Category: Advisory Services

Posted on Jun 13, 2016

Succession Planning and Strategic Planning

Many small businesses prepare — and regularly update — a strategic plan, but many overlook this important task.

Whether your business falls into the “have” or a “have-not” category, a strategic plan can be an invaluable resource to help your company accomplish its ultimate objectives. And part of this process involves having a succession or exit plan.

The Anatomy of a Strategic Plan

First, let’s review some basics about strategic planning. Fundamentally, it is an activity that helps:

  • Set priorities;
  • Focus energy and resources;
  • Strengthen operations;
  • Ensure that employees and management work toward common goals;
  • Establish agreement around intended outcomes; and
  • Adjust direction as the business environment changes.

The best way to start is to skip to the ultimate goal: What do you want your business to accomplish? This amounts to your company’s mission statement. Once that is clear, flip the process around to the beginning and ask: What steps will help my company achieve its goal(s)?

You don’t need a large number of goals in a strategic plan. You could have ten or more, but you also may have only four or five. For a strategic plan to have the most impact, the goals should be clear and concise. Setting goals outlines the course your business will take. If the goals miss the mark, other efforts will probably be useless.

Once you set the goals and management is on board, you must set objectives for reaching each goal. Objectives are rather broad in nature and should be concise. They guide employees toward making decisions that are in line with helping your business achieve its goals.

Under each objective list a series of action steps. These are more specific than the objectives they support and should note who is responsible for the action and when it should be completed.

The final step is to regularly evaluate the status of each action step, noting:

  • When it is completed;
  • Whether it resulted in reaching the objective; and
  • If the cumulative completion of objectives resulted in reaching the goal.

There are many variations to this scheme, but this is a common format in strategic planning. Keep in mind that goals are likely to change over time to account for the economy, the industry and other factors involved with the business.

A Road Map for Succession

Developing a succession plan should be a part of your strategic plan. Successful succession is one of the most important goals for any business. Other goals might deal with profitability, expansion or operational issues, but none is more important than succession. Think about it — is any other goal genuinely valid without a road map for succession?

A succession plan or exit strategy typically begins by establishing a team to focus on it. While the team will deal with the broad issues of the strategic plan, it will not be involved with how that plan is accomplished. Instead it focuses on the steps needed to position you and your partners for the ultimate succession. This may include assessing health issues — especially related to senior managers.

In effect, the business will get its marching orders from the succession planning or exit strategy team. That is where the business and its managers take the ball and kick it across the goal line. All existing goals should be reviewed to ensure they support the overarching succession or exit goal.

It is often helpful to have a facilitator. Your CPA is likely to be on the succession planning team and is often a good choice to play this role.

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Posted on May 19, 2016

The Federal Trade Commission is making full use of its bolstered regulation and enforcement power over auto sales advertising.

How One Ad Misled Consumers

The FTC is paying particular attention to ads that are posted online or on social media.

The agency reportedly has said that dealerships boost their chances of problems with the FTC by taking ads that might have been fine for print or on television and cutting and pasting them online. The reason: Fine print can become unreadable when reproduced in smaller print online or a video.

In one case against an auto dealer, the FTC complaint says the website ad included a photo of the car and a video. Near the end of the video ad, a block of text appears stating:

“. . . . Priced with all applicable manufacturer rebates and incentives. Does not include tax, title, acquisition, registration or doc fees. Not all model trim levels will be applicable. Kelley Blue Book: Minus the mileage, wear and tear up to $10,000 fair. Not to be combined with any other offer. See dealer for complete details.”

Combined with other examples of the dealers’ website ads, the FTC concluded that “the company does not disclose important additional terms of the prominently advertised lease, including but not limited to whether consumers must pay tax, tags, registration or doc fees, the number of lease payments, and whether an extra charge may be imposed at the end of the lease.”

When the Dodd-Frank Wall Street Reform and Consumer Protection Act became law in 2010, the FTC’s power over the ads increased. The agency now looks at television, print and online ads to see if they clearly spell out all the costs and other important terms of a sale needed by consumers. Dealers publishing misleading ads risk censure and potentially severe financial penalties.

The FTC has charged several auto dealers with false or deceptive advertising about the cost of buying or leasing cars. Most dealers settle the charges by agreeing to take a series of administrative steps to ensure that future ads comply with relevant laws and regulations.

The agreements warn that further violations may result in civil penalties. Those penalties could amount to as much as $16,000 per day. The agreements remain in effect for 20 years.

One enforcement action charged a Massachusetts auto dealer with running advertisements saying consumers could lease vehicles with no money down and specified monthly payments. The FTC said the advertised amounts did not mention substantial fees.

In a consent order, the dealership agreed to follow the rules applying to such ads, which requires clearly and conspicuously disclosing, for instance, whether the price in the ads are for loans or leases and how much money must be paid up front.

Among other dealerships charged were:

    • A Maryland dealer that allegedly advertised “Internet prices” and “dealer discounts” not available to a typical consumer.
    • An Ohio dealer who allegedly ran a bait and switch operation in which discounts applied only to more expensive models of the advertised vehicles.
    • Two dealerships in California charged with advertising vehicles for sale for $5,000 less than their actual prices. Both used ads that included a mix of English and Spanish.
    • A dealer in Georgia allegedly advertising auto financing with low monthly payments, when the payments advertised were temporary “teasers.” After making a few payments at the teaser rate, the monthly payment would go up.
  • A Michigan dealership that allegedly sent out mailers falsely claiming that the recipients had won sweepstakes prizes.

