance ethical behavior.

Changes, adaptations and successes of new measurement processes require endless patience and protracted communication with employees. They require investment in data gathering tools, education and training, and of TIME! They require the finance professional to evolve from the role of reporter and critic to the role of process facilitator. This is usually a difficult undertaking, but it represents another opportunity for the CPA to help transform a company’s business in this new age. 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 mano.mahadeva@usoncology.com.

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Today’sCPA

| SEPTEMBER/OCTOBER 2012

Accounting and Auditing

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

Lease Proposal Gets an Update On June 19, 2012, the Financial Accounting Standards Board (FASB) and the International Accounting Standards Board (IASB) met to continue discussions concerning the proposed lease accounting model. They emerged with a proposed amendment that is a step further toward full convergence that began several years ago in this area.

Deliberations focused on expense recognition patterns and income statement presentation as a response to complaints that the current model front-loaded lease expense, which undermined the economics of most leases. The amendment differentiates expense recognition patterns of certain leases based on the nature of the underlying asset. A quick summary follows.

LESSEE ACCOUNTING In the 2010 exposure draft, the entity records an obligation and a “right-to-use” asset equal to the net present value of the payment outlays. (See the article, “The Ever-Changing Lease Exposure Draft” in the November/December 2011 issue of Today’s CPA magazine.) The asset is then amortized over the lease term using the effective interest method. The boards developed guidance on differentiating lease expense recognition patterns. As such, some leases will continue to be recognized according to the guidance in the 2010 exposure draft, while some will adapt a new straight-line lease expense approach.

Specifically, property leases, such as land or buildings, are to be accounted for using the new straight-line method. Initial recognition of the asset and liability does not differ from the original proposal, but expense recognition through amortization is different.

The new approach measures changes in the carrying amount of the asset each period by subtracting the period’s accretion of the liability from the straight-line expense amount. The income statement will then reflect one amount as lease expense, similar

to the current operating lease standards.

However, the straight-line approach will not be used under the following two conditions: • the lease term is for the major part of the economic life of the underlying asset; • the present value of the fixed lease payments accounts for substantially all of the fair value of the underlying asset.

All other non-property leases are to be accounted for as described in the 2010 exposure draft. An initial liability and right-of-use asset are recognized, while subsequent measurement of lease expense uses the effective interest method. The asset is amortized and lease expense is recognized in the income statement. The approach is not adopted if one of the following criteria is met: • the lease term is an insignificant portion of the economic life of the underlying asset; • the present value of the fixed lease payments is insignificant to the fair value of the underlying asset.

Further information on the 2010 exposure draft can also be found in the Accounting and Auditing column titled “Proposed Standard for Leases Requires Big Changes in Financials” in the January/February 2011 issue of Today’s CPA. The principle behind the decision to amend the current standard focuses on the lessee’s intent in obtaining the lease. When the lessee uses the lease to finance the acquisition of the portion of the underlying asset, such as in the case of property leases,

the lessee typically does not use more than an insignificant portion of the asset during the lease term. In contrast, other types of leases use more than an insignificant portion of the asset during the lease term.

Under the new accounting treatment, leases with a minimum lease term of 12 months or more will require capitalization, while shorter-term leases will not.

LESSOR ACCOUNTING The boards’ aims concerning lessor accounting center around symmetry with lessee accounting. The decision changes the accounting model used to determine when to apply the receivable and residual approach. (For more details, see the article, “The Ever-Changing Lease Exposure Draft, Part II – Lessor Accounting” in the May/ June 2012 issue of Today’s CPA.) To simplify the amendment, the boards decided to apply the same criteria and dividing line as is discussed above for lessee accounting. The focus remains on whether a significant portion of the underlying asset is consumed or used during the lease term.

As such, a lessor would apply the receivable and residual approach to leases in which the lessee consumes more than an insignificant portion of the asset over the lease term.

However, if an insignificant portion of the asset is consumed, the asset will remain on the books of the lessor, and an approach similar to operating lease accounting would be applied.

NEXT STEPS In future meetings, the boards will discuss issues on presentation and disclosure before preparing another revised exposure draft prior to the end of the year. Further deliberations are needed to determine constituents’ responses to the proposed changes. Read more concerning the updated lease accounting standards at www.fasb.org or www.ifrs.org.

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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.

Today’sCPA

| SEPTEMBER/OCTOBER 2012

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Emerging Issues

By James F. Reeves, CPA | Column Editor

Reimagine …

(Part One of Two) Each year, the American Institute of CPAs (AICPA) publishes the results of its Top Technology Initiatives survey and for the past few years, the leading vote getters from the CPA respondents include issues surrounding data security, managing IT risk and ensuring client privacy. And to be sure, with client confidentiality and privacy being part of the core CPA value proposition, these concerns are rightly at the top of the list of imperatives for any public accounting firm. These are table stakes in a way, as much a part of the cost of doing business in the 21st century as tax prep software, digital information resources, e-mail and firm websites, particularly with trends like cloud computing, bring-your-own-device (BYOD), social media and the 24-hour news cycle exacerbating concerns.

Perhaps no single technology trend has received as much buzz as cloud computing, which essentially involves outsourcing software installation, application and data storage, and the related infrastructure to a third party, whereby the applications and data are stored in remote data centers and accessed through a browser. Not necessarily a new technology concept, the buzz centers around the new business models and potential benefits of reduced IT costs, scalability, automatic software updates, accessibility from any device with a browser, disaster protection, and lack of geographic barriers.

Cloud computing has allowed new business models to emerge, including the software as a service (SAAS) model, often allowing firms to license the software by the month, empowering smaller firms to scale in ways not previously possible. Microsoft recently announced a cloud version of its Office suite, tailored for tablets and other touch screen devices, scheduled to launch in early 2013. It will store documents and settings on the Internet by default and will be offered in a SAAS licensing model.

A bit further down the list of top technology trends are productivity enhancing advances in hardware and software, particularly in the mobile arena, that are actually changing the way people work. In addition to tablets and smartphones, ultralight (aka ultrabook, ultrathin) computers less than one inch thick, weighing less than three pounds, and coming with eight-hour battery lives are now available. Also available are mobile monitors that rotate, pivot and connect to laptops, as well as software that lets people use their tablets as second monitors. And mobile Internet access via smartphones and MiFi devices that can connect multiple devices via one data plan can enable teams of auditors to stay connected to their engagement applications while in the field.

Further, Citrix Receiver provides anytime, anywhere access to one’s entire desktop environment back at the office, including applications and data, free, from any device including tablets and smartphones, for anyone with Internet access. Such an environment enables professionals to begin their workflow from their mobile devices

and work back towards the desktop (e.g., physical inventory observations that later synch up with the accounting records).

Still further out in terms of widespread adoption are new communication and collaboration technologies that promise to deliver efficiencies in the way people work together and improvements in the way teams function. Video is becoming more pervasive, voice recognition capabilities continue to improve, and enterprise social collaboration platforms are bringing social media technologies to firm engagements, allowing firm members to manage engagements, share information and network with colleagues (particularly in larger firms). Meanwhile, next-generation productivity tools are enabling realtime collaboration by team members on workpapers, spreadsheets, text documents, calendaring and presentations.

Of course, all of these communication and collaboration technologies involve the sharing of confidential information, which brings us full circle back to the data security and privacy issues.

THE EMERGENCE OF “BIG DATA” “Big data,” which has been called Moneyball for business, refers to the unprecedented volume of information, or data, being generated by organizations and by extension, to a new genre of software designed to capture the value from the data, taking data analysis to a whole new level of organizational insights, predictive analytics and real-time visibility into customer behavior.

The theory goes something like this: the overall volume of data is growing at an exponential rate, reportedly 50 percent per year and will continue to do so.

According to IBM’s website, 90 percent of the world’s data has been created in the past two years alone. This would include data from sensors, clickstreams, e-mails,

James F. Reeves, CPA, is Senior Vice President, New Product Development at the Tax and Accounting business of Thomson Reuters. Contact him at jim.reeves@thomson.com, or visit his blog at http://jamesfreeves.blogspot.com.

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Today’sCPA

| SEPTEMBER/OCTOBER 2012

call records, social media, images, audio, videos, GPS signals, transaction records, etc. Established companies like IBM and Oracle, as well as startups like Splunk, are building platforms to collect and analyze this torrent of data, both structured and unstructured, across an enterprise, enabling organizations to extract insights, make sense of complexities and predict future outcomes in ways not previously possible.

Big data was the marquee topic at the World Economic Forum this year in Davos, Switzerland, and analysts have suggested a plethora of jobs await data analysts with the right skill sets. This sounds a little big brother-ish, and I’m not sure whether to believe the hype, but I sure wouldn’t bet against it at this point.

CPAs, particularly internal and external auditors, have used data extraction software for years to access and analyze large

volumes of data. One has to wonder how the advent of big data, should it live up to its billing, will extend CPAs’ analytical capabilities and reset expectations.

DIGITAL ENGAGEMENT Collectively, the impact of these developments support a broader trend suggested by best-selling author Geoffrey Moore (Crossing the Chasm, Beyond the Tornado) at the AICPA Spring Council meeting in May. Dr. Moore looks at the evolution of the Internet over the past few decades and suggests that we have evolved from an era of “digital consumption,” where the focus was media, communication, advertising, entertainment, retail and travel, to one of “digital engagement,” meaning that client relationships will be increasingly digitized.

As a result, Moore told the Council, “Every [consumer/customer/client] facing

process will need to be re-engineered over the next 10-15 years.” Including but not confined to CPAs, Moore cited customer service, customer support, account management, health care, education, professional services and government as activities that will become increasingly digitized as the decade unfolds.

FROM EVOLUTIONARY TO REVOLUTIONARY For the most part, this assessment of technology trends within the accounting profession has been what one might consider evolutionary … plenty of change, but not beyond the realm or trajectory of what would be expected. That said, looking at the state of technology through a different lens, through what I think of as the Silicon Valley view, will provide a more revolutionary perspective. Stay tuned in the next issue of Today’s CPA. ■

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Today’sCPA

| SEPTEMBER/OCTOBER 2012

9/12/11 10:03 AM

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Chapters

By Rhonda Ledbetter | TSCPA Chapter Relations Representative

Outstanding Chapter Awards – 2011-2012 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 presidents from chapters of all sizes, who understand the work involved in successfully leading volunteers.

Following is information about the chapters honored for the 2011-2012 year.

OUTSTANDING MEDIUM-SIZED CHAPTER: CENTRAL TEXAS

President: Michelle R. Downs, CPA The first strategic planning meeting in several years was held and, as a result, a three-year plan was put into effect. To increase community awareness, the first-ever chapter marketing initiative was formed.

Two local newspaper interviews were conducted and the slogan “CPAs – Count On Us” was developed to support chapter campaigns. For the first time, a chapter team participated in area fundraising walks.

A presentation on the topic of “Safeguarding Your Assets” was made during a Chamber of Commerce event in conjunction with the McLennan Community College Small Business Development Center. Four chapter members were part of a Nonprofit Network panel on preparing IRS Form 990 and internal controls best practices.

The goal of increasing young CPA participation was reached. The number of events for that segment was doubled, to four, and attendance was triple the previous average number.

An increased total of $5,000 for accounting scholarships was raised, to be awarded in the 2012-13 school year.

OUTSTANDING SMALL CHAPTER: SOUTHEAST TEXAS

President: Sheri K. DelMage, CPA The number of $1,000 scholarships given to accounting students at the area university was doubled over last year, from four to eight. Funds were raised solely through two projects: a raffle, new to the chapter, and a Boss’s Appreciation Day luncheon at a restaurant that opened exclusively for the event. Volunteers worked throughout the chapter area to sell sponsorships and tickets.

A new project was development and presentation of a financial literacy seminar for university students. Another new project in connection with the university was participation in the Beta Alpha Psi tailgating party before a football game.

Students and chapter representatives served food and soft drinks provided by the chapter.

Another new public awareness project was development of a Facebook page and promotion to CPAs, candidates and students. To grow the number of “likers,” a drawing for a $100 gift card would be held if 100 were in place by the deadline; the objective was met.

MOST IMPROVED CHAPTER: ABILENE

President: Diane Terrell, CPA The chapter’s goals for the year were focused on inclusion, information and interest. To achieve inclusion, a chapter Facebook page was created and a Facebook “like” link was added to the chapter website. A LinkedIn group for the chapter was created, along with a “follow us” tab. Status updates were posted on Facebook and LinkedIn, including pictures from chapter events.

Information goals were met in a variety of ways. For the first time in several years, eight chapter newsletters were distributed to members. As a new information project, a reference book was created for chapter leaders; it included board minutes, the chapter’s bylaws, monthly financial statements, and other information useful to future leaders.

To increase interest in the CPA profession and awareness of TSCPA, the chapter honored all senior accounting students from the three local universities at a luncheon meeting. It also awarded three $1,500 scholarships to a junior accounting major at each of the three universities.

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 rledbetter@tscpa.net.

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Today’sCPA

| SEPTEMBER/OCTOBER 2012

Spotlight on CPAs

By Anne McDonald Davis, ABC.

Following the Money Fort Worth CPA Finds Her Niche in Forensic Accounting The image of a CPA as financial detective has been given many a jazzy turn on TV’s popular legal and crime dramas. But Trish Fritsche, CPA-Fort Worth, cautions that Law & Order and CSI don’t quite convey all that’s involved.

“Some (accounting) students see those shows and think, ‘Whoa!’ … but there are hours and hours of detailed accounting work performed before testifying in court,” notes Fritsche, a senior manager in forensic accounting services for Weaver. “It takes a certain personality to do our kind of work.”

Fritsche also holds the designations of CFF (Certified in Financial Forensics) and CITP (Certified Information Technology Professional) from AICPA (American Institute of CPAs), which gives a hint of the additional study and expertise required for her specialization. A compassionate but keen instinct for the realities of human nature also comes in handy, whether dealing with the perpetrators of financial misdeeds or the victims.

“Everybody has a breaking point; anybody will commit a fraud under the right circumstances,” Fritsche observes in an intriguing and somber insight. “Anyone can snap. Understanding that, studying witness interviewing techniques, looking at things from a lot of different angles … that’s all part of the job.”

Needless to say, these situations have the potential to be rather volatile. Fritsche says that some clients are “very emotional, especially

Today’sCPA

| SEPTEMBER/OCTOBER 2012

in the beginning.” (The client may be an individual, an attorney, a governmental entity or a board of directors.) Her charge is to help them understand the accounting side of the transactions, which can be quite complex.

She sympathizes: “People don’t plan to be the victims of financial fraud, but when they need us, they need us. How many times have I heard … ‘but I trusted him’? It’s human nature to trust, which is good, but sometimes people take advantage of that.”

Sounds rather … stressful? “I love it; I love helping people,” enthuses Fritsche. “This has given me the opportunity to give back, to take helping to the next level.”

EARLY INSPIRATIONS AND CHOOSING A CAREER PATH The Fort Worth CPA is a native of the city and she traces her greatest career influence to her father, a policeman who moved into city management.

“I would go up to City Hall after school, and one of the first things my dad taught me to do was go up to the city attorney’s office and put the checks in order. I thought that was way cool,” chuckles Fritsche. “He instilled in me a real sense of giving back to the community, of serving the public.”

Still, it took a while before Fritsche entered the profession. She started junior college in Fort Worth, then took a sabbatical for a bit and worked … but admits she always ended up in the accounting department.

“I was working for an international company when auditors came in … and I knew then, that was my job,” she reminisces. “So I decided to finish my education - graduated with honors

from North Texas. And from there, I went to work at Weaver.”

Fritsche joined Weaver’s audit group for governmental entities and nonprofits. As the firm grew, particularly over the past decade, they added a forensic and litigation group; Fritsche transferred about five years ago.

