Lease Accounting Changes Coming Down the Pipeline

Joe Boruff

The proposed change in accounting for leases will apply to all entities, including privately held companies and nonprofit organizations, who prepare their financial statements in accordance with US generally accepted accounting principles (“GAAP”). Entities with a significant amount of leasing activity could see dramatic changes to their balance sheet.

Overview:

Simply put, the goal of a recent exposure draft jointly published by the Financial Accounting Standards Board (“FASB”) and International Accounting Standards Board (“IASB”) is to eliminate operating leases and get virtually all leasing transactions on the balance sheet for all entities. Generally speaking, all leases will have to be capitalized on the balance sheet once this proposed requirement is adopted. It will supersede the guidance in Topic 840 (FASB Accounting Standard Codification) on leases and IAS 17, Leases, in IFRSs (International Financial Reporting Standards).

Under current US GAAP, leases are treated as either capital leases or operating leases. These models have been criticized because they do not provide the user of the financial statements with an accurate representation of leasing transactions as they may not necessarily reflect the underlying economic reality. Current lease accounting allows for off-balance-sheet treatment of leases.

The exposure draft proposes that lessees and lessors should apply a right-of-use model in accounting for all leases. This means that the lessee recognizes an asset representing its right to use the leased property and a liability for the obligation to make future lease payments. The lessor recognizes an asset representing its right to receive lease payments and then must consider one of two approaches: the performance obligation or derecognition approach.

In light of the overall issues discussed in the IFRS convergence and its differences from GAAP, this is one area that will be pervasive for all entities ranging from the smaller privately-held companies to publicly traded companies, whether they are domestic or international.

Summary:

-          All leases for all entities must be reflected in the balance sheets of lessors and lessees.

-          There is no distinction between a “capital” lease and “operating” lease.

-          Smaller companies will be able to treat the change prospectively, upon adoption

-          Larger companies will treat the change retroactively (affecting each year presented in the current year financials), upon adoption

-          Lease terms of 12 months or less would not be capitalized by either the lessee or lessor.

-          Changes will increase debt and may affect loan covenant ratios. Changes will also likely increase EBITDA as leases currently recognized as “operating” will now have “amortization” expense and payments will reduce liability obligations under the new framework.

-          As this will apply to all entities preparing financial statements according to GAAP, some entities may opt to prepare their financial statements in accordance with an Other Comprehensive Basis of Accounting (“OCBOA”), for example, income tax basis, for third party use where OCBOA basis presentation is accepted.

Important Dates:

August 17, 2010 - The initial exposure draft for the proposed accounting standards update was issued.

June 13, 2012 - a joint press release was issued noting all decisions reached to that date were preliminary and a revised joint exposure draft would be issued in the fourth quarter of 2012. The revised exposure draft will address both the balance sheet and income statement treatment of leases to be adopted for lessees and lessors.

The FASB and IASB anticipate completing this important convergence project during 2013.

Let me know how I can be an asset to you and make this convergence one of the lease(t) of your worries!

Please follow this link to the actual FASB/IASB Exposure Draft for further details:

Are you compliant with new 401(k) Fee Disclosure Rules?

Jennah Purk, CPA, MST

You may have noticed that new rules regarding fee disclosures for retirement plans from the Department of Labor have been in the news recently.  Note that these are not new fees, but the fee disclosure requirement is new.  Two of the new requirements include:

1.       Retirement plan vendors were required to provide plan sponsors with required fee disclosures by July 31, 2012.  This is referred to as the 408(b)2 disclosure.

2.       Plan sponsors are required to provide plan participants required fee disclosure information by August 31, 2012.  This is the 404(a)5 disclosure.

The new rules also impose a requirement that plan sponsors not only fulfill the disclosure requirements but that they now examine the disclosures to ensure they are adequate and determine that the fees charged are reasonable and fair.  Many plan sponsors may not be aware of these additional duties.

Be aware that these new fee disclosure rules are different from fiduciary standards for plan sponsors.  The DOL has prepared a fact sheet on these new requirements you may view here.

Slower refunds next year???

Scott Pinkowski, CPA

According to IRS officials, due to the rapidly increasing problem of identity theft, refunds this coming year will be slower due to additional work required to verify the return has not been fraudulently filed.  Identity thieves are using stolen social security numbers to file unauthorized returns early in the season and the victims are not aware their identity has been stolen until they file their return to find it rejected.