The dealerships are charged under a variety of laws and regulations, including the FTC Act, the Consumer Leasing Act and the Truth in Lending Act. All the dealers said the violations were not deliberate.

Closely review your dealership’s ads to ensure you don’t inadvertently run any ads that could be construed as misleading.

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Posted on May 16, 2016

Checklist 1200

Sound planning is one of the most critical factors to the success of your business. Before you started your business, you likely put together a plan for your start-up expenses and projected monthly revenues and expenses. Now that your business is up and running, your plan will need to be adjusted regularly to match your actual performance.

If you’re like most small business owners, time is your most scarce resource. Conducting a monthly or quarterly financial health checkup with your local certified public accountant (CPA) can provide a substantial return on your financial planning time because it allows you to leverage the expert training and experience of a CPA who advises many small business owners.

By reviewing the following aspects of your business, your CPA team at Cornwell Jackson can help you identify and correct problem areas before they become crises.

Small Business Check-in List

Here are some of the things you need to think about when you conduct a periodic checkup on your business:

KEY PERFORMANCE INDICATORS (KPIs)
KPIs vary for each type of business. Your CPA can help you develop KPIs most relevant to your business, formulate them into a dashboard and review them with you on a regular basis. Most CPAs can also provide you with comparative data based on their extensive experience with other businesses as well as other industry sources.

STRATEGY AND PLANNING
Small owners don’t have the luxury of a strategic planning department, and daily operations consume most of your time. Your CPA can serve as your strategy adviser and help you boil your strategy down into measurable goals and review your progress on a regular basis.

SALES FORECASTING
In the beginning, your sales forecast was based on market research, your sales and marketing plan and your best estimates based on experience in your industry. Even the best start-up sales forecasts need to be reworked in light of new information you’ve learned from actual operating performance. Because your CPA advises many small businesses, he has extensive experience with sales forecasts and can perform a periodic checkup to see whether your sales forecast is realistic in light of your specific circumstances.

GROSS PROFIT MARGIN
Amid frequently changing costs and pressure to make sales, many small business owners find it challenging to keep up with whether they’re maintaining adequate profit margins to sustain their business. Your CPA can help you calculate and track gross margins by product or service, by customer (or customer group) or by job. Most importantly, your CPA can help you identify causes of margin erosion and recommend changes you can make to get your margins back on track.

CASH FLOW FORECASTING
Cash flow management makes the difference between success and failure for most businesses. Your CPA can provide you with the kind of professional cash flow forecasts an in-house finance department would provide to management in a larger business. Your CPA can help you answer the questions: What will our cash balance look like during our slow season? Will we need to borrow to cover shortfalls? Do we have a large enough line of credit?

ACCOUNTS RECEIVABLE (A/R)
Accounts receivable can be difficult to forecast until you have enough history to identify trends. In many cases your CPA has access to trend and benchmark data for other businesses similar to yours and can help you forecast seasonal fluctuations and compare your A/R performance to industry benchmarks. Your CPA can also help you identify needed adjustments to your credit and collection policies. Here are some of the things you need to think about when you conduct a periodic checkup on your business: 3

ACCOUNTS PAYABLE (A/P)
Sometimes an accounts payable problem arises suddenly. But more often problems develop over time and can be corrected before they become crises. Your CPA can review your accounts payable and help you develop a plan to resolve payment issues and prevent them from occurring.

INVENTORY
For many businesses, inventory is a major draw on operating capital and cash flow. If your business has seasonal fluctuations, inventory forecasting can be difficult. Your CPA can help you forecast your inventory needs and evaluate inventory financing options from suppliers, local banks and commercial lenders.

PAYROLL
For most businesses, payroll is a major expense. Your CPA can help you locate industry benchmarks and develop a scorecard for you to monitor. CPAs can also provide an objective checkup on your health care expenses, retirement plan and other employee benefits. If you need specific benefits help, your CPA can provide you with a referral to a specialist.

BANKING
Most lenders include certain loan covenants in their lending agreements such as a requirement to maintain certain types of insurance coverage, to meet a certain debt to income ratio and so on. Failure to maintain these requirements could result in penalties or even worse — having your loan called. Your CPA can help you develop a scorecard to monitor and stress-test your loan covenants in light of your financial forecasts. If a loan covenant breach is likely, your CPA can help you develop a plan to bring your business back into compliance or to renegotiate covenant requirements with the lender.

TAXES
You don’t want a big surprise tax bill when you file your annual return, but you don’t want to tie up more capital than necessary in your estimated quarterly tax payments. Your CPA can check your performance and projections against your estimated tax payments to help you avoid surprises at tax time.

REGULATORY COMPLIANCE
Laws, regulations and financial reporting standards change frequently. Failure to comply can result in costly penalties from state and federal authorities or place you in technical default of loan covenants with your bank. Your CPA can help you identify regulatory changes that could impact your business and assist you with compliance.

EMERGENCIES
Preventing emergencies is one of the benefits of scheduling regular checkups with your CPA. But you can’t predict some situations such as the loss of a major customer, a lender unexpectedly calling a loan, a personal health problem or other unpredictable event. When you’ve been meeting with your CPA on a regular basis, your CPA knows your business and is in a better position to help you when an emergency arises. Because your CPA is specially trained and advises many small businesses, your CPA is uniquely qualified to advise you on your financial options in a crisis situation.