One exciting and rewarding case: “Once there, I helped on a receivership, which required complex financial analysis, expert testimony, assisting the Department of Justice,” she recalls. “It was a $60 million financial scheme and we ended up returning over 50 percent back to the elderly investors.”

Fritsche continues to do “a lot” of governmental work: assisting district attorneys, helping cities with investigations, looking into whistleblower accusations. In addition, she feels very strongly about family law - tracings and characterizations. Aside from those two primary areas of practice, she says she rounds it out by assisting with general litigation matters.

VOLUNTEERING FOR THE PROFESSION’S FUTURE “I’ve been involved with the Texas Society ever since I became a CPA,” she says. She has served on the Fort Worth Chapter PAC Committee, the B&I task force in Austin, the state legislative committee, and the state BV/FLS (Business Valuation, Forensic and Litigation Services) Committee.

This summer, Fritsche began service as chair of the Society’s BV/FLS Committee.

Their fall meeting will address three areas: providing additional learning opportunities for people in this field in Texas; championing CFF certification; and getting the next generation involved, helping younger members embrace “the good work that we do.”

She asserts: “I believe in building up the next generations of leaders at TSCPA and in our firm. I’m years from retirement … but there continued on next page

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FOLLOWING THE MONEY continued from previous page

comes a point in time when you pass the torch. We carry it together, but you need to guide the people coming up for us all to succeed.”

How about the daunting economic climate faced by young people entering the profession today? “Right after tough times, the best evolutions have occurred historically,” she muses. “The ability to create

the new things of the world are from the next generation; let them do what they do best.”

Outdoor sports author and humorist Patrick McManus wrote: “Scholars have long known that fishing eventually turns men into philosophers. Unfortunately, it is almost impossible to buy decent tackle on a philosopher’s salary.”

Fritsche has solved that dilemma by combining her lifelong love of fishing with a profitable profession. After a brief brag about her lure collection, Fritsche says that if you’re looking for her on a non-working weekend, look no further for her and her husband than Lake Whitney.

“We’re a water family,” she confides, adding that her now-grown daughter, Amelia, could swim at three months. “I’ve never been without a boat since I was born. Our most recent acquisition is a 1958 aluminum cabin cruiser we’re going to restore.”

As for being a philosophizing fisherman … Fritsche did repeat a Henry Ford quote that Weaver CEO Tommy Lawler, CPA-Fort Worth, recently shared with his staff: “Coming together is a beginning. Keeping together is progress. Working together is success.”

“I embrace that,” she smiles.

■

Take Note Succession Planning Resource for TSCPA Members Only

Accountants Confidential Assistance Network Seeks Volunteers

TSCPA offers members a place to go that is focused on firm management and practice management issues. The Practice Management Institute was developed in partnership with the Succession Institute, LLC. This resource provides free material and content on succession planning. There are also CPE self-study course offerings available at a discounted rate for those who would like to receive CPE credit. To learn more, please go to the CPE section of the TSCPA website at tscpa.org, scroll down and select Practice Management Institute CE.

TSCPA has been asked by the Texas State Board of Public Accountancy to befriend a number of CPA candidates around the state as part of the Accountants Confidential Assistance Network (ACAN) program. ACAN is a peer assistance program that helps Texas CPAs, CPA candidates and/or accounting students who are dealing with alcohol, chemical dependency and/or mental health issues. Can you help? Please contact Craig Nauta at 800-428-0272, ext. 238; 972-687-8538 in Dallas; or at cnauta@tscpa.net.

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Today’sCPA

| SEPTEMBER/OCTOBER 2012

Take Note

A Bridge from High School to College Accounting – The Accounting Pilot and Bridge Project

Dr. Dan Deines, CPA, facilitated the APBP course held in Houston

The accounting profession is predicted to experience a decline in its ranks in the next 10 years as CPAs from the baby boomer generation retire. To address this issue, the Accounting Pilot and Bridge Project (APBP) was created to advance high school accounting education and improve the supply chain of the accounting profession. Through this project, a college-level accounting course was developed for high schools. In some states, the course offers college credit for students who take it and pass a rigorous (three-hour) qualifying examination.

This approach was modeled after the College Board’s successful Advanced Placement (AP) program. Since 1955, the College Board has worked to assist in transitioning talented students from high school to college by offering college-level AP courses that give credit from participating colleges and universities.

The first goal of the Accounting Pilot and Bridge Project was to create a rigorous, introductory college-level accounting course for high schools that: • attracts high-quality students, • prepares them for the academic rigor of the college/university accounting curriculum, and • gives them a clear understanding of the roles accounting professionals play in business and society.

The second goal of the project was to build links between high school accounting programs and college/university accounting programs. The college/university accounting programs would grant credit to those students who take the college-level accounting course in high school and then pass the exam.

Currently, more than 500 high school teachers in 37 states have been trained to use the curriculum.

Today’sCPA

| SEPTEMBER/OCTOBER 2012

The Texas Connection From July 9-11, 2012, the APBP course was held at the Houston Chapter office. The course was facilitated by Dr. Dan Deines, CPA, KPMG Professor of Accounting at Kansas State University, as well as two high school teachers from Kansas – Glenda Eichman and Janie Patterson – who are using the curriculum. High school business and accounting teachers were invited from around Texas and 36 attended, which was near capacity.

According to Dr. Deines: “We had a great three days, and we felt that this was the best group of teachers we have ever had.

The high school teachers were excited about enriching their curriculum and are very interested in building meaningful links between their programs, the accounting profession, and the accounting programs at colleges and universities in Texas.”

The evaluations from the teachers who attended the course were very positive. A few of the teachers said: “I loved this training because it helps me better prepare my students for college accounting. Up to this point, my students have just had the opportunity to learn how to record information, but now I think I can lead them to use accounting to interpret the data.”

“New, refreshing way to teach accounting. Thanks for all the ideas!”

“A wonderful opportunity to cover accounting topics to share with my students. Completely enjoyed … the excitement level and enthusiastic learning.”

The Next Steps The APBP’s next step is for the College Board to adopt accounting as part of its AP Curriculum. Collaborating with the College Board would help give the accounting profession access to the high-quality students it will need to attract for the future.

TSCPA’s support is important for the project’s success to help build the bridge from accounting education to the entrance into the profession. For more information about the project, please visit the APBP website at www.accountingpilot.com, or contact Dr. Dan Deines at ddeines@ksu.edu or by phone at 785-532-6038.

TSCPA Membership Renewal

If you haven’t already done so, it is time to renew your TSCPA membership for 2012-2013. TSCPA dues renewal notices were sent out and paper statements were sent to members who had not yet renewed their dues. You can access and update your records and pay your dues online at tscpa. org. If you have a question regarding your member dues, please contact Member Services at 800-428-0272, Ext. 260. continued on next page

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Copyright © 2012 American Institute of CPAs. All rights reserve

Take Note Health Care Act Opens Up Opportunities for CPAs in Business and Industry When President Obama signed the Patient Protection and Affordable Care Act (PPACA), he ushered in one of the most dramatic and CGMA_FullPage_ADS.indd 1 controversial health care reform initiatives since the passage of Medicare more than 45 years ago. In pursuit of its goal to address rising health care costs and provider access, the PPACA has raised the demand for specialized professional skills and knowledge, as well as new internal business processes. Organizations need expert insights for understanding legislative provisions and explaining them to employees, and policies and procedures in place for ensuring compliance with current and future requirements.

CPAs performing management accounting duties on behalf of business and industry have an opportunity to take on a leadership role within their organizations, guiding management as it navigates the way through the intricacies of PPACA legislation. Recognized by the new Chartered Global Management Accountant (CGMA) designation, created by AICPA and the Chartered Institute of Management Accountants (CIMA), CPAs in business and industry can distinguish themselves as PPACA authorities through their extensive education, training and experience in finance, management and regulatory affairs.

Expanded Role and Heightened Profile The far-reaching scope of the PPACA extends beyond health care providers and insurers to include organizations representing virtually every industry, size and geographic area. PPACA’s broad application presents vast opportunities for CPA, CGMAs to further improve operational efficiency and performance, and showcase the full extent of their capabilities, value and contributions.

Although the degree of the PPACA’s impact depends largely on the size of the employer, there are a number of key responsibilities that are uniquely suited to the expertise of CPA, CGMAs and are in strong demand by managers at organizations. These responsibilities are discussed in the following paragraphs.

Identify and Respond to Additional Costs – PPACA implementation has a number of penalty provisions that need to be identified and addressed. Management will need help fully understanding the complete range of possible penalties, explain the consequences of penalty-related decisions, and create strategies for avoiding and mitigating penalties whenever and wherever possible.

Included among PPACA provisions is the $2,000 per-person penalty that applies to large employers that fail to offer health care coverage to employees. Employers may make this decision for financial reasons – it may be less costly to pay the penalty than offer health care benefits, which according to the Kaiser Family Foundation average $4,508 for employee-only coverage and $10,044 for employee and family coverage. Other penalties include $3,000

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that is incurred when an employee enrolls in a qualified health plan that allows a premium tax credit or cost-sharing reduction to the employee.

Evaluate the Full Impact of Coverage Decisions – CPAs in business and industry counsel their organizations on the bottomline ramifications of failing to provide employees with health insurance coverage, and help reach decisions that best serve the organization and its employees. Ramifications may include increases in employee compensation to offset the expense employees will incur for private insurance, as well as additional payroll taxes.

1/30/12 11:09 AM Assist with Process and Procedural Changes – The PPACA includes a number of provisions that result in changes to existing systems and procedures that can be more successfully accomplished with CPA, CGMA guidance. For example, Section 9002 of PPACA expands reporting requirements for employer-sponsored health care benefits on employees’ IRS Form W-2 at year-end. Human resource and payroll systems will need to be updated to capture the cost of employer-sponsored insurance benefits effective for calendar year 2011 and extended to 2012 by the IRS. Contribute to Hiring, Compensation and Benefits Decisions – As implementation of PPACA moves forward, organizations need professional expertise in fully understanding the legislation’s impact on hiring decisions and compensation and benefits packages.

Among the human resource responsibilities that are undergoing drastic changes, and require close CPA, CGMA involvement, are evaluating employer-sponsored insurance benefits; attracting employees; weighing the advantages and disadvantages of full-time, part-time, temporary and per-diem team members; and addressing potential changes to compensation structures.

Answer Tax Questions – The PPACA contains numerous tax provisions that will impact individuals and businesses of all sizes.

One impact that higher-income taxpayers are likely to notice is the 3.8 percent increased tax on investment income, which translates to an overall 18.8 percent tax on capital gains for 2013, versus 15 percent in 2012.

Keep Leadership Updated on Legislative Changes – Similar to other legislation of its magnitude, PPACA must be viewed as a process rather than an event. In the years ahead, laws that have been passed may be modified and new laws will take effect, and the key to complete compliance is being prepared and proactive. Upcoming laws may address issues ranging from clarifying the PPACA’s intent to being more specific with respect to compliance provisions, particularly those pertaining to enforcement and penalty provisions.

Role of the CGMA CGMAs play a dominant role in keeping the organization abreast of the latest legislative developments and explaining their impact on the organization and its members. From holding face-to-face meetings with the management team to preparing briefing reports for board members, CPA, CGMAs are senior leaders’ valued resource for the news and information that help keep operations PPACA compliant and successful.

To learn more about the CGMA designation and its benefits and resources, please visit their website at www.cgma.org.

Today’sCPA

| SEPTEMBER/OCTOBER 2012

Take Note

By Rhonda Ledbetter | TSCPA Chapter Relations Representative

TSCPA’s 2012 Annual Meeting of Members TSCPA members, families and colleagues gathered in Corpus Christi, the Sparkling City by the Sea, for the 2012 Annual Meeting of Members and Board of Directors Meeting. Participants enjoyed a variety of activities by – and on – the bay.

CPA-PAC AWARDS

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 – Fort Worth Medium-sized Chapter – East Texas Small Chapter – San Angelo

YEAR IN REVIEW Immediate Past Chairman Donna Wesling, CPA-Austin, shared highlights of achievements during the year. Just a few of those were: • Strength through numbers was maintained. At over 28,000 members, TSCPA is one of the largest CPA organizations in the country. The Society speaks with a strong voice at the state and federal levels, having a positive impact on legislation and regulations that affect Texas CPAs. • The diversity within the organization was celebrated. Members practice in disparate fields such as business and industry, public practice, nonprofit, education, and government; each of those carries with it a need for specialized education and information.

There is a range of generations among members. There is also diversity among chapters, in size and in the uniqueness of the areas they cover.

• TSCPA continued its work to keep CPAs united by protecting their certificate and maintaining their positive image.

• The Rising Stars program was implemented, giving recognition to CPA members 40 years old and younger who have demonstrated leadership skills and active involvement in TSCPA, the accounting profession and/or their communities. They can provide a vision of how the world is changing and how the Society should adapt. (The names of the individuals recognized at this meeting as Rising Stars were in the March/April 2012 issue of this magazine.)

A key issue is that the financial statements do not include Medicare or Social Security, although most financial statements are expected to show obligations or liabilities on the balance sheet. Caturano provided alarming statistics about future expenditures in excess of future revenues. More information is available at aicpa.org/WhatsAtStake.

CPA Horizons 2025 is in place to gather insights from CPAs, business leaders, regulators, thought leaders and futurists. Participants have examined the trends affecting CPAs in their daily work, given opinions on how these trends will impact CPAs, and helped to identify actions the profession could take to meet challenges and leverage opportunities in the coming years. Core values are standing the test of time. One piece of information emerging with regard to competencies is that project management will be the most important skill for professionals.

Regulatory and legislative matters touched on included the JOBS Act, PCAOB activities including audit firm rotation, and tax issues (www. totaltaxinsights.org). An update on private company financial reporting summarized the Financial Accounting Foundation’s decision and AICPA’s work on a financial reporting framework for small/medium entities.

The new Chartered Global Management Accountant (CGMA) designation was highlighted. CGMAs are part of a new, worldwide network of management accounting professionals. The credential will enhance global awareness of their importance.

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.

Dick Bowen, CPA-Dallas, shared his saga as a whistleblower at a major financial institution and talked about continued failure to fully investigate his warnings. Details about the series of events are in a Spotlight on CPAs article in the May/June 2012 issue of this magazine.

The Dallas Chapter recently honored Bowen as CPA of the Year for his early efforts in drawing attention to certain mortgage lending practices that later contributed to financial turmoil in the U.S. and abroad. He told the audience that he has a new career, fulfilling a lifelong dream, as University of Texas at Dallas Naveen Jindal School of Management accounting professor.

AICPA American Institute of CPAs Vice Chairman Rich Caturano, CPA, discussed issues and initiatives AICPA is dealing with at the national level. A project with far-reaching impact is titled “What’s At Stake.” It is a nonpartisan program raising awareness that the U.S. government’s financial statements provide a different perspective compared to the annual budget, and educating stakeholders about the resulting effect.

AICPA is working to engage policymakers and citizens in a dialogue to make the country’s fiscal health a national priority.

FINANCIAL CRISIS LESSONS LEARNED

continued on next page

Rhonda Ledbetter is the TSCPA chapter relations representative. Contact her at 972-687-8508 or at rledbetter@tscpa.net.

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| SEPTEMBER/OCTOBER 2012

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Take Note He closed by expressing his hope that his story inspires others to act ethically. He encouraged listeners to be accountable in their work – to themselves, their profession, shareholders, and the values that made this country great.

REGULATORY AND LEGISLATIVE A preview of the upcoming session of the 83rd Texas Legislature was provided by TSCPA Managing Director for Regulation and Legislation, Bob Owen, CPA-Dallas.

The outcome of two or three elections for state Senate positions could cause a shift in power. Also, there will be significant turnover among legislators, with the fact that 37 (or more) representatives will not return. At least four Senate committee chairs and 11 in the House will be gone. Speaker Joe Straus is being challenged by Rep. Bryan Hughes for the House leadership position.