SB Quarterly Pulse Check Cover

To download this checklist from the AICPA, click here.

In this guide, we cover:

  • Strategy and Planning
  • Cash FLow Forecasting
  • Gross Profit Margins
  • Key Performance Indicators (KPIs)
  • and more!

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Posted on May 2, 2016

DCEO-Accounting_MNS2965
In May 2016, we were honored to participate in the D-CEO Magazine Accounting Roundtable. Our newest partner, Mike Rizkal, CPA sat down with other leaders from accounting firms in the Dallas area to discuss the current state of business accounting, economic variables, and the various trends that affect our clients.

To read the full article on DCEO’s website, click here.

How is the location of a CPA firm office relevant to the decision to work with them?

Location is still a big factor, but no longer a deal breaker. Due to advancements in technology, we can now serve more clients that aren’t geographically located in our backyard while still maintaining the efficiency and personal touch of a face-to-face meeting. The advancements in online collaboration and meeting tools have changed our industry significantly and will continue to play an important role in how we service our clients. We invest in technology that matches our clients’ desire for convenience, and then we address their preferences for communication to deliver the best service possible. For traditional tax and audit compliance, those services are built around collaboration and often work best with a local CPA. However, a firm that has the capability to work remotely through cloud-based technologies can bridge the gap of geographical distance.

Is bigger better? How does the size of firm impact clients?

In our experience, going with a bigger firm doesn’t always guarantee better services or solutions. It is all about balance. Certainly for some larger entities and public companies a “name” firm carries weight with investors. However, in the middle market segment in which we serve, service is paramount and our competitive fees create more flexibility for ownership. Clients should focus on finding a firm with a solid reputation within the financial community that directly impacts them. When searching for an accounting firm, companies should consider: direct and easy access to partners, the capabilities of the firm to help solve their problems or provide referrals to other trusted service providers.  The most common reason for change to a new CPA firm is that the client felt “lost in the shuffle.” Therefore, it is important to find a firm that can deliver on the level of service offered during the proposal process. Don’t  buy based on size alone.

Do your clients rely on their CPA firm to make recommendations of trusted advisors in other service areas?

We spend a lot of time making sure we have strong alliances so we can refer clients to someone we trust. If we are not confident in the level of service they will provide, we do not refer them. The key to a successful recommendation is to know the needs of your client first, then match them with a specific service provider with experience that meets those needs at a value-based cost. Matching the personality of the client with the potential service provider is also an important factor in the referral selection. We go beyond simply providing a recommendation. It is our hope to provide a referral that leads to a successful relationship.

We spend a significant amount of time in the business community developing relationships that we believe can benefit our clients. Even after the referral, our team stays involved to ensure our client has a positive experience and the desired results are achieved.

How are your clients balancing the importance of providing strong earnings for banking needs versus reducing the amount of taxes paid?

All clients are looking for opportunities to reduce the tax burden while continuing to produce strong financial results that attract capital. We have found the answer to this question to be a combination of strategic tax and financial planning. This is often achieved through balance and communication.

There are several strategic tax planning opportunities that do not negatively impact the company’s earnings or common financial measurements. Banks are not purely concerned with earnings, but instead focus on the overall stability and financial health of the company.

We feel that it is important to help our clients through strategic planning to reduce the tax burden while maintaining strong financial performance. Then we work with our clients to communicate these strategies to their financial institution. We have often found that communication helps manage surprises and keeps our clients and their lenders on the same page regarding specific tax planning strategies and expected earnings.

How do tax laws and incentives in Texas benefit your clients?

Texas undoubtedly is one of the most business friendly states in the nation and has one of the lowest tax burdens in the country. Clearly, based on current economic performance of the state, Texas has done a good job incentivizing companies to do business in the Lone Star state. Unlike many other states, Texas does not impose a personal income tax or a corporate income tax. Texas’ margins tax was established to provide a broader, fairer tax assessed at a lower rate. There are numerous other tax incentives and laws that make Texas a business friendly state, including property tax incentives, sales and use tax exemptions for manufacturing, research and development and business relocation deductions, just to name a few. We look at every advantage and weigh it against the goals and financial results of every client before recommending a solution.

What unique marketing programs have you implemented to grow your business?

We are being very segment focused and promoting thought leaders in the industries we serve. We are increasing our web presence to encourage online leads, because a lead indicator among growing firms is website visits. We haven’t prioritized our website in the past, and I think the industry in general has underestimated buyer behaviors toward online search and comparison shopping.

We are promoting technologies that reduce client fees and improve operational efficiencies. Especially in services where we are experts, we are looking at solutions that make us attractive to clients for outsourcing such as payroll services.

What are obstacles that impede the growth of your clients’ businesses?

The biggest obstacles to growth are often corporate governance and finding and attracting talent. There are many issues that affect our clients’ businesses. Few owners can solve them all on their own. Many business owners are top-line focused and struggle to address the other challenges affecting the company primarily due to lack of time. Business owners need to invest inside the company as much as focus on new business development in order to remain competitive on all fronts. Keeping talent, investing in the right technologies and managing a diverse and mobile workforce are the biggest challenges to growth.

What is the best formula for creating a valuable and successful relationship between you and your client?

The key to creating a valuable and successful relationship is proactive involvement and communication. We strive to be actively involved in our clients’ businesses through tax planning and regular interaction throughout the year. Every client wants to feel attended to on a professional and personal level. We have leveraged internal resources, technology and our team to ensure follow-up with clients so they are well informed during every stage of the engagement. Our focus as professionals, then, is to exceed expectations with our attention and value-added services.

How should companies evaluate the effectiveness of their accounting firm?

Companies can evaluate the effectiveness of their accounting firm by assessing whether they feel the firm goes above and beyond to meet their expectations.

  • Is the team simply completing the task they’ve been assigned or are they spending time proactively planning for the engagement to ensure the best client results in the most efficient manner?
  • Is the accounting firm providing the right level and type of communication as to the status of the project and the expected delivery date?

Proactive service means showing clients what they want before they know they want it. Clients need to hold their accounting firm to a standard of meeting promises and expectations. A CPA must be engaged in the relationship to know what can make a difference.

As a trusted advisor, what are you doing differently today to provide additional value to your clients?

We are striving to be more than just a service provider. We want our clients to view us as a resource to help with their business challenges. We encourage communication by offering an unlimited phone calls and meetings retainer to every client.  We want our clients to know that simply calling us to discuss a solution is not going to cost them.  These conversations often uncover opportunities and needs and enhance our client relationships.

Our professional team brings value to the table from a background of various industries and experiences, which can often be translated into a unique solution for our clients’ needs.

How has the use of technology impacted how clients run their business — are they willing to make the investment in this economy?

The advancements in technology and increases in efficiency it creates are often too big to ignore. During the recent downturn of the economy, companies sought out opportunities to leverage technology to decrease overhead and increase profitability. Although there has been some economic improvement, companies continue to look for new ways to increase efficiency. This is often achieved by leveraging new technology. We focus on making technology recommendations that fit our clients’ needs and help our clients assess the cost/benefit of their technology investments. It can be as simple as setting up ACH bill payment through their bank or investing in an ERP system. We live in a technology-based world at a time of high competition and increased demand for efficiency. Our clients are willing to invest in solutions that reduce overhead costs, increase efficiencies and help them remain competitive in today’s economy.

What are the most important issues impacting your client base today?

There are numerous issues impacting our clients, including increased competition, pricing, talent retention, taxes, succession planning, changes in healthcare regulation, increased compliance complexity and demand for efficiency.

We take pride in helping our clients navigate these challenges by being proactively involved in their business. Clients need an advisor to help prioritize and weigh their decisions, provide insight based on experience in their industry, and assess the financial impact of these decisions. Our goal is to help our clients make the best decision they can to provide a solution they can be confident in.

How do you keep up to date on issues that impact your clients?

We attend trade shows and conferences within our industry and the industries in which our client operate. Spending time with our clients is how we get the first-hand information on issues and trends affecting their industry. We see it as part of our job to stay in contact and be experts in our clients’ segments. We want to give clients a head start on what’s coming — and it’s constantly changing.

Often the concerns of here and now outweigh what’s coming in the future. It’s natural. Attending these conferences helps our professionals stay aware of upcoming changes in the industry, which allows us to provide knowledge to our clients regarding the latest trends, and in turn this helps our clients succeed in today’s competitive market.

What keeps your clients up at night?

The issues that keep our clients up at night are numerous and often different based on the industry in which they operate and the lifecycle stage of their business. Companies are always balancing the long-term decisions to remain competitive with the short-term concerns about payoff. What’s the short-term reward for the long-term investment? It’s human nature to worry about that. Are we on the right track? Can we keep the key people we need to succeed? Not to mention the normal concerns all business owners face, such as meeting revenue targets, maintaining healthy cash flow, technology investment and managing increased regulation. During these times of increased complexity it is important to find a trusted advisor that can help navigate the ever-changing business environment.

 

MR Headshot

Mike Rizkal, CPA has been with Cornwell Jackson for over ten years, and leads the firm’s benefit plan and financial statement audit practice. He specializes in providing a variety of services to privately-held middle market businesses, with a focus in the construction, real estate, manufacturing, distribution, professional services and technology industries.

View Mike Rizkal’s full bio here.

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Posted on Mar 28, 2016

Form 3115 - Accounting Word CloudOn March 24, 2016, The Internal Revenue Service (IRS) made an announcement regarding the revisions of Form 3115. This was the first update since 2009, and the changes are now required to be used, however the IRS will still accept the previous version of Form 3115 until April 19, 2016. We have summarized the major changes from the IRS below and answered some of the most common questions received by our tax professionals on this subject.

What is new about Form 3115-Application for Change in Accounting Method in 2016?

The new form updates the previous form with formatting changes, allows for multiple change numbers, and adds some new significant questions. Below, we have detailed some of the major changes; however, this is a summary of some of the major changes and should not be considered as an all-encompassing list.

  1. Duplicate Copy: The IRS has always required a duplicate copy of the form to be filed along with the original. Under the old procedures this form was to be filed in Ogden, Utah. As of January 2016 this duplicate copy is to be filed in Covington, Kentucky.
  2. Multiple Changes in Accounting: The IRS has added spacing to allow for multiple changes in accounting to be taken on one form.
  3. Legal Basis: On Page 3, Part II, Lines 16a and 16b the IRS requires that the legal basis supporting the changes be provided. The IRS indicated that in many situations taxpayers had made automatic changes without providing enough legal information to confirm that the taxpayer qualified for the change. Previously this information was only required for non-automatic changes.