There are 24 incumbent legislators without TSCPA key persons and more than 40 new legislators with whom we must establish relationships. Members who know a legislator or candidate are encouraged to step forward and offer to become a key person to help represent the CPA profession on a personal level.

The budget will be a primary agenda item again, with education and Medicaid as two focus areas. The margin tax continues to be an issue, with a recent call from the chairman of the House Ways and Means Committee to make it “fairer and simpler.” Despite calls

EXECUTIVE BOARD 2012-2013 Fred Timmons, CPA-San Antonio Chairman Willie Hornberger, CPA-Dallas Chairman-elect Stephen Parker, CPA-Houston Treasurer Jeannette Smith, CPA-Rio Grande Valley Treasurer-elect Roxie Samaniego, CPA-El Paso Secretary Michael Brown, CPA-Central Texas Jesse Dominguez, CPA-Austin Charlotte Jungen, CPA-Southeast Texas

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Kathy Kapka, CPA-East Texas Lyn Kuciemba, CPA-Brazos Valley Mark Lee, CPA-Houston Jim Oliver, CPA-San Antonio Lei Testa, CPA-Fort Worth Mike Young, CPA-Panhandle Donna Wesling, CPA-Austin Immediate Past Chairman John Sharbaugh, CAE Executive Director/CEO

for reform, there will likely be no overhaul of the current system and no business income tax.

Next session, there is at least one issue of interest to CPAs. In 1999, the Legislature authorized the Texas State Board of Public Accountancy, along with two other agencies, to operate as a selfdirected, semi-independent (SDSI) agency. An SDSI agency is one that is allowed to self-fund its operations through license fees and other non-tax revenues, without being subject to the legislative appropriations process. The authorizing legislation is subject to review this year by the Sunset Advisory Commission and the process must be reauthorized during the next session.

Stay current on these and other important developments affecting CPAs by reading the Capitol Interest article in each issue of this magazine or visiting the Governmental Affairs blog at http:// tscpa.typepad.com/.

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. 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, named for Jerry and Roslyn Love and James A. and Charlotte Ann Smith.

The silent auction held at the Annual Meeting raised more than $9,000 for the AEF. The work of the AEF includes scholarships for senior and graduate accounting students at participating Texas universities. New in 2012, there will be nonrenewable $2,500 scholarships. They carry criteria that include a stated intent to sit for the CPA exam. The AEF is also making a $10,000 donation to the AICPA Minority Scholarships program.

Trustee John Misitigh, CPA-Houston, unveiled a strategic planning mechanism recently put into place by the AEF. It grew from a recognized need to address rising education costs and the mission to educate future CPAs. The AEF has adopted recommendations proposed by the Strategic Planning Task Force, creating a standing committee to implement the activities and embarking on a longterm program to grow cash inflows to supplement current spending and grow the asset base.

BUSINESS MATTERS 2011-2012 Treasurer Tracy Stewart, CPA-Brazos Valley, presented the year-end financial report, which can be viewed at tscpa.org.

2012-2013 Treasurer Stephen Parker, CPA-Houston, presented the new fiscal year 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.

Today’sCPA

| SEPTEMBER/OCTOBER 2012

PLANNING FOR THE NEW YEAR 2012-2013 Chairman Fred Timmons, CPA-San Antonio, talked about plans for the year. They include: • building awareness in colleges and universities, • recruiting and involving young CPAs, • encouraging chapters to engage this demographic, and • continuing current TSCPA young professionals activities.

He shared statistics about the number of people who have taken and passed the Uniform CPA Exam in Texas the last five years. TSCPA monitors the number of Texas licensees for the Society’s recruitment efforts.

New members are one of the most at-risk member segments, so TSCPA has several programs developed with them in mind.

The Young CPAs and Emerging Professionals Committee seeks opportunities to serve this member demographic and provides an entry point for them to get involved in the Society. It also plans an annual conference for candidates and young CPAs. The Rising Stars recognition program will be held again, and a new leadership program will debut in the spring. Read more about these and other initiatives at tscpa.org.

SPEAKERS’ PRESENTATIONS, OUTSTANDING CHAPTER AWARDS AND FUTURE SITES You can view speakers’ PowerPoint presentations through the TSCPA website at tscpa.org. Please see the Chapters column in this Today’s CPA issue for information about the recipients of the Outstanding Chapter Awards.

Las Vegas is the site for the 2013 Annual Meeting of Members and Board of Directors Meeting, June 28-29. In 2014, it will be held in Santa Fe, NM.

CHAPTER CHALLENGE GOLF TOURNAMENT There were 26 players who enjoyed the hospitality of the Corpus Christi Country Club. The final “average” scores were extremely close. John and Carolyn Sharbaugh and Jerry Cross played as at-large players with their scores added into the calculation of each chapter’s average score. The teams (chapters) placed as follows: San Antonio (77.3) – The Timmons family (Fred, Hinson and Rick), Jim Oliver, Bill Patton, Randy Vogel Central Texas (79.4) – Alton and Twila Thiele Corpus Christi (79.4) – Damian Shipley, Gilbert ‘Mark’ Elizondo Houston (79.7) – Mark Lee, Nick Spillios, Mike Spartalis, Dick and Nancy Rutledge Panhandle (80.3) – John Doucette, Dennis Spear, Mike Young East Texas (80.4) – Rodney Overman, Jeff Tague Austin (81.9) – Jesse Dominguez, Donna and Steve Wesling

Today’sCPA

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TSCPA 2010-2011 AWARD RECIPIENTS

Larry Edgerton, CPA-Permian Basin, 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. Edgerton has been a member since 1980, and has served the Society and his chapter in a variety of roles. They include service on at least 25 TSCPA committees, the Executive Board and Board of Directors, as a member of the AICPA Council, as chapter president, and as TSCPA’s 2005-06 chairman.

David Duree, CPA-Permian Basin, 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.

Duree has held several positions for NASBA and TSBPA, including serving as the presiding officer for TSBPA. He also serves as a mentor within his firm and volunteers for various professional, charitable, and civic organizations.

Walter Hill, CPA-Central Texas and Jim Tsakopulos, CPASan Antonio, were elected as Honorary Fellows. Included in the criteria is leadership in TSCPA on a consistent basis for a number of years. Each has served on various Society committees and councils, and many years on the Board of Directors. Hill was president of the Central Texas Chapter in 1978-79 and Tsakopulos served the San Antonio Chapter as president in 1990-91.

Charlotte Jungen, CPA-Southeast Texas, 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. She was certified and joined TSCPA in 1999. Her volunteer service to the Society and the Southeast Texas Chapter includes a term as chapter president, two terms on the Executive Board of TSCPA, and service to various committees. Jungen is also dedicated to giving back to community organizations.

Michael Brown, CPA-Central Texas, received the award for Outstanding Committee Chair. He has served on the Young CPAs and Emerging Professionals Committee since its creation in 2007 and as chair since 2010. Under his direction, the committee has developed a strategic vision for programs and services aimed at young members, hosted successful conferences for young CPAs, and raised the visibility of this important member segment within TSCPA. Charlie Evans was elected as an Honorary Member. He began representing TSCPA before the Texas Legislature in 1991. Since then, he has been involved with virtually every bill that has come before the Texas Legislature that impacts the accounting profession. He has helped TSCPA have an effective voice with state legislators.

SPECIAL RECOGNITION AWARDS

The Special Recognition Award is presented by the TSCPA chairman to honor members who have performed an extraordinary service to the Society in a given year. This year, the awards were presented to Art Agulnek, CPA-Dallas; Leroy Bolt, CPA-Abilene; Rosie Morris, CPA-Austin; and Mark Zafereo, CPA-Victoria.

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Capitol Interest

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

A Look into the Future have been thoroughly vetted. Texas is fortunate to have several CPAs serving in legislative office and running for election or re-election.

Please see the related article, “CPAs Running for Office,” (page 22) for more information about CPAs seeking legislative elective office.

CPAS’ NEXT SESSION CONCERNS

John Sharbaugh, CAE, TSCPA Executive Director/CEO; Rep. John Otto, CPA-Southeast Texas; and Bob Owen, CPA-Dallas, TSCPA Managing Director of Regulation and Legislation

ELECTIONS The future is over for those candidates who lost their primary runoff election. They can go back to whatever they were doing, nursing their bruised political ambitions. Lt. Gov. David Dewhurst is still our lieutenant governor, so unlike most losing candidates, he still serves in an elected office. Like most of us, he thought keeping his old job before getting a new one was a wise move.

What did the primary run-off results tell us?

The Tea Party is alive and well, incumbents are an endangered species and it takes more than money (it still takes money) to win an election in Texas. Republicans are still in charge in Texas, but the future may lie with different Republicans than in the past. Most Republican “establishment” candidates lost.

With the general election dead ahead on Nov. 6, you might wonder why you are not seeing the same level of political ads that inundated the airwaves before the primary run-off. That’s because Texas is not a swing state in the presidential election, and the November election is a mere formality for most other races. The Republicans continue to dominate statewide offices, and most of the 181 legislative races were determined (at least the party victor) by the redistricting process.

There is perhaps one state Senate race and

maybe half a dozen state House races that may be competitive. Even if the Democrats win a few of those contested seats, Republicans will continue to dominate the Texas Legislature.

Dewhurst’s failure to win the U.S. Senate Republican nomination likely caused groaning in the wings by those with statewide office ambitions. There is a very long list of others who would like to run for the lieutenant governor spot. At least one future candidate, Texas Land Commissioner Jerry Patterson, announced the day after the primary run-off that he planned to run for lieutenant governor regardless of Dewhurst’s plans (which were unknown at the time). And of course some of those who want to run for lieutenant governor currently occupy elected office and there are those who want those positions too. But maybe there will be more openings. Much of the press reported Dewhurst’s demise as further proof of Gov. Rick Perry’s falling political star. Perhaps Dewhurst and Perry won’t run for re-election; or perhaps they will have substantial primary opponents even if they do. Change is in the air.

CPAS RUN FOR LEGISLATIVE OFFICE CPAs make good legislators. They understand fiscal matters, pay attention to detail and are skeptical of proposals until they

A sales tax on professional services has raised its ugly head again. In the June 5 House Ways and Means Committee hearing, former Rep. Talmadge Heflin, speaking on behalf of the Texas Public Policy Foundation (TPPF), reiterated a long-standing position of TPPF that all Texas property taxes should be eliminated and the lost revenue replaced with an expanded sales tax. Heflin’s testimony offered two sales tax options: 1. A 12.5 percent sales tax on the current sales tax base plus sales of property, or 2. A 9 percent sales tax if the base is expanded to include both sales of property and “all services that are taxed in at least one other state.”

It’s option number two that would include sales taxes on professional services. I heard Heflin’s testimony at the time, but didn’t think much about it because he was just reiterating a long standing position of TPPF. During the last session, legislation was introduced proposing this property tax for sales tax switch by freshman Rep. James White (R-Hillister), but the bill was never scheduled for a hearing. Why am I now concerned?

Because Rep. Harvey Hildebran, Ways and Means Committee chairman, is now publicly saying this is a good idea. It’s one thing for a freshman lawmaker to introduce a bill; it’s quite another for the chairman of Ways and Means to talk about it. A bill authored by the Ways and Means chairman will get a hearing, and it has a high probability of being voted out of the committee. In response to all this property tax vs. sales tax swap talk,

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

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Rep. Jim Keffer (R-Eastland) commissioned former Deputy State Comptroller Billy Hamilton to study the issue. Hamilton’s report challenges the TPPF proposal as being unrealistic with regard to the sales tax rate that will be necessary and points out many other considerations that must be taken into account. Hamilton says the actual tax rate required to make the swap might be as high as 25 percent. He also points out the potential loss of local government control by cities, counties and school districts.

Another paper on eliminating property taxes, “Eliminating Property Taxes in Texas: A Detailed Fiscal Analysis” by Richard D. Cunningham was published by Texas Center for Economics, Law and Policy in Sept.

2010. It also took issue with the loss of local government control, but proposed procedures to solve that problem. Their proposal not only eliminates property taxes, but also replaces the current franchise tax with a 2.525 percent business sales tax on all business sales – paid by the business, not passed on to the public.

The elimination of the property tax is also one of the planks in the Texas Republican party platform. While it’s not time to panic (it’s a long way from talking about it to doing it), the issue has to be of concern to CPAs again. Perhaps CPAs will change their long-time mindset against a tax on professional services if they don’t have to pay property taxes anymore. I’d be interested in your thoughts; you can send them to me at bowen@tscpa.net.

It’s also not clear how this proposal can possibly fit into Perry’s opposition to new taxes; but who knows, maybe if you eliminate one tax and replace it with another, it’s not a tax increase; not very comforting to those individuals who suffer increased taxes.

Perry has his own proposals for the next legislative session he calls his “budget compact.” He is asking legislators to sign on and a number have already committed.

One of the elements is to “practice truth in budgeting.” While House Speaker Joe Straus has not commented specifically on the budget compact, he evidently has firmly embraced the budget transparency idea. In a July 9 House Appropriations subcommittee hearing, Straus criticized the long-held practice of using dedicated revenue funds to balance the state budget. It works like this: The Legislature votes to collect a tax or fee for a specific purpose (such as subsidizing hospital emergency room trauma care), collects the tax and then does not appropriate the expenditure of the funds. That keeps

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the funds in the treasury and helps balance the budget. The Legislature also has an even worse practice of authorizing the fund collection under the guise of a specific purpose, only later to use it for something else.

Straus noted that this deceptive practice has been firmly in place for two decades and that Comptroller Susan Combs reports that almost $5 billion sits unspent and unappropriated in these dedicated accounts. Straus asked the subcommittee to move towards eliminating the practice and to further consider whether the Legislature should even establish fees or taxes for dedicated purposes at all.

Combs reports that Texas will collect at least $5 billion more this fiscal year than she originally projected and that the so-called rainy day fund could top $8 billion, about $1 billion more than expected. Will that be enough to guarantee transparency? The fact that we haven’t had transparency in past surplus years isn’t comforting, but perhaps with Perry and Straus championing the cause there is reason for optimism.

There is nothing new to report on the franchise tax front. There are still no plans for overhaul, but some hope for a few improvements for some taxpayers.

Momentum is building to make the $1 million revenue floor permanent.

CPAs should be interested in a rather mundane issue that is up for sunset review for this session. The Texas State Board of Public Accountancy (TSBPA) operates as a self-directed, semi-independent (SDSI) government agency. An SDSI agency is one that is allowed to self-fund its operations through license fees and other non-tax revenues, without being subject to the legislative appropriations process. The legislation authorizing SDSI for TSBPA must be re-enacted in the 2013 session or the agency will revert to being just like all other government departments that contribute their collected revenues to the state and then have to ask the state for an appropriation to operate. The typical license fee collection followed by an appropriation is another area that typically lacks transparency. The Legislature frequently takes the revenues but appropriates less than those revenues back to the agency, thereby creating a hidden tax.

TSBPA has been a more effective and efficient agency as an SDSI agency. To learn more about TSBPA’s operations as an SDSI agency, please see the following article “Texas State Board of Public Accountancy Operates as a Self-directed, Semi-independent Agency.” ■

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Capitol Interest

CPAs Running for Office CPAs in Texas are not only active in supporting candidates for election, some are actually serving in and seeking public office. CPAs are good for government. They understand finances, budgets and maybe even taxes, unlike many other legislators. CPAs typically get into the details; they have an inherent drive to understand the financial implications of legislation.

Texas is fortunate to already have one TSCPA member serving in Congress and five TSCPA members serving in the state Legislature. Four of the five are incumbents and do not have a major party opponent in the November general election, so they will continue to serve. One current CPA House member is running against an incumbent state senator. One other TSCPA member is a candidate in an open House seat, but is opposed by a former House member.

Here’s a rundown on these CPAs willing to share their talents with the public.

the Senate Transportation and Homeland Security Committee, and was recently appointed as chairman of the powerful Senate Finance Committee. He also serves on the Finance, International Relations and Trade, Redistricting and State Affairs committees.

Williams is president of Woodforest Financial Services. He has sponsored a number of bills supported by TSCPA and has always been open to TSCPA’s legislative concerns. Williams is running for re-election with no major party opponent in November. He is being opposed by a Libertarian candidate.

REP. MIKE CONAWAY (R-MIDLAND); CONGRESSIONAL DISTRICT 11

REP. ANGIE CHEN BUTTON (R-GARLAND); HOUSE DISTRICT 112

Conaway is serving his fourth term in Congress and is well known to TSCPA members having been a frequent speaker at TSCPA’s Annual Meeting. Before being elected to Congress, he served as chairman of both the National Association of State Boards of Accountancy and Texas State Board of Public Accountancy. Rep. Conaway currently serves on the House Agriculture, Intelligence, Armed Services and Ethics committees. He also serves as Deputy Republican Whip and has helped organize a CPA caucus among congressional members. Rep. Conaway has earned the reputation as “a voice of reason” in Washington. His background as a CPA and profession leader has given him the credibility to be a vocal proponent of fiscal responsibility in government. Although Rep. Conaway has won his previous election campaigns by substantial margins, he does have a Democratic and Libertarian opponent in the November general election.

SEN. TOMMY WILLIAMS (R-THE WOODLANDS); SENATE DISTRICT 4

Williams has a long tenure in the Legislature.

He has served as a state senator since 2003 and served several terms in the Texas House of Representatives. He has become a leader in the Senate, having served as chairman of

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Button is serving her second term in the House. She serves on the powerful House Appropriations Committee (a good place for a CPA) and as vice-chair of the Technology Committee. Button is a marketing manager for Texas Instruments where she promotes American products internationally. She has been an effective legislator, already receiving recognition from a number of organizations, such as the Championship for Free Enterprise award from the Texas Association of Business.

Button has been responsive to TSCPA’s issues from the beginning of her legislative service.

She has no opponent in the November general election.

REP. JOHN C. OTTO (R-DAYTON); HOUSE DISTRICT 18

Otto has served in the House since 2004.

He serves as the vice-chairman of the House Ways and Means Committee, the tax writing committee of the House. He also serves as the chairman of one of the Appropriation subcommittees. When Otto first ran for the House, he was an individual practitioner with extensive tax experience. Because he was a hands-on tax practitioner, he is one of the most knowledgeable members on tax issues.

In his freshman year, he was called upon by

House leadership to explain the now infamous margin tax to his fellow legislators and he has been the House go-to guy on taxes since then.

Otto authored the bill (along with Williams) that reformed the property appraisal process in Texas, making appraisals more consistent across the state. TSCPA has worked closely with Otto on several bills during his tenure. Otto has no opponent in November.

REP. CHARLES PERRY (R-LUBBOCK); HOUSE DISTRICT 83

Perry (not related to Gov. Perry) is in his freshman term as a House member. He serves on the House Corrections, Defense and Veterans’ Affairs and Rules and Resolutions committees.

In his first term, Perry worked with TSCPA by agreeing to offer a floor amendment to a bill to overcome TSCPA’s concerns about the bill. Perry has his own accounting practice in Lubbock. He has no general election opponent.

REP. RAUL TORRES (R-CORPUS CHRISTI); HOUSE DISTRICT 33; SENATE DISTRICT 20

Although Torres is only in his first term in the House, he is now running for election to the state Senate against Democratic incumbent Sen. Juan “Chuy” Hinojosa from McAllen. In the House, Torres serves on the Appropriations and Insurance committees. Torres was a victim of the House redistricting process, which resulted in his being paired with another Republican representative in the same district. Torres elected to run for the Senate rather than stand for re-election. Senate District 20 is considered to be 54 percent Democratic based on past voter performance, but Torres won his House seat against a Democratic incumbent in what some called a “toss-up” district (51 percent Democratic).

PHIL STEPHENSON (R-WHARTON); HOUSE DISTRICT 85

Stephenson is running to fill an open House seat with no incumbent, but former Democratic Rep. Doro Olivo is opposing him in the November election. Past votes show the district to be a 56 percent Republican voter district. Olivo was defeated in her Democratic primary election in a different district in 2010. Stephenson has been involved in politics for some time, having served as a Republican County chairman. Stephenson has his own two-office accounting firm.

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Texas State Board of Public Accountancy Operates as an SDSI Agency Texas was one of the pioneer states to implement the concept of self-directed, semi-independent (SDSI) government agencies. An SDSI agency is one that is allowed to self-fund its operations through license fees and other non-tax revenues, without being subject to the legislative appropriations process. The agency is still subject to both legislative and executive branch supervision. Its employees must also comply with rules and regulations for government employees. It provides regular reports to both the Legislature and governor and is subject to audit by the state auditor.

Most government agencies collect license fees and other service revenues and turn these collections over to the general fund of the state. In turn, the Legislature appropriates funds from the state’s budget to operate the agency. Frequently, the Legislature’s appropriations bear no resemblance to the funds generated by the agency. In the case of the Texas State Board of Public Accountancy (TSBPA), the agency was historically funded at a level below the funds generated by license and examination fees.

In 1999, the Texas Legislature passed a pilot project to allow TSBPA, the Board of Architectural Examiners and the Texas Board of Professional Engineers to operate as SDSI agencies for a determined period. The legislation requires TSBPA to make an annual payment to the state of Texas general fund of $703,344 per year. Otherwise, the agency establishes the necessary license and exam fees in sufficient amounts to fund agency operations, subject to certain maximum fee amounts set forth in the Public Accountancy Act (Chapter 901: Occupations Code).

With the operational flexibility offered

by SDSI, TSBPA has been better able to respond to changing needs of the accounting profession while fulfilling its mandate of protecting the public interest. In recent years, TSBPA has expanded requirements for continuing professional education (CPE) for its licensees, instigated stronger ethics requirements for both exam candidates and licensees, strengthened its enforcement

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efforts, and had the ability to direct resources to prosecute major cases. The result has been a decrease in complaints and enforcement actions.

TSBPA has also instituted a rigorous effort to pursue non-licensees engaged in the unauthorized practice of accountancy to protect the public from unqualified individuals and organizations. After receiving complaints from CPAs about the quality of some CPE programs, TSBPA established a review program for CPE sponsors to help ensure that CPE offered to Texas licensees is of the highest quality.

During the 2009 session, the Texas Legislature transferred responsibility for administering the Scholarship Fund for Fifth-Year Accounting Students from the Higher Education Coordinating Board to TSBPA, which has substantially enlarged the program in both the number and size of scholarships awarded. By Board rule, the agency now directs enforcement penalties to the scholarship fund to provide additional funding for the program.

Operating as an SDSI agency has allowed TSBPA to accumulate sufficient funds to be able to handle any immediate funding issues, especially providing adequate resources to protect the public against unqualified or unethical practitioners and wouldbe practitioners. The Board can pursue appropriate disciplinary cases regardless of how well funded the respondent might be. The initial pilot program for these

three agencies has been so successful that additional agencies have been added to the SDSI program, and the pilot program deadline for review has been moved back more than once. The review time has finally arrived and SDSI legislation for TSBPA must be renewed during the 2013 legislative session. The Sunset Advisory Commission is currently reviewing SDSI and will make recommendations to the Legislature on whether to renew the legislation for another 12 years and perhaps suggest any appropriate changes in the statute.

TSCPA is supportive of SDSI and will be encouraging the Sunset Commission to recommend the 12-year extension. TSCPA has observed that the Board has developed a more robust operation, not only providing more adequate protection for the public, but also becoming much more efficient in its administrative and supervisory processes.

CPA license fees have remained reasonable throughout TSBPA’s SDSI tenure. License fees were increased from $30 to $60 in FY 2005 to ensure adequate funding for the prosecution of major cases, reduced to $45 in FY 2007 and to $30 in FY 2010. A fee increase to $41 has been approved to become effective in FY 2013. If TSBPA was not an SDSI agency, they would have to get the Legislature’s approval for an increase in revenue. While legislators typically are happy for agencies to raise fees, they are more reluctant to lower them.

SDSI gives TSBPA the flexibility to change the fees, up or down, as the circumstances warrant. TSBPA has evidenced trustworthy stewardship under SDSI over the past 12 years.

TSBPA has a very good track record when it comes to enforcing the Public Accountancy Act. Many such boards in other states do not have adequate resources to pursue offenders. Competent, qualified and ethical CPAs are the losers when others are not held accountable for inappropriate actions. TSCPA embraces the highest ethical standards for the accounting profession and believes a well run and sufficiently funded accountancy board is in the best interest of both the public and the accounting profession.

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Cover Article

THE ABCS OF INVESTING

FOR HIGHER EDUCATION

BY BRINN SERBANIC, CPA, CFP®

T

he volatility of the economy and stock market in recent years has investors and parents scrambling for a safe haven to preserve the nest egg intended for their children’s future education. Tuition inflation is outpacing market returns, and the formerly conservative college savings assumption of a 5 percent annual return compounded over an 18-year period is now wishful thinking. Therefore, with the future far from certain, investors should closely analyze the options available for higher education savings.

Internal Revenue Code (IRC) Section 529 provides favorable federal tax treatment for “qualified tuition programs.” A qualified tuition program is defined as either: a college savings plan or a prepaid tuition program.

529 COLLEGE SAVINGS PLANS The purpose of a college savings plan under Section 529 is to invest after-tax dollars in the market to generate earnings that grow tax-deferred and then may be withdrawn tax-free for higher education.

Eligible Expenses Plan funds may be used for tuition, fees, books, room and board, equipment, and other “qualifying higher education expenses” as defined in Section 529(e)(3)(A).

Return on Investment The key factor distinguishing college savings plans from prepaid tuition plans is that a return on investment, even preservation of principal, is subject to market risk. However,

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for incurring greater risk, account owners have the potential for greater returns.

The majority of savings plans require the investor to select an investment portfolio at the time of plan enrollment, and then the plan’s manager directs and maintains the investment mix.

Portfolios typically employ an age-based asset allocation strategy; thus, the plan invests aggressively when the beneficiary is young and gradually becomes more conservative as the beneficiary nears college age. Investors should also research portfolio options such as principal protection portfolios, money market accounts and guaranteed investments. In accordance with Internal Revenue Service (IRS) Notice 2001-55, account owners are permitted to change the plan’s investment option once per year or when changing beneficiaries.

Plan Requirements A U.S. citizen age 18 or older may enroll in a savings plan offered by any state at any time during the year. The plan offerings vary from state to state with regard to fees and portfolio options, so investors should shop around for the plan with the best fit. The purchaser of the plan is the account owner and retains control of the funds. The account owner may change the beneficiary of the plan at any time and as many times as desired, without penalty or tax, provided the new beneficiary is a member of the family of the old beneficiary. Section 529(e)(2) provides a detailed list of eligible members of the family, including children of the old beneficiary.

Account owners may transfer funds in an existing 529 plan to another savings plan or prepaid tuition plan for the same

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beneficiary once per year without tax or penalty. Rollovers to a different beneficiary who is a member of the family of the old beneficiary may occur at any time, and there is no limit on the number of rollovers per year.

Investment Limit The investment limitation on Section 529 plans is high compared to other savings vehicles, such as individual retirement accounts (IRAs). Each state imposes its own limitation, and Texas currently restricts investment in Texas-administered Section 529 plans to a total value of $370,000 per beneficiary. The limitation is specific to Texas accounts, so if a Wisconsin savings plan and a Texas prepaid plan are maintained for the same beneficiary, the value in the Wisconsin plan does not count towards the beneficiary’s Texas maximum program limit. There are no income phase-outs on contributions or withdrawals from 529 plans.

Plan Fees Account owners typically incur a flat annual maintenance fee and a variable plan manager fee; however, the amounts and fee structure depend on the state plan chosen.

529 PREPAID TUITION PLAN (TEXAS TUITION PROMISE FUND) The purpose of the Texas Tuition Promise Fund is to contribute after-tax dollars to purchase units of tuition credits at today’s prices for future redemption at tomorrow’s prices.

Eligible Expenses In contrast to college savings plans, prepaid tuition plan credits are used solely for tuition and required fees. Therefore, room, board and textbooks would be paid out-of-pocket or with an alternative savings vehicle. Under the Texas plan, 100 tuition units is equal to 30 semester hours. The cost of a tuition unit is set annually for each new enrollment period.

Return on Investment An investor’s account consists of tuition units, representing semester hours, which are to be redeemed in the future. Hence an investment in a prepaid tuition plan is guaranteed by the state government to increase at the same rate as college tuition. In the past decade, tuition rates have increased at approximately double the inflation rate, so prepaid plans are a low-risk investment option.

Plan Requirements Any U.S. citizen or legal resident age 18 or older may open an account provided the beneficiary is a Texas resident. If the beneficiary is not a Texas resident, then his/her parent must be the account purchaser and a Texas resident. The enrollment period for opening new accounts is Sept. 1 through Feb. 28 of each year; though for beneficiaries under one year of age, the enrollment period is extended to July 31. Tuition units may not be redeemed until three years after the date the unit was purchased.

Because account owners are dealing in tuition units rather than dollars, contributions are not invested in individual investment portfolios to generate individual returns, but rather all contributions

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are pooled in the general fund and the plan’s money manager is responsible for producing a return that will meet the plan’s future obligations. The state is responsible for covering any shortfall between the pool’s investment returns and tuition liabilities. As with college savings plans, the purchaser is the account owner and retains control of the funds. The account owner may change the beneficiary of the plan at any time and as many times as desired, without penalty or tax, provided the new beneficiary is a member of the family of the old beneficiary as defined in Section 529(e)(2).

The Texas Tuition Promise Fund offers three types of tuition units.

Type I – All Texas College Units: Type I units are purchased towards tuition and required fees at any Texas public university, including the most expensive school; therefore, Type I units are more costly than the other types. If the beneficiary attends a less expensive school, then fewer Type I units are required to claim the same number of semester hours. If any units remain at the conclusion of the beneficiary’s education, the units may be transferred to another beneficiary or refunded.

Type II – Four-Year State School Units: Type II units provide for the current weighted-average cost of tuition and fees across all fouryear Texas public universities. The weighted average cost is the sum of each university’s tuition multiplied by the university’s number of in-state students enrolled and then divided by the total number of in-state students enrolled at all universities. If the beneficiary attends a school in which tuition is greater than the weightedaverage cost, more Type II units must be claimed to receive the same amount of semester hours.

Type III – Community College Units: Type III units apply to the weighted-average cost of tuition and fees across all two-year Texas colleges.

The Texas prepaid tuition plan also offers three different types of payment plans: • lump sum – the investor purchases a set number of tuition units in a one-time payment and the unit price is locked in; • installment plan – the investor specifies the number of units desired and then selects a particular payment plan, locking in the unit price in effect; the payment plans are subject to an 8 percent annual interest rate; • pay-as-you-go plan – the investor purchases units at random and pays the unit price in effect at the time of payment.

Investment Limit Texas currently limits all Texas-administered Section 529 investments to a total value of $370,000 per beneficiary. There are no income phase-outs on contributions or withdrawals from 529 plans.

Plan Fees Account purchasers pay a flat $25 application fee at enrollment and no further maintenance charges throughout the life of the plan.