These are just three of the changes under this new form. Tax preparers that utilize a Form 3115 should make themselves aware of the modifications to this new form. Per the request of the IRS, if a taxpayer has had a form prepared for the 2015 tax year that has not yet been filed, the form should be updated to the new Form 3115 prior to filing.

In addition to a new Form 3115 and instructions, the IRS announced that the filing location for the duplicate form is changing. Previously under Rev Proc 2015-13, taxpayers were required to file a duplicate Form 3115 with the Ogden, Utah, service center. Effective Jan. 1, 2016, taxpayers should file the duplicate form at the Covington, Kentucky, service center. If prior to April 20, 2016, a taxpayer filed their duplicate Form 3115 with the IRS at either the Ogden, Utah, or Covington, Kentucky, locations using the 2009 Form 3115, the taxpayer may file the original Form 3115 with their return using either the 2009 Form 3115 or the 2015 version.

The filing address to be used for the Covington, Kentucky, center is:

Internal Revenue Service
201 West Rivercenter Blvd.
PIN Team Mail Stop 97
Covington, KY 41011-1424

Click here for a link to the updated Form 3115 – Application for Change in Accounting Method.

Types of Accounting Methods Available

What are the different types of accounting methods available?
Cash basis and accrual basis are accounting methods that determine when and how you report income and expenses for tax purposes.  In the U.S., the IRS wants you to use the same method each year when reporting income.  Depending on your specific situation, there may be additional rules around when to use cash or accrual basis.

What is cash basis?
When cash basis is used as the accounting method, income is reported as payments are received, instead of invoices are issued. Expenses are reported when you pay bills. If invoices are used and bills are received to pay later, then this report method will affect the amount reflected in your A/R and A/P accounts.

What is accrual basis?
With accrual basis as the accounting method, income is reported as soon as invoices are sent to a client (instead of when money is received) and expenses are reported when bills are received.
Accrual basis is more accurate than cash basis reporting. It also allows for better business management by revealing trends in income and expenses well in advance of the actual payments being made or received.

Considering a change in accounting method for your business?

If you are considering a change in accounting method for your business, be sure to ask the right questions before making a move.

  1. How often can a company change its accounting method?
  2. What straight-line method changes require IRS approval?
  3. How does the Tax Year and Accounting Method Impact the Tax Picture for my business?
  4. If the total amount of the change is less than $25,000, can I spread the adjustment out over several years?

For guidance on this issue, talk to one of our tax professionals today. We’re here to help. Gary Jackson, CPA is the tax and consulting partner and can help determine if a change in accounting method would benefit your business.

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Posted on Mar 14, 2016

New retail space available for rent

Many companies choose to lease certain assets, rather than buy them outright. Leasing arrangements are especially common among construction contractors, manufacturers, retailers, health care providers, airlines and trucking companies that rely on expensive equipment or real estate in their day-to-day operations.

FASB Chair Golden Speaks Out

Here’s what Financial Accounting Standards Board (FASB) Chair Russell Golden has to say about the new standard on accounting for leases, according to a FASB News Release on February 25:

“The new guidance responds to requests from investors and other financial statement users for a more faithful representation of an organization’s leasing activities. It ends what the U.S. Securities and Exchange Commission and other stakeholders have identified as one of the largest forms of off-balance sheet accounting, while requiring more disclosures related to leasing transactions. The guidance also reflects the input we received during our extensive outreach with preparers, auditors, and other practitioners, whose feedback was instrumental in helping us develop a cost-effective, operational standard.”

Financial Reporting Incentive to LeaseRoughly 85% of these leases aren’t reported on company balance sheets, according to estimates made by the Financial Accounting Standards Board (FASB). But that’s going to change under a new accounting standard — Accounting Standards Update (ASU) No. 2016-02, Leases (Topic 842) — that was issued on February 25.

Management may decide to lease assets for a variety of reasons. For example, they may not have enough cash for downpayments or access to financing — or they may not want to bear the risk that equipment will become technologically obsolete or property values will nosedive. In essence, leasing can allow companies to be more flexible, lower risk and adapt to changing market conditions.

From a financial reporting perspective, leasing offers an added bonus: Under the existing rules, a lease obligation is reported on the balance sheet of the company that leases the asset (the lessee) only if the arrangement is similar to a financing arrangement — then it’s considered a capital (or finance) lease. Otherwise, it’s an operating lease, which is expensed as lease payments are incurred and the terms are disclosed in the footnotes.

For example, if you lease a computer for most of its useful life and can purchase it for $1 at the end of the lease term, the arrangement would likely qualify as a capital lease. But it you sign a five-year lease on office space, it would probably be classified as an operating lease under current practice.

Globally, this treatment has allowed companies to hide trillions of dollars of operating leasing obligations in their footnote disclosures, rather than report them on their balance sheets.

The FASB Finalizes Long-Awaited Leasing Standard

The lease accounting project has been on the FASB’s agenda for more than a decade. In 2013, the FASB proposed the latest round of changes to lease accounting, which were largely aligned with an international accounting proposal on leasing. But these proposals were met with significant opposition across the world. So, the FASB and the International Accounting Standards Board subsequently abandoned their effort to create a converged lease accounting standard and separately went back to their own drawing boards.

The finalized standard on lease accounting under U.S. Generally Accepted Accounting Principles is a watered down version of the FASB’s 2013 proposal. It still allows for a distinction between how capital and operating leases are reported on the income statement and statement of cash flows.