However, the plan charges small fees for administrative items, such as late payments and document replacement. continued on next page

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Cover Article ABCS OF HIGHER ED continued from previous page

COMPARISON OF POTENTIAL SCENARIOS Perhaps the greatest unknown variable factoring into plan choice is what path the beneficiary will take down the road. The Texas Tuition Promise Fund is primarily designed for beneficiaries who will enroll at a Texas public university. College savings plans provide more flexibility in higher education options, but what if the beneficiary decides not to attend college at all? Or what if the student receives a full scholarship? Chart 1 analyzes many potential scenarios that could impact the availability and effective use of invested funds. However, note that in any situation, the account owner has the option to change the beneficiary, thus avoiding taxation or penalty.

Under both types of plans, the federal tax consequences of Code Section 529 are the same. Withdrawals for qualified education expenses avoid taxation, while non-qualified distributions (i.e., those made for any reason other than higher education) result in the earnings being subject to tax and a 10 percent penalty. In the case of death or disability of the beneficiary or receipt of a scholarship, the penalty is waived.

Although Section 529 governs the taxation of distributions, the investor’s choice of plan determines the amount of the distribution.

Because the Texas Tuition Promise Fund deals in tuition units rather than investment dollars, the distribution received under scenarios other than attendance at a Texas public university may be either the refund value or the transfer value.

The refund value is equal to: • the purchase price of unused tuition units, plus or minus • the adjusted annual net earnings or losses on contributions

made to purchase the units; the adjusted annual net earnings are computed at a rate set by the Board that is up to 2 percent less than the actual investment return for each year; the annual net earnings are capped at a maximum of 5 percent per year.

The transfer value is equal to the lesser of: • the costs that the unit would cover at a public in-state university or • the original purchase price of the unit plus or minus the plan’s net investment earnings or losses on that amount.

The refund and transfer value calculations are not intended to provide a significant rate of return. Under either the refund value or the transfer value, the distribution received may be less than the initial investment if a negative return was incurred over the life of the contract. Preservation of principal is not guaranteed under all circumstances. Thus, the risk of the Texas prepaid plan lies not in investment performance, but rather in the actions of the beneficiary who may opt for an education outside of a Texas public university.

CONTRAST SAVINGS PLAN VS. PREPAID PLAN Both plans typically have a minimal impact on need-based financial aid consideration because the plans are counted as assets of the account owner and not the beneficiary. Prepaid tuition plans assess significantly lower fees, but college savings plans offer greater flexibility for the beneficiary to select any type of higher education, such as private, out-of-state or technical colleges. Fund earnings in a savings plan are determined by the market rate of return, which hopefully exceeds the tuition inflation rate over the life of the

Chart 1: Comparison of Potential Scenarios Potential Scenario

Federal Tax Consequences Applicable to Both Plans

Texas Tuition Promise Fund

529 College Savings Plan

Beneficiary does not attend college

Earnings subject to tax and 10% penalty

Refund Value

Beneficiary unable to attend (death or disability)

Earnings subject to tax but no penalty

Refund Value

Beneficiary attends college later in life

Distributions when taken not subject to tax or penalty

Withdrawals must be completed within 10 years of beneficiary's projected high school graduation, excluding U.S. military service After 10 years, open contracts cancelled and receive Refund Value

Account remains open indefinitely, no penalty

Trade school

Distributions not subject to tax or penalty

Transfer Value

Funds eligible for use

Community college

Distributions not subject to tax or penalty

Funds eligible for use

Funds eligible for use

Private university

Distributions not subject to tax or penalty

Transfer Value

Funds eligible for use

Out-of-state university

Distributions not subject to tax or penalty

Transfer Value

Funds eligible for use

International university

Distributions not subject to tax or penalty

Transfer Value

Funds eligible for use at certain foreign colleges

Graduate or professional school

Distributions not subject to tax or penalty

Transfer Value - transfer units remaining after undergrad to savings plan

Funds eligible for use

Scholarship recipient

Earnings taxed but no penalty on distributions up to scholarship value

Refund Value

Plan rollover to another plan type

Distributions not subject to tax or penalty

Transfer Value

Any non-qualified withdrawal

Earnings subject to tax and 10% penalty

Refund Value

Beneficiary Attends:

26

Today’sCPA

| SEPTEMBER/OCTOBER 2012

investment. However, prepaid plans tend to function as a hedge against the market. In recessions or downturns, state governments typically reduce funding for higher education, resulting in tuition increases. Thus prepaid plans are increasing in value when college savings plans are losing value in the market.

The major risk of the Texas Tuition Promise Fund is that the plan is under the control and budget of the state government. The state reserves the right to modify benefits paid in the case of projected actuarial deficits. In fact, the predecessor to the Texas Tuition Promise Fund was the Texas Guaranteed Tuition fund, which was closed because investment returns did not keep pace with tuition inflation. In the case of plan termination, investors will receive the refund value for their tuition units. However, contracts remain in effect for currently enrolled beneficiaries and those projected to graduate from high school no later than the third anniversary of the date the plan is terminated.

ALTERNATIVE OPTIONS The options for higher education savings are certainly not limited to college savings plans or the Texas prepaid plan. Two other types of prepaid tuition plans to consider are: private prepaid tuition plans and the Independent 529 plan. Private prepaid tuition plans are sponsored by an individual university and investors purchase tuition credits for the beneficiary to redeem at the particular university offering the plan.

The Independent 529 plan is a prepaid tuition plan specifically for private colleges and universities. Currently, 270 schools participate, and new member schools that join must honor existing tuition certificates from all current account owners. If the beneficiary attends a public or non-participating college, the account owner may roll the value of the plan into a state-sponsored 529 with no federal tax effect; however, earnings are adjusted based on the net performance of the program, subject to maximum earnings or maximum losses of 2 percent per year.

Apart from prepaid plans, a wide variety of bonds and certificate of deposit (CD) options are available. The CollegeSure CD offered

by College Savings Bank is an FDIC-insured CD with a variable interest rate based on the College Board’s Independent College 500 Index. Thus, the return is indexed by the average increase in private college tuition rather than public college tuition. Each year’s interest rate equals the private college inflation rate minus an issue margin determined at the contribution date. For 2011, the inflation rate was 4.36 percent and the issue margin was 2.35 percent (for CDs with a five-year or more term), resulting in an interest rate of 2.01 percent. Further, the maximum interest rate in any year is equal to the CD’s first year interest rate (2.01 percent) plus an interest rate cap (3 percent for 2011); so for accounts purchased in 2011, the maximum interest rate for any year during the life of the CD is 5.01 percent. The issue margin and the interest rate cap are determined on the contribution date; therefore, investments in the CD would be optimal in years that interest rates are high.

The CollegeSure CD is a conservative investment vehicle with the primary advantage being the guarantee of preservation of principal.

In addition, there are no fees, the funds may be used at any school for qualifying education expenses, and interest earnings are backed by the federal government. The disadvantage is that the account owner must specify a maturity date at the opening of the account and early redemption penalties apply.

ADDITIONAL TAX CONSIDERATIONS Estate and gift tax implications must be critically evaluated at each stage of the planning process. A feature unique to Section 529 plans is that gifts to the plan are treated as completed gifts of present interest, thus qualifying for the annual exclusion, even if the contributor is also the account owner controlling the funds. Also distinct to Section 529 plans is the accelerated gift option, which allows a donor to gift five years worth of the applicable annual exclusion amount in one year. Hence an individual may contribute up to $65,000 per beneficiary in one year to a Section 529 plan and a married couple may contribute $130,000. However, additional gifts to the beneficiary during the five years after the contribution will cut into the donor’s lifetime exclusion. Section 529(c)(5)(A) states that distributions from Section 529 plans are not considered gifts to the beneficiary, although, per Section 529(c)(5)(B), a transfer of an account to a new beneficiary will be treated as a taxable gift from the old beneficiary if the new beneficiary is in a younger generation than the old beneficiary.

With regard to federal education tax credits and deductions, IRS Publication 970 clarifies that no double benefit is permitted.

Thus education expenses paid for by tax-free distributions from a qualified tuition program may not be the same education expenses used in calculating the tuition and fees deduction or education credits.

Account owners should keep in mind the following tax planning strategy in the event that major losses are incurred during the life of a Section 529 plan. The law permits investors to withdraw the funds, paying no tax or penalty on the distribution, because the plan has generated an overall loss, and claim the loss as a miscellaneous itemized deduction subject to 2 percent of adjusted gross income.

After a 61-day period has lapsed, thus preventing the distribution from being deemed a non-taxable rollover, the investor may contribute the funds back into a Section 529 plan. Essentially, the taxpayer is able to claim current losses with no effect on plan funds.

THE VALUE OF DIVERSIFICATION Investors face a formidable task in wading through the broad variety and sheer volume of investment vehicle offerings to select the plan with the best fit for a specific beneficiary. In evaluating college savings plans versus prepaid tuition plans, a clear winner is only apparent in a particular situation and set of assumptions. As a result, the value of a diversified portfolio can never be understated in saving for higher education.

■

Brinn Serbanic, CPA, CFP®, is a tax accountant for Pattillo, Brown & Hill, LLP in Waco, Texas, and can be reached at brinn.serbanic@

pbhcpa.com.

Today’sCPA

| SEPTEMBER/OCTOBER 2012

27

CPE Article

BY KAREN M. OXNER, DBA, AND THOMAS OXNER, PH.D.

REPORTING COMPREHENSIVE INCOME

THE TIME TO CHANGE IS HERE CPE Self Study Curriculum: Accounting and Auditing Level: Intermediate Designed For: Business and industry, as well as public practice; anyone who is involved in the preparation of financial statements Objectives: 1.) To understand the historical development of comprehensive income and the current reporting requirements; 2.) To understand the components of comprehensive income and the magnitude of these components Key Topics: Comprehensive income, other comprehensive income, FASB Codification Section 220, SFAS No.130 Prerequisites: Basic knowledge of financial accounting

Throughout the first half of the 20th century, accountants disagreed as to what should be reported in net income. The competing schools of thought were (1) the current operating concept and (2) the all-inclusive concept. The current operating concept requires that only income from normal operations be included in income of the current period. The all-inclusive concept defines net income of the period as the total change in proprietorship, except for dividend distributions and capital transactions.1

Advanced Preparation: None

28

Today’sCPA

| SEPTEMBER/OCTOBER 2012

The purpose of this article is to describe the historical development of reporting Comprehensive Income and, most importantly, recent changes to the relevant standards to be implemented in 2012. Finally, the impact of these changes are examined for a sample of companies.

HISTORICAL DEVELOPMENT The Financial Accounting Standards Board (FASB) ended the aforementioned debate in favor of the all-inclusive concept when it promulgated Statement of Financial Accounting Concepts No. 3, Elements of Financial Statements of Business Enterprises (SFAC No. 3) in 1980. Although the basic premise remained unchanged, FASB issued SFAC No. 6, Elements of Financial Statements, in 1985 superseding SFAC No. 3. Both of these SFACs introduced the concept of comprehensive income as one of the 10 elements of financial statements. “Comprehensive income is the change in equity of a business enterprise during a period from transactions and other events and circumstances from nonowner sources. It includes all changes in equity during a period except those resulting from investments by and distributions to owners.”2 The specification of comprehensive income as one of the 10 elements of financial statements in SFAC Nos. 3 and 6 indicated that it must be presented in the financial statements of an enterprise.

At the time that these statements were issued, an authoritative pronouncement indicating the nature of this presentation was lacking, and these changes in equity could be displayed in a statement that reports the results of operations or included directly in balances within a separate component of equity in a statement of financial position.3 In June 1997, FASB addressed the presentation of comprehensive income, issuing Statement of Financial Accounting Standards No. 130 (SFAS No. 130) Reporting Comprehensive Income. SFAS No. 130 requires that comprehensive income be reported in financial statements. The definition of comprehensive income used in SFAS No. 130 remains the same as that used in SFAC No. 6 and previously referenced. Likewise, the purpose of reporting comprehensive income is to report all changes in the equity of an enterprise as a result of transactions and other economic events of the period other than transactions with owners in their capacity as owners. In effect, SFAS No. 130 requires that all changes in equity, other than net income and transactions with owners, be reported within comprehensive income.

SFAS No. 130 divided comprehensive income into two categories: (1) net income and (2) other comprehensive income.4 Thus, firms must continue to report net income in the financial statements generally defined as revenues minus expenses. Other comprehensive income includes non-owner transactions that do not affect net income, but do affect equity. Items in other comprehensive income are to be classified based on their nature. At the time SFAS No. 130 was issued in 1997, the types of events included foreign currency items, minimum pension liability adjustments, and unrealized gains and losses on certain investments in debt and equity securities.5

Today’sCPA

| SEPTEMBER/OCTOBER 2012

In addition to specifying the elements of comprehensive income, SFAS No. 130 indicated that comprehensive income may be reported in three possible formats: 1. A separate statement of comprehensive income.

2. Below net income in a combined statement of results of operations.

3. As a component of a statement of changes in stockholder’s equity.

The preferred alternatives are 1 and 2 listed above.6 Subsequent to the issuance of SFAS No. 130, FASB issued the Accounting Standards Codification (ASC), which indexes accounting standard by topic. Comprehensive Income is discussed in Section 220 of the Codification (ASC 220).

CHANGES IN THE REPORTING REQUIREMENTS FOR COMPREHENSIVE INCOME Effective for fiscal periods beginning after Dec. 15, 2011, the reporting requirements for public companies relating to comprehensive income were modified (ASU 2011-05). The three reporting alternatives were reduced to two. The new reporting requirements stipulate that an entity must report comprehensive income in either (1) a single continuous financial statement or (2) in two separate but consecutive financial statements.7 The following items are required to be presented in the single continuous financial statement: a. A total amount for net income together with the components that make up net income. b. A total amount for other comprehensive income together with the components that make up other comprehensive income. c. Total comprehensive income.8 continued on next page

29

Reporting Comprehensive Income continued from previous page

An entity that chooses to report comprehensive income in two separate but consecutive statements is required to present the following: a. Components of, and the total for, net income in the statement of net income. b. Components of, and the total for, other comprehensive income, as well as a total for comprehensive income in the statement of other comprehensive income, which shall be presented immediately after the statement of net income. A reporting entity may begin the second statement with net income.9 As additional financial reporting standards have been issued, the items that may be included in comprehensive income have increased. The following is an updated list of the items that may be included in comprehensive income: a. Foreign currency translation adjustments. b. Gains and losses on foreign currency transactions that are designated as, and are effective as, economic hedges of a net investment in a foreign entity, commencing as of the designation date. c. Gains and losses on intra-entity foreign currency transactions

d. e. f. g.

h.

i.

that are of a long-term investment nature (that is, settlement is not planned or anticipated in the foreseeable future), when the entities to the transaction are consolidated, combined or accounted for by the equity method in the reporting entity’s financial statements.

Gains and losses (effective portion) on derivative instruments that are designated as, and qualify as, cash flow hedges.

Unrealized holding gains and losses on available-for-sale securities.

Unrealized holding gains and losses that result from a debt security being transferred into the available-for-sale category from the held-to-maturity category.

Amounts recognized in other comprehensive income for debt securities classified as available-for-sale and held-to-maturity related to an other-than-temporary impairment recognized in accordance with Section 320-10-35 if a portion of the impairment was not recognized in earnings.

Subsequent decreases (if not an other-than-temporary impairment) or increases in the fair value of available-forsale securities previously written down as impaired (see paragraph).

Gains or losses associated with pension or other

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Today’sCPA

| SEPTEMBER/OCTOBER 2012

TABLE 1: REPORTING FORMAT AND RELATIVE SIZE OF COMPREHENSIVE INCOME Firm Name

Reporting Format*

Comprehensive Income (loss)

Net Income (loss)

CI as a % of NI

Genworth Financial Inc

1

$1,681.0

$ 285.0

589.82%

Metlife Inc

2

6,796.0

2,790.0

243.58%

Owens-Illinois Inc

3

114.0

(47.0)

242.55%

Torchmark Corp

3

859.2

517.1

166.17%

AK Steel Holding Co

3

(204.2)

(128.9)

158.42%

Nabors Industries Ltd.