Under the new standard, on income statements, capital leases will continue to be treated as financing transactions, meaning interest and amortization will be calculated with rent expense. Because interest is calculated on a declining balance over time, the cost of capital leases will look more expensive at the beginning of a lease. Leases that qualify as operating leases will be treated as simple rentals on the income statement. So, companies with rental-type contracts would report lease payments evenly over time.

The big difference under the updated guidance is that all leases with terms of more than 12 months will be reported on the balance sheet. In other words, lessees will report a liability to make lease payments, initially based on the net present value of those payments, and a right-to-use asset for the term of the lease. Companies can also elect to capitalize leases with terms of 12 months or less under the new standard.

In addition, lessees will need to expand disclosures about the terms and assumptions used to estimate their lease obligations, including information about variable lease payments, options to renew and terminate leases, and options to purchase leased assets. As a practical expedient, the new standard allows private companies and not-for-profit organizations to use risk-free rates to measure lease liabilities.

The new standard also provides guidance on how to determine whether a contract includes a leasing arrangement and, therefore, must be reported on the face of the balance sheet. For example, some “combined” contracts include lease and service provisions. These components generally need to be valued separately, because ASU 2016-02 requires companies to report only lease provisions on the balance sheet. For simplicity, however, the FASB allows companies with combined contracts to elect to also account for nonlease provisions under this guidance, if they prefer.

The FASB defines a lease as, “A contract, or part of a contract, that conveys the right to control the use of identified property, plant, or equipment (an identified asset) for a period of time in exchange for consideration. Control over the use of the identified asset means that the customer has both (1) the right to obtain substantially all of the economic benefits from the use of the asset and (2) the right to direct the use of the asset.”

Updated International Rules Issued in January Regarding Lease Accounting

On January 13, 2016, the International Accounting Standards Board issued its updated guidance on accounting for leases. The FASB and IASB agree on how to report leases on balance sheets. The main difference between the two standards is how expenses are reported on the income statement.

In general, all lease expenses will be treated as financing transactions and capitalized under the international standard. For companies that follow the international accounting standards, the effects will spill over to their income statements and statements of cash flows, not just their balance sheets.

The international rules also permit exemptions for certain small ticket items, such as copiers and coffeemakers. But there’s no specific threshold for which assets are considered “small ticket,” requiring companies to exercise judgment.

Effective Dates of New Lease Accounting Regulations

Fortunately, you still have time to get your accounting systems and lease agreements in order. The new standard goes into effect for fiscal years beginning after December 14, 2018 (in other words, in 2019 for calendar-year public companies). Private companies have an additional year to implement the changes.

This doesn’t mean you should put this standard on the back burner for long. The changes could be significant from current accounting practices if you rely heavily on leased assets. And public companies will need to start collecting comparative data in 2017 to meet the regulatory requirements of the Securities and Exchange Commission.

For more specific information about how this new standard will affect your financial statements, contact our in-house expert, Mike Rizkal, CPA.

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Posted on Mar 4, 2016

manufacturing audit, R&D credit, icdisc, manufacturing tax credits, manufacturing dallas, manufacturing employment

In the past year, manufacturing employment in the Dallas/Fort Worth area has dropped by 2 percent. This statistic alone seems negative, but the overall outlook for manufacturing is trending positive with increased focus on innovation, simplified supply chains, diversification into customer-focused services and creativity with materials performance and fuel sourcing. It’s still a challenging industry, but this real or perceived lull in growth is the perfect time to assess the structure and vision of your company. Strengthen the basics with strategic planning to be ready for what’s next.

Strategic PlanningManufacturing Outlook

A slower year or two for revenue may be the opportune time to pursue a transfer of assets to the next generation. If earnings are down 15-20 percent, for example, savings on the transfer and estate tax can be significant if owners act now.

Also, if year-to-year revenue continues to be flat or even less than the previous year, your CPA can help you consider reporting an operating loss and cleaning up the books through carrybacks and refunds from years when revenue was higher.

Even if the company is in good financial health and sustaining a moderate profit, now may be a good time to revisit the company vision, your business model, your KPIs and your tools for tracking them. There are many more integrated solutions that tie the sales side of the house to supply chain, to production and all the way through to realization. Leaders should take time now to explore and demo these various management tools.

Manufacturing Tomorrow

Significant global growth in manufacturing is forecast mainly in Southeast Asia, India, the Middle East and Eastern Europe. By 2025, it is expected that a new global consuming class will have emerged in these developing economies as wages rise and demands for more goods and services increase.

As these manufacturers mature, they will have to focus on reducing costs, appealing to a broader base of customers and finding more skilled workers. In the end, all manufacturers will have to respond faster to market shifts based more on a global pulse than what is happening in their backyards.

In established markets, customers are already dictating variation in products, after-sales customer care and advanced or more environmentally friendly materials. These buyers are doing the majority of research on their own, interacting with the producer only briefly, then hitting the submit button. If they have a bad experience, they report it on social media. Producers are serving increasingly knowledgeable customers who want it their way…or they will go somewhere else.

On the supply side, manufacturers will continue to deal with volatile resource prices and a shortage of highly skilled talent. Difficulty obtaining supplies, regulatory and labor risks and lack of public infrastructure will influence the location and relocation of production facilities.

All of these predictions point to the need for manufacturers to be tech-savvy and globally aware. Even if home base is Dallas/Fort Worth, the market is the world. Work with advisors who recognize this shift. Get your financial and strategic house in order to invest in tomorrow’s opportunities.