3

144.0

94.7

152.06%

Sears Holdings

3

222.0

150.0

148.00%

Leucadia National Corp

3

2,642.6

1,940.2

136.20%

Harley Davidson Inc

3

194.7

146.5

132.93%

QEP Resources Inc

3

436.3

329.1

132.57%

Hess Inc

3

2,641.0

2,125.0

124.28%

Fifth Third Bancorp

3

880.0

737.0

119.40%

Cephalon Inc

3

494.5

425.7

116.17%

Newmont Mining Corp

3

3,600.0

3,116.0

115.53%

Conoco Phillips

3

13,066.0

11,358.0

115.04%

Deere & Co

3

2,078.7

1,865.0

111.46%

Polo Ralph Lauren

3

629.4

567.6

110.89%

CA Inc

3

888.0

827.0

107.38%

PPL Corp

3

1,017.0

959.0

106.05%

Plum Creek Timber Co Inc

2

221.0

213.0

103.76%

KLA Tencor Corp

3

823.4

794.5

103.64%

Exxon Mobil Corp

2

32,391.0

31,398.0

103.16%

Limited Brands Inc

3

821.0

805.0

101.99%

Abercrombie & Fitch

3

152.7

150.3

101.63%

Kraft Foods

3

4,179.0

4,114.0

101.58%

Davita

3

490.3

484.2

101.26%

Broadcom Corp.

3

1,092.9

1,081.8

101.03%

Micron Technology Inc

3

1,865.0

1,850.0

100.81%

Bed, Bath, & Beyond

3

795.7

791.3

100.56%

Family Dollar

3

360.0

358.1

100.53%

Air Products & Chemicals

3

1,058.7

1,054.5

100.40%

Compuware

3

141.1

140.8

100.18%

AT&T

3

19,898.0

19,864.0

100.17%

National Oilwell Varco Inc

2

1,660.0

1,659.0

100.06%

Apple Inc

2

13,890.0

14,013.0

99.12%

AutoZone

3

723.9

738.3

98.05%

Expedia Inc.

3

413.8

425.5

97.25%

Marriott International Inc

3

443.0

458.0

96.72%

Noble Energy Group

3

696.0

725.0

96.00%

Celgene Corp

2

838.3

880.2

95.24%

Dover Corp

2

665.4

700.1

95.05%

Mastercard Inc

3

1,748.0

1,847.0

94.64%

C R Bard Inc

3

478.1

509.6

93.82%

Gannett Co Inc

3

574.3

622.8

92.21%

Pinnacle West Capital Corp

3

321.9

350.1

91.96%

Equifax Inc.

2

248.8

274.8

90.54%

Hasbro Inc

3

347.3

397.8

87.31%

FMC Corp

3

152.0

184.9

82.21%

Hudson City Bancorp

3

438.1

537.2

81.55%

Tellabs Inc

2

124.4

155.6

79.95%

Reporting Format* 1=Separate Statement of Comprehensive Income 2=Combined Statement of Earnings and Comprehensive Income 3=Included in the Statement of Changes in Stockholder’s Equity

Today’sCPA

| SEPTEMBER/OCTOBER 2012

continued on next page

31

Reporting Comprehensive Income continued from previous page

postretirement benefits (that are not recognized immediately as a component of net periodic benefit cost). j. Prior service costs or credits associated with pension or other postretirement benefits. k. Transition assets or obligations associated with pension or other postretirement benefits (that are not recognized immediately as a component of net periodic benefit cost).10

EMPIRICAL EXAMINATION OF REPORTING OF COMPREHENSIVE INCOME At the time the data were gathered for this article, companies were allowed to report comprehensive income in three different formats: 1. A separate statement of comprehensive income.

2. Below net income in a combined statement of results of operations.

3. As a component of a statement of changes in stockholder’s equity.

FASB clearly stated that the preferred reporting alternatives are 1 and 2.11 Since alternative 3 has disappeared at the end of 2011, will this change have a large impact upon current financial reporting?

Fifty companies were randomly selected from the Standard and Poor’s 500 Companies (S&P 500) to examine their reporting practices with respect to comprehensive income. The fiscal years of

32

the companies selected ended prior to Oct. 1, 2011. The companies that were selected are listed in Table 1 (see page 31) along with the format they use to report comprehensive income. Forty companies (80 percent) report comprehensive income as a component of the Statement of Changes in Stockholder’s Equity. Nine (18 percent) of the companies examined use the Combined Statement of Net Income and Comprehensive Income reporting format. Only one firm (2 percent) used the separate Statement of Comprehensive Income reporting format.

If this sample can be extrapolated to the population of firms reporting in the United States, then 80 percent of firms will be required to change their reporting format. Thus, the new reporting requirements for comprehensive income will indeed require significant changes in the reporting formats that firms are using.

The new reporting requirements ensure that comprehensive income and the components of other comprehensive income will be more noticeable for financial statement users. This change in reporting warrants further analysis of other comprehensive income. Is other comprehensive income typically a material amount and what are its most common components?

To gather information on the materiality of other comprehensive income, Table 1 also presents net income (NI), comprehensive continued on next page

Today’sCPA

| SEPTEMBER/OCTOBER 2012

TABLE 2: DOLLAR VALUE OF THE COMPONENTS OF COMPREHENSIVE INCOME Firm Name

Difference Between NI and CI

Foreign Currency

Marketable Securities

Derivatives

Post Employment Benefits

AK Steel Holding Co

$(75.30)

$(0.80)

$1.30

$0.90

$(76.70)

Abercrombie & Fitch

2.46

3.40

(0.62)

(0.32)

Air Products & Chemicals

4.20

137.70

10.20

3.20

Apple Inc

(123.00)

7.00

123.00

(253.00)

AT&T

34.00

271.00

(8.00)

(322.00)

Bed, Bath, & Beyond

4.40

4.70

(0.60)

AutoZone

(14.42)

0.71

(0.10)

Broadcom Corp.

11.14

15.19

(4.05)

CA Inc

61.00

58.00

C R Bard Inc

(31.50)

(38.40)

Celgene Corp

(41.90)

(18.20)

Cephalon Inc

68.83

66.70

Compuware

0.26

0.26

Conoco Phillips

1708.00

1404.00

158.00

Davita

6.08

(0.13)

0.62

5.56

Deere & Co

213.70

35.80

5.00

14.90

Dover Corp

(34.68)

(33.64)

0.23

Equifax Inc.

(26.00)

(1.10)

Expedia Inc.

(11.70)

(12.00)

Exxon Mobil Corp

993.00

1059.00

Fifth Third Bancorp

143.00

FMC Corp

(32.90)

Family Dollar

1.91

Gannett Co Inc

(48.52)

(21.53)

Genworth Financial Inc

1396.00

236.00

1038.00

122.00

Harley Davidson Inc

48.24

9.50

(0.13)

(2.97)

41.80

Hasbro Inc

(50.48)

(32.50)

(5.00)

(13.00)

Hess Inc

516.00

30.00

458.00

28.00

Hudson City Bancorp

(99.13)

KLA Tencor Corp

28.90

28.00

Kraft Foods

65.00

(13.00)

Leucadia National Corp

702.33

(7.86)

Limited Brands Inc

16.00

(1.00)

Marriott International Inc

(15.00)

(15.00)

Mastercard Inc

(99.00)

(107.00)

5.00

Metlife Inc

4006.00

(358.00)

4257.00

11.00

96.00

Micron Technology Inc

15.00

11.00

5.00

1.00

(2.00)

Nabors Industries Ltd.

49.30

60.90

(8.20)

(3.20)

(0.20)

National Oilwell Varco Inc

1.00

13.00

(13.00)

1.00

Newmont Mining Corp

484.00

98.00

130.00

(13.00)

Noble Energy Group

(29.00)

Owens-Illinois Inc

161.00

122.00

(2.00)

41.00

Polo Ralph Lauren

61.80

91.40

(25.00)

(4.60)

Pinnacle West Capital Corp

(28.15)

(19.70)

(8.50)

Plum Creek Timber Co Inc

8.00

PPL Corp

58.00

QEP Resources Inc

107.20

Sears Holdings

72.00

93.00

Tellabs Inc

(31.20)

(35.40)

(2.80)

Torchmark Corp

342.14

3.25

346.80

Today’sCPA

| SEPTEMBER/OCTOBER 2012

(26.00)

Other Items

(146.90)

91.00

$2.00

0.30 (6.90)

(8.13)

3.00

2.90

0.90

6.00

(20.90)

(5.70) 2.10

146.00

158.00 (1.30)

0.20

(25.10)

0.33 55.00

(121.00)

101.00

17.00

25.00

22.40

(5.90)

(23.40)

1.91 (27.28)

(88.50) 0.30

715.59

0.30

(10.60) 1.20

(0.60)

(22.00)

100.00

0.31

(5.71)

17.00

269.00

3.00

(29.00)

2.00 (59.00)

24.00

6.00 93.00 136.70

(29.50)

(9.00)

(12.00)

6.40

0.60 (7.90)

33

Reporting Comprehensive Income continued from previous page

income (CI), and CI as a percentage of NI for the most recent fiscal period. The data in Table 1 is sorted based upon the magnitude of CI as a percentage of NI. For some firms, CI is larger than NI, while for others the opposite is true. If an arbitrary materiality threshold of 10 percent is used, 21 of the firms (42 percent) have a difference that is greater than 10 percent. For 17 of these firms, CI is greater than 110 percent of NI (ranging from 110 percent to 589 percent, with a mean of 171 percent). Four firms have CI that is less than 90 percent of NI (ranging from 87 to 79 percent with a mean of 83 percent). In this sample, firms whose CI was greater than NI were not only more numerous, but the increases were of larger amounts and greater variability than firms whose CI was less than NI. For the remaining 29 firms (58 percent), the difference between CI and NI is 10 percent or less. The relationship between CI and NI will become more visible when comprehensive income is required to be reported as a continuation of the Income Statement or as a separate Statement of Comprehensive Income.

Because the difference between net income and comprehensive income is a significant amount in many cases, Table 2 presents the type and magnitude of the items that make up these differences.

The items included in other comprehensive income were grouped as follows: foreign currency (items a, b and c listed above), marketable securities (items e, f, g and h listed above), derivatives (item d listed above), and post employment benefits (items i and j listed above).

All but three companies in the sample reported items in two or more categories, and every category had from 60 to 88 percent of the sample represented (foreign currency – 44 firms; marketable securities – 31 firms; derivatives – 36 firms; and post employment benefits – 37 firms). Thus, the items occur frequently across many industries.

There were two firms that listed items in a category called “Other.” No additional information was provided as to the nature of these items.

Foreign currency items as a percent of OCI ranged from 3279 percent to -122 percent, with a mean of 179 percent. Post employment benefit items ranged from 268 percent to -3498 percent, with a

mean of -63 percent. Derivative items ranged from 160 percent to -1300 percent, with a mean of -32 percent. Marketable securities items ranged from 243 percent to -89 percent, with a mean of 25 percent. Observations from Table 2 indicate that the most frequent category, foreign currency, also had the largest relative impact on other comprehensive income. The other categories followed a similar pattern. The relative importance of these items was no doubt a result of the current economic circumstances in the world environment.

SIGNIFICANT CHANGES FOR MANY FIRMS Based on our sample and analysis, the new reporting requirements for comprehensive income will require significant format changes for a majority of firms since most currently present comprehensive income on the Statement of Changes in Stockholders’ Equity.

Further, other comprehensive income is material in many cases (41 percent of sample firms’ OCI exceeded 10 percent of NI) and likely warrants more prominent financial statement disclosure. The new reporting standard is more closely aligned with the all-inclusive conceptualization of net income as well.

Where OCI equaled 10 percent or more of net income, it was most often an increase (17 of 21 firms) rather than a decrease (four of 21 firms). Further analysis of the items composing OCI revealed that most companies reported items in multiple categories, but that foreign currency items were the most frequently reported and had the largest impact on OCI. FOOTNOTES 1.

2.

3.

4.

5.

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34

11.

Accounting Theory by Eldon S. Hendrickson, Revised Edition, Richard D. Irwin & Co. (1970), pps 144-145.

Statement of Financial Accounting Concepts No. 6, Elements of Financial Statements, Financial Accounting Standards Board, 1985, ¶70.

Statement of Financial Accounting Standards No. 130, Reporting Comprehensive Income, Financial Accounting Standards Board, 1997, ¶11.

Statement of Financial Accounting Standards No. 130, Reporting Comprehensive Income, Financial Accounting Standards Board, 1997, ¶15.

Statement of Financial Accounting Standards No. 130, Reporting Comprehensive Income, Financial Accounting Standards Board, 1997, ¶17.

Statement of Financial Accounting Standards No. 130, Reporting Comprehensive Income, Financial Accounting Standards Board, 1997, ¶22-26.

Financial Accounting Standards Board, Accounting Standards Codification, Stamford, Conn, Section 220-10-45-1.

Financial Accounting Standards Board, Accounting Standards Codification, Stamford, Conn, Section 220-10-45-1A. Financial Accounting Standards Board, Accounting Standards Codification, Stamford, Conn, Section 220-10-45-1B. Financial Accounting Standards Board, Accounting Standards Codification, Stamford, Conn, Section 220-10-45-10A. Statement of Financial Accounting Standards No. 130, Reporting Comprehensive Income, Financial Accounting Standards Board, 1997, ¶22-26

Dr. Karen M. Oxner holds a DBA from Southern Illinois University.

She is an associate professor of Economics and Business at Hendrix College in Conway, Ark. Dr. Tom Oxner holds a Ph.D. from the University of Georgia. He is a professor of Accounting and Department Chair at the University of Central Arkansas in Conway, Ark.

Today’sCPA

| SEPTEMBER/OCTOBER 2012

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, 2012, 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 self-study exam: 1. b 2. a 3. d 4. b 5. d 6. c 7. b 8. a 9. b 10. b 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.

Today’sCPA

| SEPTEMBER/OCTOBER 2012

Reporting Comprehensive Income: The Time to Change is Here

BY KAREN M. OXNER, DBA, AND THOMAS OXNER, PH.D.

1 FASB’s conceptualization of the Income Statement is based on which school of thought?

A. B. C. D.

Current operating concept Change in equity method Change in working capital method All-inclusive concept

2 Comprehensive income is the change in equity of a business enterprise during a period from transactions and other events and circumstances from: A. Owner sources.

B. Nonowner sources.

C. Regulators.

D. The board of directors.

3 SFAS No. 130 required that comprehensive income be reported:

6

SFAS No. 130 indicated that comprehensive income may be reported:

A. As a separate statement of comprehensive income.

B. Below net income in a combined statement of results of operations.

C. As a component of a statement of changes in stockholder’s equity.

D. Any of the above alternatives.

7 Among the reporting options for comprehensive income under SFAS No. 130, which was the most widely used based on the sample of companies in the article?

A. A separate statement of comprehensive income B. Below net income in a combined statement of results of operations C. As a component of a statement of changes in stockholder’s equity D. All reporting options were used equally

A. In the financial statements.

B. Through footnote disclosure.

C. If it differed from net income by plus/minus 10 8 New reporting requirements for percent. comprehensive income stipulate that D. For public companies only. an entity must report comprehensive income in: 4 SFAS No. 130 divided comprehensive income into which two A. A single continuous financial statement.

B. Two separate but consecutive financial categories? statements.

A. Net income and investments by owners C. The statement of stockholder’s equity.

B. Net income and cash-based income D. A or B are acceptable.

C. Net income and operating income D. Net income and other comprehensive income 9 Other comprehensive income includes which of the following 5 Other comprehensive income categories of items? includes: A. Foreign currency transactions A. Non-owner transactions that do not affect net B. Derivatives income, but do affect equity.

C. Post-employment benefits B. Owner transactions that do not affect net D. All of the above income, but do affect equity.

C. Appropriations of Retained Earnings.

10 Based on the sample in the study, D. Pro forma earnings estimates. which of the following components of other comprehensive income had the largest average impact?

A. Foreign currency transactions B. Derivatives C. Post-employment benefits D. All components were equal

35

Feature

By Barbara W. Scofield, Ph.D., CPA, and Wilma Dye, Ph.D., CPA

Not-for-Profit Mergers And Acquisitions Not-for-profit (NFP) entities engage in mergers and acquisitions just as for-profits do. But until 2009, there was no specific guidance from the Financial Accounting Standards Board (FASB) that dealt with the nuances of NFP mergers and acquisitions.

Standards transforming accounting for acquisitions by business entities specifically exempted NFPs. Statement of Financial Accounting Standards No. 164 Not-for-Profit Entities: Mergers and Acquisition, issued May 22, 2009 and now incorporated in Codification™ through ASU 2010-07, builds on the guidance from SOP 94-3, AICPA Accounting and Audit Guide for Health Care Organizations (Health Care Guide), ARB 51, and APB Opinion No. 16 to provide a more relevant, representationally faithful, and comparable set of principles, while incorporating into FASB guidance common practices unique to NFPs (Codification™ 958-805-10).

Here are some examples of the combinations that will be affected by these pronouncements. An NFP hospital purchases a medical laboratory with the intention of integrating the services with the hospital. A private university acquires a historic site previously operated by the city to better conserve the historical archives

36

and artifacts, consistent with the university mission. Two charitable after-school tutoring programs in adjacent neighborhoods combine their operations. Each of these examples is impacted by a different aspect of accounting for mergers and acquisitions, and is used to illustrate the standards below.

This article provides an overview of accounting for mergers and acquisitions for a NFP acquirer and the transition to Generally Accepted Accounting Principles (GAAP) reporting for intangibles already recognized on the balance sheet. Combinations may involve either independent organizations or activities, as long as those activities are considered an integrated set of activities and assets that fulfill a purpose or mission for which an entity exists. Specifically exempted from these pronouncements are purchases by NFP organizations that comprise merely groups of assets, joint ventures in which two organizations cooperate without changing their control structures, reorganization

within a controlled group, and combinations that do not result in consolidation based on the guidance in SOP 94-3 and the AICPA Health Care Guide, as discussed later in this article.

Using one of the introductory examples, if a hospital buys the equipment from a laboratory that is closing, it would be merely purchasing a group of assets. However, if it purchased the equipment and continued the operations of the laboratory, using the employees, management, patient lists and financial contracts in place, the hospital has clearly made an acquisition.

What makes NFP combinations different from business combinations? In a for-profit acquisition, a reciprocal transfer always occurs in which the value acquired can be measured by either the fair value of the consideration given or the net assets acquired. In an NFP acquisition, there may be little or no consideration given and, in fact, there could be net liabilities assumed.

NFP combinations focus on expanding

Today’sCPA

| SEPTEMBER/OCTOBER 2012

the mission of the organization, often in a non-reciprocal transfer. In a for-profit acquisition, the acquirer is differentiated from the acquiree by considering all of the facts and circumstances with respect to the ownership and control characteristics in the resulting entity. While this principle applies to most NFP acquisitions as well, there are NFP combinations in which control is ceded by both of the combining organizations to a newly created organization, bringing back to GAAP the concept of a merger that had been eliminated when “pooling of interest” business combinations were eliminated for business entities by SFAS No. 141 in 2001.

In addition, although some NFP entities mimic business entities, except for their lack of ownership interests, there are many that are funded by donors and provide goods and services without fees, changing the relevance of some GAAP requirements for for-profit business combinations. For example, the historic site in the introduction might have been donated to the university in return for an agreement to continue to maintain the site and its collections with no consideration changing hands. While such “bargains” are rare in for-profit settings, they are not unusual in NFP settings when merger partners value the unrecorded intangible benefits that accrue to the underlying NFP mission. Table 1 provides a summary of these differences, and the resulting differences in business combination accounting for NFP entities.

CLASSIFICATION OF A COMBINATION INVOLVING AN NFP ENTITY NFP organizations, unlike for-profit organizations, classify a combination as either a merger or an acquisition. The appropriate accounting treatment for a merger is the carryover method and for an acquisition is the acquisition method. The relevant criterion for selecting between merger and acquisition classification is whether the two combining organizations have both ceded control to a new entity or whether one entity retains control. This evaluation uses a specialized definition of control suited to the NFP environment.

In the for-profit environment, control is defined using voting interest of shareholders (Codification™ 810-10-15-8), but NFP entities lack common shareholders. The definition of control for NFP organizations adopted by FASB has its roots in SOP 78-10

Today’sCPA

| SEPTEMBER/OCTOBER 2012

and is used throughout AICPA literature: Control means the direct or indirect ability to determine the direction of the management and policies through ownership by contract or otherwise. (SOP 78-10.42 or SOP 94-3, 6:17 to 6:37, Health Care Guide 11.08) The key factors to consider in justifying merger treatment are whether both parties equally participate in the creation of the new organization with neither party monopolizing the combined entity’s new leadership structure. All of the facts of the situation must be evaluated to determine whether there is an acquireracquiree relationship or whether the two organizations are creating a wholly new entity. (See Table 2 and Codification™ 958805-55 for additional illustrations.)

For example, if the two tutoring services in the introduction created a new entity with 50 percent of the board members from each predecessor organization, it would likely be classified as a merger even if the name and bylaws of one of the organizations were adopted. However, if the new organization’s board included all of the board members from one entity plus a single additional board member from the other organization, and the executive staff was drawn solely from the dominant entity, even a new charter and bylaws would not overcome the presumption that an acquisition had taken place.

The next two sections provide the guidance in financial reporting for the two acquisition methods used with NFP acquirers.

THE CARRYOVER METHOD In a combination that is classified as a merger, the new entity begins a new set of books on the date the new entity takes control, recording the net assets of the two or more combiners at their previous book values. In contrast to for-profit business combinations, no valuation adjustments to fair value are made. In addition, the carryover method uses a measurement date consistent with the actual transaction date, resulting in an initial financial statement period that will be less than 12 months when a merger takes place in the middle of a fiscal year, a departure from the former “pooling of interest” rules that had been adapted to NFP transactions previously. The carryover method limits the assets recognized by the combined entity to include only assets

already recognized on the books of the combiners. There are two exceptions to this basis.

1. If the merger contract requires a change such that the prior classification is no longer GAAP-compliant, the new facts are used in classification and valuation.

For example, the merger contract for our tutoring services could designate particular office equipment of one entity as “held for sale” post-merger, since one headquarters is serving both programs, changing the valuation basis of some long-term assets.

2. A change in valuation can be made to conform accounting policies of the two entities. Perhaps the tutoring services each maintained an inventory of books and supplies for sale to clients. The combined entity could adjust inventory values to a single inventory method for consistency across both organizations. However, this is a limited exception. In another example peculiar to NFP entities, a merger may result in art objects that had been classified as furnishings becoming a part of a collection because the objects will be moved to a place of public display that meets the definition of “collections” in the Codification™ Glossary 958-805-10 / SFAS No. 116. These objects will be initially classified at their book value and then subsequently reclassified.

THE ACQUISITION METHOD Any combination that doesn’t meet the strict criterion of a merger is classified as an acquisition and uses the acquisition method, following the same GAAP guidance as for-profit entities. The acquirer is the organization that obtains control of the other party, which is identified based on a consideration of all the facts and circumstances of the acquisition. The date of the acquisition is the date on which control is obtained, typically the closing date of the transaction when the net assets are transferred in ownership. The net assets of the acquiree are stated at full fair value with goodwill recognized for the difference between the fair value of the net identifiable assets and the consideration given. However, even as these principles are familiar, there are some issues that have particular significance in NFP combinations, and additional guidance is provided for contributions received, collections, goodwill and donor relationships. continued on next page

37

Not-for-Profit Mergers and Acquisitions continued from previous page

Table 1 Comparison of For-Profit and Not-for-Profit Combinations For-Profit Combinations

Not-For-Profit Combinations

Control

Generally majority voting interest through common shareholding.

Ability to determine the direction of management and policies through ownership or contract.

Classification

All combinations are acquisitions.

Combinations may be: • Mergers, when each combiner cedes control to a new entity, or • Acquisitions, otherwise.

Measurement

Fair Value in a reciprocal transaction.

Measurement depends on classification: • Fair value with adjustments for collections that are at least partially gifted (acquisitions), or • Book value (mergers).

Non-reciprocal transactions occur and may make measurement more difficult.

Goodwill

Goodwill is considered an intangible that is tested annually for impairment rather than amortized.

Goodwill is considered an intangible that is tested annually for impairment, rather than amortized.

However, goodwill is written off in the period of acquisition by not-for-profits that are predominantly supported by donations and returns on investments.

Treatment of a “bargain”

Gain in Income at the time of the acquisition.

Contribution revenue, adjusted for collections that are at least partially gifted.

Contribution received. “Contribution received” is the credit balance account recognized as a part of an acquisition transaction if acquirer pays less than the fair value of the net identifiable assets. Given that many NFP combinations occur with no consideration transferred, this separately reported donation revenue is placed on the acquirer’s operating statement. This has no equivalent concept in the for-profit realm. Example A in Table 3 illustrates the recognition of contribution received if the historic site were transferred to the control of a private university without any payment on the part of the university.

38

Collections. NFP organizations may elect to not capitalize collections that meet the triple criteria of (1) collections are “held for public exhibition, education or research in furtherance of public service rather than financial gain;” (2) collections “are protected, kept unencumbered, cared for and preserved;” and (3) collections “are subject to an organizational policy that requires the proceeds from sales of collection items to be used to acquire other items for collections” (Codification™ Glossary 958-805-20). The underlying principle in an acquisition is that a collection must be recognized at fair value at

the time of the acquisition. The organization will subsequently write off the collection by reducing net assets (unrestricted, temporarily restricted or restricted) in their operating statement in the year of the acquisition.

There are limits to the routine recognition of the fair value of collections at acquisition.

Three different situations may occur.

1. Collections may be acquired with consideration matching their fair value.

If an acquirer purchases an NFP entity or activity that includes items that will be a collection for the acquirer, the items will be recognized in the acquisition transaction at fair value only when the consideration paid is at least as much as the fair value of the net identifiable assets including the collection (see Example B and C, Table 3).

2. Collections can also be acquired at a discount because they are partially considered gifts. If the consideration given is less than the fair value of the net identifiable assets acquired when the collection assets are included in net assets, the collection assets are considered at least partially a gift. No contribution received is attributed to the gift of a collection made through an acquisition. The value of the collection is recognized only to the extent of its purchase price allocation (see Example D, Table 3).

3. Collections may be acquired entirely as a gift. Collections will not be recognized in assets at the time of the acquisition at all if the consideration given is less than or equal to the fair value of the net identifiable assets, not including the collection.

Goodwill. For-profit and NFP acquisitions follow common measurement principles for goodwill, adjusted for the presence of the allocation to collections explained above. However, when NFP organizations are predominantly supported by contributions and return on investments, GAAP requires that goodwill be writtenoff as a decrease in net assets on their financial statements in the year of the acquisition. These NFP organizations do not carry goodwill on their books. While some judgment is required in making this classification decision, FASB provides the additional guidance that predominantly means that an organization must have significantly more donations and investment earnings than the total of all other sources of revenue (Codification™ 958-805-25-29).

Today’sCPA

| SEPTEMBER/OCTOBER 2012

Thus goodwill will only appear on the books of for-profit enterprises and businessoriented NFP enterprises. NFP entities with no revenue from sales or services will still record goodwill in the acquisition journal entry, but the goodwill is then written off prior to the close of the period.

Donor relationships. NFP organizations may attract a partner because of their relationship with particular donors. Unlike customer relationships, the intangible donor relationships is not allowed as a separately identifiable intangible asset.

Donor relationships are defined as having no value in the NFP setting, because donors incur no costs in ending non-reciprocal donor relationships. To the extent this intangible exists, its value will be combined with any goodwill recognized. Note that the intangible of donor lists is a separately recognizable intangible asset, since readily available objective fair values for the sale or distribution of donor lists exist. NFP entities that commit to maintaining the privacy of the donors have an agreement that prevents the recognition of a donor list intangible.

DISCLOSURE REQUIREMENTS ASSOCIATED WITH MERGERS AND ACQUISITIONS Disclosure requirements are incorporated to provide a complete picture of NFP mergers and acquisitions, and are parallel to the disclosures required in the for-profit environment. A complete list of disclosures is available in the Codification™ at 958-805-50.

Public NFP entities (those that have outstanding debt securities traded in a public market; Codification™ Glossary 958-805-20) have additional disclosure requirements beyond non-public companies. Public NFP entities must provide whole year pro forma revenue and changes in net assets (unrestricted, temporarily restricted and permanently restricted, separately) and comparative financial information as if the organizations had been combined for all comparative periods. Public NFP entities with acquisitions during a fiscal year must disclose revenues, changes in net assets (unrestricted, temporarily restricted and permanently restricted, separately) that pertain to the acquiree since the acquisition date.

Today’sCPA

| SEPTEMBER/OCTOBER 2012

Table 2 Factors Considered in Determining Whether the Merger Classification Criterion is Met The classification of a business combination as a merger is supported if: 1. Both parties contribute to the formation of the combined organization.

2. The relative financial strength and size of the combiners suggests there is no domination of one by the other.

3. There is no cash paid or other assets transferred to owners, members, sponsors or other participants.

4. The terms of the acquisition transaction are negotiated by, and beneficial to, both parties.

5. The governing body is composed of members from both of the combiners and/or newly appointed members.

6. There is a new legal entity.

(Codification™ 958-805-55)

COORDINATION WITH AICPA HEALTH CARE GUIDE GAAP for NFP mergers and acquisitions coordinates with the requirements in the AICPA Health Care Guide for NFP health care providers with respect to entities that have not previously presented consolidated financial statements and with respect to recognition of transactions within a performance indicator.

Texas CPAs

Codification™ 958-805-15-4 limits the applicability of this GAAP on NFP mergers and acquisitions for business-oriented NFP health care companies when consolidation is not permitted. Consolidation with an NFP parent company is not permitted for health care providers (Health Care Guide) or other NFPs (SOP 94-3) in the following circumstances: (1) if there is a voting continued on next page

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Not-for-Profit Mergers and Acquisitions continued from previous page

Table 3 Acquisition of a Historic Site by a Private University Historic Site Trial Balance at Acquisition Book Value (000s) Fair Value (000s) Assets Cash 26 26 Land 5 50 Building, net 100 1000 Furnishings, net 20 200 Collections * 225 Liabilities Payables (1) (1) Net Assets Unrestricted (128) Temporarily restricted (2) Permanently restricted (20) *The historic site has a policy of not capitalizing its collections. An appraisal of the collection has set its fair value at $225. majority ownership interest or majority voting interest on the board of directors, but control doesn’t reside with the acquirer (SOP 94-3.10); (2) if control is due to a source other than controlling financial interest and control is temporary (SOP 94-3.11); and (3) if there is economic interest, or there is control, due to a source other than controlling financial interest or majority voting interest in the board of directors, but not both (SOP 94-3.13). In addition, NFP entities can choose not to consolidate if control is due to a source other than controlling financial interest or majority voting interest on the board of directors (such as contract, affiliation, etc.) and there is an economic interest (SOP 94-3.12).

NFP business-oriented health care entities provide a performance indicator that is roughly parallel to the subtotal income from continuing operations for a for-profit entity.