If you have any questions about how to add operational efficiencies, reduce taxes or plan for transfer of ownership in your manufacturing operation this year, talk to the manufacturing team at Cornwell Jackson.

GJ HeadshotGary Jackson, CPA, is the lead tax partner in the Cornwell Jackson’s business succession practice. Gary has built businesses, managed them, developed leadership teams and sold divisions of his business, and he utilizes this real world practical experience in both managing Cornwell Jackson and in providing consulting services to management teams and business leaders across North Texas.

 

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Posted on Dec 4, 2015

RE WP Download-01Welcome to uncertainty. The age of information has brought an unprecedented requirement for people, processes and technology to evolve quickly. Real estate must provide the same level of flexibility to adapt to or even anticipate the next big economic or social change. Therefore, investors as well as developers are attracted to opportunities that cover as many variables as possible.

Dallas was ranked among the best cities to work in technology in 2015, according to data on 200 locations by financial advice tech start-up SmartAsset. Cost of living is reasonable and the city’s three tech incubator organizations that emerged post-recession have accelerated tech start-ups and acquisitions. According to data analyst CB Insights, Texas had 22 tech companies in the IPO pipeline in addition to acquisition activity.

Nationally, firms employing fewer than 50 people are showing job growth outpacing larger firms by nearly five to one, according to the Urban Land Institute. Many of those firms are in the TAMI industry, defined as technology, advertising, media and information. Tech industry employees, about 4 percent of the workforce in Dallas, make 73 percent higher wages than the city’s average compensation, which bodes well for housing investment.

 

Smart Buildings Go Beyond ‘Nice to Have’

As consumers grow more technologically savvy (or dependent?), expecting to connect wherever they are, the building infrastructure and envelope itself needs to flex and accommodate next-generation technologies. Beyond that, the need to conserve resources is at play. Analysts are already recommending that technology and sustainability be factored into current asset valuations. A bad sustainability rating could result in valuation “brown discounts” for things like energy inefficiency or technology obsolescence.

With energy and water demands increasing globally, The Global Smart Building Market 2015-2019 report noted that the smart building market is expected to grow from $7 billion in 2015 to $36 billion by 2020, at a CAGR of 38% from 2015 to 2020.

Tied into the smart systems of buildings is the prediction that devices and platforms begin to learn the preferences of people and create a preferred “experience” for users…whether real or virtual. The potential for speaking to your home or office to get what you want — and having it speak back intelligently — is no longer just science fiction.  

In the short term, developers of both residential and commercial real estate can anticipate continued requests for features and affiliated services that include physical and data security, multi-channel communications capabilities, climate controls and similar automated options. Real estate technologies must deliver on higher expectations for safety, efficiency and productivity.

 

Want more real estate trends? Download the full Whitepaper or read this post: Low Debt Supports Positive Cycle of Development

If you would like to learn more about how this topic might affect your business, please contact Gary Jackson, CPA at Gary.Jackson@cornwelljackson.com or call 972.202.8000. 

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Posted on Dec 3, 2015

Developers and investors are looking for opportunities to get the most flexible bang for their buck, either in real estate zoning and use or in location aligned with a variety of amenities and attractions. They are steering clear of developments that focus on just one class or type in order to reduce volatility long-term.

The Dallas/Fort Worth area is part of this flexible multi-use communities trend. The Central Business District population is predicted to grow to 59,337 by 2030. Young people and some Baby Boomers are choosing city cores in Dallas, Atlanta, Charlotte, Nashville and Portland, according to a 2016 report co-published by the Urban Land Institute and PwC US. Young people are waiting longer to get married and have families. Boomers want an active cultural and social life. Both lend themselves to vibrant, downtown or uptown neighborhoods with smaller, maintenance-free residences. They want to be close to work, dining, recreation and shopping with the option to walk, bike or use public transit. Housing types tailored to demographics are becoming a necessity to match these evolving lifestyle and environmental demands.

NAIOP, the national commercial real estate association, considers what they call walkable mixed use or flexible multi-use communities as “the future of commercial real estate development.” In a spring 2015 article, NAIOP defined “walkability” as a relationship between people and the streetscape. It must be inviting, comfortable, fun and safe, which means that the buildings aren’t the main focal point, but are instead designed to shape the pedestrian experience.

NAIOP predicts this type of mixed use will be in high demand with “appreciation in land values and rents.” You may see this playing out in West Dallas at Trinity Groves, where 1,000 new apartments are in development in the midst of a foodie’s haven of restaurants along the Trinity River.

Large corporate clients are re-imagining the amenities and design of large-scale campuses, too, moving away from traditionally closed and secure fortresses to a still-secure design that makes the campus look like part of a community. CityLine’s deal with State Farm makes it an anchor tenant for 186 acres of development in Richardson that includes retail, grocery, a movie theater, restaurants and upscale apartments.

In Frisco, plans for a new headquarters and training facility for the Dallas Cowboys has prompted investment interest from around the world. Estimates are more than $5 billion in development along a one-mile stretch between Warren Parkway and Lebanon Road. The area will be a community in itself with entertainment, retail, restaurants, hotels, industrial and office complexes and residential options.

And finally, the industrial market has grown legs, thanks in no small part to e-commerce and retail distribution trends. Foreign investors are very keen on retail-affiliated industrial real estate for distribution of perishable and non-perishable goods. All you have to do is look at consumer options for two-day or same-day delivery through e-commerce sites to realize the potential for distribution center development. NAIOP even cites expansion of the Panama Canal in 2016 as a key indicator of service delivery shaping real estate development.

Fort Worth is home to an Amazon distribution center with another center opening in Dallas, the fourth in the state. The 500,000-square-foot Dallas distribution center will handle small retail items and is slated to open in 2016 along Interstates 45 and 20.

Interiors Must Be Flexible, Too

Focusing on how people work rather than title or tenure at a company is also influencing the layout of interior spaces for collaboration, private focus time and “touching down.” Remote office workers who only visit the office occasionally, for example, as well as the speedy expansion/contraction of labor pools dictate this move toward flexible space.

The traditional big box office space lined with private offices and filled in the center with cubicle workspaces is losing its attraction in favor of open concept and loft interiors that combine work and “play” areas. Employers recognize the need for collaboration as well as focus time throughout the day among different work groups that a traditional office setting no longer accommodates.

Quality pre-builds that anticipate the desires of tech-minded, collaborative tenants are still a valuable investment. This is especially true if they are willing to bank on high-end finishes that attract tenants who prefer move-in-ready, modern spaces.

In residential spaces, city dwellers are opting for less square footage in favor of more amenities, ranging from pool houses and workout facilities to on-site bike repair and community rooms.

The sharing economy is influencing an interest in communal spaces that encourage face-to-face interaction as well as fewer individual parking spaces and more secure bike storage and proximity to transit.

These trends pose a challenge for remote real estate management arrangements. Management companies anticipate not only a move toward on-site management in some cases, but also new methods of staff training and oversight for building exterior and amenity maintenance.

Want more real estate trends? Download the full Whitepaper or read this post: Techy Options Go Beyond ‘Nice to Have’ to ‘Must Have’

If you would like to learn more about how this topic might affect your business, please contact Gary Jackson, CPA atGary.Jackson@cornwelljackson.com or call 972.202.8000.

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Posted on Dec 2, 2015

RE WP Download-01For the last five years, experts in real estate accounting and commercial real estate investment have encouraged people and institutions to buy. Now we are starting to hear whispers as to how long a real estate bull market will last. Are we headed for a bust?

Not so fast. The U.S. economy is in a far different place than it was 10 years ago. Real estate developers, lenders and private equity investors have adopted a more cautious mindset that is demonstrated by bullishness on mixed use and re-use and a focus on mainstream methods of financing.

The Federal Reserve is expected to hold the line on already historically low interest rates. Plus, developers as well as their tenants are keeping more “rainy day” cash reserves for reinvestment. For these reasons and others, private equity investors and real estate analysts are predicting an extended positive cycle of growth in the Dallas/Fort Worth area and elsewhere.

 Neither developers nor investors are interested in extending financing any longer than necessary. They also are cautious about higher risk financing. Post-Recession, vehicles such as mezzanine financing are rare for mid-size to large enterprises. In fact, a new version of financing known as “unitranche” is combining senior and subordinated debt into one financing vehicle, making it more attractive and cost-effective for developers and less risky for investors.

Mezzanine’s one sweet spot appears to be among small deals where traditional bank financing comes up short and private equity can’t make up the gap. But the number of dedicated mezzanine players has also dwindled as they adapt their investment strategy to market demand.

There is also more competition. Real estate investment trusts (REITs) are sustaining popularity as a way to fund and invest in real estate while mitigating risk. Since 2009, investors have replaced bonds with investment in REITs and realized returns of 4-6% each year in dividends, according to CNN Money. Although any announcement of raised interest rates affects REIT prices — signaling investment volatility in 2015 right along with the stock market — long-term pragmatists are advising clients to hold onto their REITs and even add to them because a stronger economy equals a stronger real estate market.

The newest form of investment, crowdfunding, is also taking a small portion of the market. Vehicles for crowdfunding satisfy the DIY developer and investor who wants more options and more transparency. With minimum investments of $5,000, more individual investors have access to real estate investments, and can use it as a form of portfolio diversification. More access to cash from diverse sources can support a more stable real estate market, coupled with strategic development. Laws regarding crowdfunding investment vehicles are still evolving with the technology itself, so investors and developers alike need to thoroughly review the pros and cons.

 

Cautious About ‘Overbuilding’

With interest rates remaining fairly steady and reduction in inventory in both the commercial and residential markets, the National Association of Realtors projected $500 billion in commercial real estate investment closings by the end of 2015. Properties are trading at 6.6 percent higher average prices compared to second quarter 2014.

In the Dallas/Fort Worth area, one of the hotbeds for commercial real estate development is Uptown. Investors are contributing millions for new office development and remodeling, the first of which to open next year is the new $225 million McKinney & Olive office tower. It will connect to The Crescent and Ritz-Carlson Hotel with plans for a major pedestrian area and park as part of Crescent Real Estate’s bullish push in Uptown.

As for the five or six other competing projects planned in Uptown, it makes sense long-term, but may take a while to fill them with tenants. Investors and developers are expected to shy away from projects that focus too much on one type or class of commercial development in order to keep their portfolios properly diversified.

 

Want more real estate accounting trends? Download the full Whitepaper or read our next blog post:  Dallas Developers Focus on Flexible, Multi-Use “Communities”

If you would like to learn more about how this topic might affect your business, please contact Gary Jackson, CPA at Gary.Jackson@cornwelljackson.com or call 972.202.8000.

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