They will report the following acquisitionrelated items within their performance indicator: • changes in the fair value of contingent consideration provided in the acquisition, unless the arrangement is a hedging instrument required to be included in comprehensive income in a for-profit entity; • any write-off of goodwill for entities that are predominantly supported by donations and returns on investments; • unrestricted inherent contribution received.

40

Acquisition Journal Entries: Four Examples EXAMPLE A: Non-reciprocal transfer Cash

26

Land

50

Building

1000

Furnishings

200

Payable

1

Contribution Received

1275

EXAMPLE B: Payment is at least fair value of net identifiable assets, including the collection Cash

26

Land

50

Building

1000

Furnishings

200

225 In addition, disclosures for NFP business-oriented health care entities Payable 1 include supplemental disclosures of the Cash 1500 performance indicator as follows: (1) performance indicator attributable to EXAMPLE C: Payment is more than fair value of the acquiree since the acquisition date net identifiable assets, including the collection included in statement of activities; (2) performance indicator as if the merger Cash 26 or acquisition(s) had occurred at the Land 50 beginning of the period; and (3) for acquisitions, comparative performance Building 1000 indicators as if the acquisition had occurred Furnishings 200 at the beginning of the prior years. The Collection 225 specific GAAP guidance for these specially Goodwill 100 identified organizations carry forward current financial reporting in light of new Payable 1 features incorporated in NFP mergers and Cash 1600 acquisitions.

EXAMPLE D: Payment is less than fair value of net TRANSITION AND identifiable assets, including the collection Collection

EFFECTIVE DATES

The standards on financial reporting of mergers became effective for events occurring on or after Dec. 15, 2009, and for acquisitions that occur during the annual period beginning on or after Dec. 15, 2009.

Thus an acquisition on Jan. 21, 2010, would follow this guidance if the parent entity has a fiscal year beginning Jan. 1, 2010, but not if the parent entity has a fiscal year beginning Dec. 1, 2009. This transition schedule puts financial reports of NFP entities issued on or after Dec. 15, 2010, on a comparable basis with respect to NFP mergers and acquisitions.

Cash

26

Land

50

Building

1000

Furnishings

200

Collection

125*

Payable

1

Cash

1400

*Collection is valued at less than its fair value because it is partially considered a gift, but no contribution received is recognized with respect to the gift portion.

Today’sCPA

| SEPTEMBER/OCTOBER 2012

An additional transition issue is that the adoption of these standards for NFP mergers and acquisitions is coordinated with the extension of current GAAP for goodwill and other intangibles to NFP organizations as of the first fiscal period that begins on or after Dec. 15, 2009. Transition activities included the following. NFP organizations predominantly supported by donations and investment returns write off any goodwill present on their books from previous mergers and acquisitions.

Other NFP entities retain goodwill on their books, but need to make the following adjustments: • amortization of goodwill ceases; • previously recorded goodwill is tested for transitional impairment; any writedown of goodwill is recognized as

cumulative effect between extraordinary items and changes in net assets, separately from any identified actual impairment; any actual impairment of goodwill is recorded prior to the transition process, so that the accounting effects aren’t comingled with economic effects; • annual impairment testing must be completed in the year of adoption in addition to testing for transitional impairment.

The estimation of the amortization period of intangibles is adjusted to match their useful lives, and amortization ceases for indefinite-lived intangibles. Indefinitelived intangibles are tested for impairment, which is recognized as a cumulative effect

between extraordinary items and change in net assets.

LONG NEGLECTED ISSUE Few topics in GAAP have been neglected for so long as NFP mergers and acquisitions.

These standards have found a balance by affirming the principles of financial reporting of for-profit acquisitions, supporting practices developed through AICPA literature, especially for health care organizations, and creating areas of exceptions and further guidance on peculiar NFP issues. The distinct purposes of NFP entities and for-profit entities are accommodated in the standards, enhancing the decision-usefulness to financial statement users while limiting the cost to preparers. ■

Barbara W. Scofield, CPA, Ph.D., Odessa, Texas, is the chair of Graduate Business Studies and a professor of Accountancy at The University of Texas of the Permian Basin. She may be contacted at scofield_b@utpb.edu. Wilma Dye, CPA, Ph.D., Odessa, Texas, is an associate professor of Accountancy at The University of Texas of the Permian Basin. She may be contacted at dye_w@utpb.edu.

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TSCPA Continuing Professional Education Programs OCTOBER MONDAY

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2 I See It! Bringing Into Focus the New Clarified Auditing Standards Dallas CPE Credits: 8

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Tax Staff Training - Level 2 Business Dallas CPE Credits: 16

24 Annual Yellow Book Update and Review: A Realistic Approach Houston CPE Credits: 8 Personal and Professional Ethics for Texas CPAs Dallas CPE Credits: 4

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Fiduciary Income Tax Returns Form 1041 Workshop Austin CPE Credits: 8

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Accounting and Finance for Construction Contractors Houston CPE Credits: 8

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26 Navigating the LLC and Partnership Allocations and Basis Minefield San Antonio CPE Credits: 8 OMB Circulars A-133, A-87 and The Compliance Supplement Austin CPE Credits: 8 Advanced Update for Compilation, Review and Accounting Services Houston CPE Credits: 8

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NOVEMBER MONDAY

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Mastering the Fundamentals of Estate and Gift Tax Planning Austin CPE Credits: 8

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29 Determining How Much Money You Need To Retire and Tax Ideas Houston CPE Credits: 8

30 New Critical Decisions in Selecting the Best Retirement Plan for Small Businesses Houston CPE Credits: 8

Personal and Professional Ethics for Texas CPAs Dallas CPE Credits: 4 The Complete Guide to Payroll Taxes and 1099 Issues Dallas CPE Credits: 8

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Advanced Update for Compilation, Review and Accounting Services Dallas CPE Credits: 8

Today’sCPA

Accounting and Finance for Construction Contractors Dallas CPE Credits: 8 The Complete Guide to Payroll Taxes and 1099 Issues Houston CPE Credits: 8

| SEPTEMBER/OCTOBER 2012

Income Tax, Estate Tax, and Financial Planning Ideas of 2012 Dallas CPE Credits: 8

1040 Tax Season Survival Guide Dallas CPE Credits: 8

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Classifieds Classifieds Positions Available Brown, Graham & Company, P.C. Texas Regional CPA firm seeking Staff Professionals for Amarillo, Austin & Amarillo Area offices. CPA or CPA Exam eligibility required. Competitive compensation and benefits with opportunity to grow for candidates desiring challenging work in a family oriented firm while living in a great community.

Send resume to: Firm Administrator P.O. Box 20210 Amarillo, TX 79114-2210 or e-mail: hr@bgc-cpa.com Firm seeking experienced Tax Professional/ CPA in the Abilene area: The ideal candidate will have the following qualifications: - CPA or eligible for exam - Bachelor’s or Master’s degree from accredited university in Accounting or Finance - Minimum of 3 years experience - Enjoy a service oriented culture/workplace

Texas Practices Currently Available Through Accounting Practice Sales: $791,000 gross. San Antonio. Accounting & Tax practice with large number of business clients & long-term staff avail. TXC1044 $600,000 gross. Austin. Steadily growing CPA firm providing primarily tax work.

Exceptional staff in place. TXC1045 $295,000 gross. Austin. Established CPA firm with 66% accounting and 34% tax work, providing good year-round income.

TXC1046

$132,500 gross. Mt Pleasant/Sulfphur Springs Area. Quality CPA practice with 50% tax and 50% accounting. TXN1277

$233,488 gross. TX Panhandle/OK. Strong cash-flow. Large number of business clients.

Building also available. TXW1004

$120,000 gross. Wise County. Established, rapidly growing business with a loyal client base. Strong cash flow to owner 60% of gross.

TXN1301

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$215,000 gross. East Texas. Well established practice with great cash flow to owner.

Partnership opportunity. TXN1249

$464,000 gross. Midland. Well-established, successful practice with enormous potential for immediate growth. Staff in place.

TXW1019

Please reply via email or mail: info@condley.com P. O. Box 2993 Abilene, Texas 79604

Well established Central West Texas practice for sale - $40,000. Equipment also available.

Great growth potential with 90% tax. Owner available for transition. Please reply to File Box #5198, Texas Society of CPAs, 14651 Dallas Parkway, Suite 700, Dallas, TX 75254

$167,000 gross. East Texas. Profitable practice with year-round income and strong cash flow to owner. TXN1231

$25,000 gross. Terrell-Kaufman Area. Turnkey tax practice with great potential for growth. Priced to move. TXN1254

Salary based on experience.

Plus benefits.

Accounting Broker Acquisition Group 800-419-1223 X21 Accountingbroker.com Maximize Value When You Sell Your Firm

$50,000 gross. Desoto. CPA tax practice.

Well-established, quality client base consists of approx 175 individuals. TXN1283

$440,500 gross. Bell County. Well-established practice in desirable locations. Solid staff on board. TXC1030

$76,000 gross. Mesquite. Well-established practice with good reputation & loyal client base. Comprised mostly of tax work for individuals. TXN1302

Practices For Sale

$430,000 gross. Hunt County. Turn-key practice comprised of 80% tax. Good cash flow and tenured staff. TXN1279

$464,000 gross. Tyler/Longview Area. Wellestablished, rapidly growing CPA firm with loyal client base. Caters to government audit clients. TXN1305 $477,000 gross. Bedford. Reputable CPA firm with loyal client base. 56% tax, 37% acctg/bkkpg, and 7% consulting & financial services. TXN1308 $69,000 gross. Grapevine. CPA audit practice. Revenues derived from 7 audits, 4 compilations and tax prep/related srvcs for same clients. TXN1309 $507,000 gross. Gainesville. Well-established firm serving a high-quality client base of 2,000 individuals & 400 businesses. TXN1300

$77,000 gross. Rotan. Quality practice composed of 85% tax work. Turn-key practice with excellent growth potential.

TXN1258 $187,000 gross. Richardson. Profitable practice, with strong fee structure. Cash flow to owner about 60% of gross. TXN1307 $175,000 gross. North Dallas. Tax work for individuals 53%, businesses 28%, monthly/ quarterly accounting work 18%. Turn-key practice. TXN1306 $207,000 gross. Fort Worth. Quality practice with strong fees. Cash flow 50% of gross. 30% acctng/bkkpg, 53% tax, 11% other. TXN1304 $107,500 gross. North Houston. Good client mix providing year round work flow. Part time staff in place ready to continue with buyer. TXS1119 $244,000 gross. Southern Coastal Town.

Desirable location with steady revenues comprised of 61% accounting, 29% tax, 10% other. TXS1121 $108,000 gross. Corpus Christi Area.

Quality firm in nice area. 78% tax and 22% accounting. Seller offering flexible terms.

TXS1120

Today’sCPA

| SEPTEMBER/OCTOBER 2012

$17,295 gross. Lake Livingston Area. Steady revenues consisting of about 100 individual returns & 4 quarterly bkkpg clients. Good cash flow. TXS1122 $50,000 gross. Houston. CPA firm. Virtual office so clients can be moved to buyers’ location. Seller available for transition.

TXS1116 $200,000 gross. The Woodlands. Excellent fee structure and turn-key operation with long-term, loyal staff in place. TXS1111 $179,000 gross. Southwest Houston. Wellestablished CPA firm with excellent cash flow. Revenue mix 57% accounting & 30% tax. TXS1112 $800,000 gross. Beaumont Area. CPA firm with 53% tax & 47% accounting. Good fee structure & strong cash flow. TXS1109 $45,450 gross.

Brownsville.

Highconcentration of tax work with 7 bookkeeping clients. Bilingual staff in place. TXS1100 $459,000 gross. Houston. Services to clients include 67% acctng, 31% tax, and 2% payroll.

Existing staff & strong fee structure in place.

TXS1110 $280,000 gross. Conroe. Strong client base.

Good cash flow with dependable employee and steady year around revenues. TXS1117 $310,000 gross. Conroe. Year around revenues. Tax 51%, bkkpg 42% and other services 7%. Turn-key operation. Support staff in place. 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 Dallas CPA Firm For Sale $1.7 Million gross. Well established and profitable practice with high net worth clientele. 100% Financing available.

Contact Info@NaabConsulting.com or 888-726-6282.

Practices Sought 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 North America’s Leader in Practice Sales 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 psmith@cpatx.com.

210-366-9430.

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 maximizevalue@accountingbroker.com

Today’sCPA

| SEPTEMBER/OCTOBER 2012

Miscellaneous Value-Added Service Cost Segregation Service Program • Accurate depreciation • Maximize client cash flow • Diversify your practice Offering engineering-based cost segregation services through CSSI as part of your practice can make sense if you have clients with commercial real estate who could benefit from tax deferrals. CSSI has worked with CPAs to help their clients for over 10 years with thousands of studies done right and delivered on time. Why not take the next step and help your clients while earning more revenue for your practice. For more information, please view PDF document at: w w w. c o s t s e g s e r v e . c o m / r f a r r c p a / cpaprogram.pdf or contact Bob Farr, Program Specialist.

Cost Segregation Services, Inc. bob.farr@cssi-associate.com 512-750-9088 www.costsegserve.com/rfarrcpa CSSI is not a CPA firm

Software For Sale PROVEN OIL and GAS ACCOUNTING SYSTEM keeps getting better. Developed for CPAs by a CPA. Over 2,400 users. G/L, A/P, depletion, document imaging, payroll, joint interest billing, revenue distribution and production management. WolfePak Software; 2901 S. First St., Abilene, TX 79605.

325-677-1543 or 800-299-1543. E-mail: sales@wolfepak.com.

For more information and to request a classified ad, contact Donna Fritz at dfritz@tscpa.net or 800-428-0272, ext. 201 or in Dallas at 972-687-8501; fax 972-687-8601.

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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.

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FOR MORE INFORMATION 46

Contact Advertising at 617.896.5344 or email custompubs@thewarrengroup.com Today’sCPA

| SEPTEMBER/OCTOBER 2012

If your Income stopped today, where would the money come from tomorrow?

A majority of people admit to not being financially prepared if a disability were to occur. According to the 2011 Consumer Disability Awareness Survey, 65% of working Americans say they could not cover normal living expenses even for a year if their employment income was lost.1 In reality, the odds are one in four that an employee entering the workforce will experience a long-term disability prior to retirement. What’s more, the average length of a long-term disability claim is more than 2.5 years.1 Think about your financial situation. If you suffered a disability that prevented you from working for several months (or several years), how would you pay your bills?

The time to protect yourself from this risk is now. The Group Disability Income Insurance Plan—exclusively for TSCPA members—can help, with: Benefits of up to $5,000/month Affordable group rates If you pay your own premiums, benefits are generally paid TAX-FREE.2

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

thInk you don’t need dIsabIlIty Insurance? thInk agaIn. www.tscpainsure.com | 1-800-262-7689 *For details about the plan’s features, costs, eligibility, renewability, limitations and exclusions.

1 CDA 2011 Consumer Disability Awareness Survey, Council for Disability Awareness. The research can be viewed at http://www.disabilitycanhappen.org/research/pdfs/ProducerResearchReport.pdf. Viewed 2/20/12.

2 Please consult your tax advisor for more information.

AR Ins. Lic. #245544 • CA Ins. Lic. #0633005 • d/b/a in CA Seabury & Smith Insurance Program Management 55283 (9/12) ©Seabury & Smith, Inc. 2012

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We are proud to be an Elite Values Partner of AICPA

Businesses turn to Accountemps, Robert Half Finance & Accounting and Robert Half Management Resources for access to skilled accounting and finance professionals. We have over two million candidates in our database. We personally interview and complete an evaluation of work history with every candidate to ensure that the professionals we send you have skills and experience well-matched to your requirements.

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Š 2012 Robert Half. An Equal Opportunity Employer. 1208-1301