A few reminders about identity theft…

·         The IRS does not initiate contact requesting personal info via e-mail.

·         When unsure about who is contacting you, contact the IRS with a known phone number from their website and explain the situation.  This goes for other companies too. 

·         Use a reputable return preparer.

·         And, as always, be aware of what companies and what individuals you are allowing access to you personal information including bank account numbers and Social Security numbers.

·         For more information on identity theft and the IRS click here.

New ERISA Fee Disclosure Deadline is Looming

Rachel Smith, CPA

Do you know those packages that you get from your company's retirement plan service provider?  The ones that are sitting unopened in a pile on your desk or on the floor?   Well, you will want to open those soon since they likely contain information that you as your company's plan sponsor will need to pass on to your employees as soon as possible.  The DOL finally issued the final regulations relating to ERISA fee disclosure requirements earlier  this year.  Many people have been uncertain what these new rules mean, but not taking the time to figure it out could disqualify your company's retirement plan.  The DOL now considers it part of the Plan Sponsors job to not only pass the fee information on, but also to evaluate the quality of the services that the plan participants are receiving for the price that they pay.  A summary of the due dates and requirements are below.

Effective July 1, 2012 – Service Providers must provide fee disclosures to the Plan Sponsors.

Effective August 30, 2012 – Plan Sponsors must provide fee disclosures to Plan Participants.  An example of the fee disclosure form may be found at http://www.dol.gov/ebsa/pdf/401kfefm.pdf

November 14, 2012, quarterly expense statements are required to be provided to Plan Participants starting with the quarter ending September 30, 2012.  Going forward, participants must receive the expense statement within 45 days of the end of the quarter.

If your service provider failed to provide the information by July 1, it is the plan fiduciary's responsibility to request it and pass the information on to the participants by the end of August.  If you have made reasonable attempts to obtain this information and the service provider still refuses, you can report them to the DOL by filing a notice online at www.dol.gov/ebsa/regs/feedisclosurefailurenotice.html.

What can you do to prepare?

1.       Determine who is your company's responsible plan fiduciary.

2.       Determine which of your covered service providers are included in the regulations.

3.       Contact those covered service providers and ask when they will provide the required disclosure, if they haven't already.

4.       Determine if the disclosure provided complies with the new regulations.

5.       Document your review of fee reasonableness and retain all documentation.  Reasonableness may be determined by comparing the fees paid by your plan to other plans by requesting bids from other service providers.

6.       Pass the information on to your plan participants.

Sounds easy, right?  For more information regarding the DOL regulations go to http://www.dol.gov/ebsa/newsroom/fs408b2finalreg.html.

Good luck!

Missouri Back-to-School Sales Tax Holiday

Taylor Souder, CPA



It's that time of year again...summer is winding down, kids will be heading back to school, and parents will be doing back-to-school shopping. 

This marks the ninth year of Missouri's back-to-school sales tax holiday where consumers can take advantage of the lifted 4.225% state sales tax on certain clothing, school supplies, and select other items.  The sales tax holiday begins Friday, August 3^rd at 12:01am and continues through Sunday at Midnight.

However, not all local jurisdictions will be participating in the sales tax holiday and consumers will still have to pay local sales tax which varies for each locality.  Some of the cities not participating this year include Ballwin, Brentwood, Bridgeton, Clayton, Des Peres, Ellisville, Fenton, Ferguson, Kirkwood, Ladue, Maplewood, Overland, Richmond Heights, St. Ann, St. Peters, University City, and Webster Groves.  In addition, Illinois will not be participating in the back-to-school sales tax holiday this year as they have in prior years, but Illinois residents can visit Missouri retailers in order to take part in the sales-tax holiday. 

There are some things that both consumers and vendors need to keep in mind about the sales-tax-holiday.

Consumer Guidelines

Items qualifying for the sales tax exemption include:

- Clothing of $100 or less- School supplies up to $50 per purchase

- Personal computers and related devices less than $3,500

- Computer software of $350 or less

Layaway items are eligible as long as the final payment occurs during the holiday.

If an item is out of stock, any rain checks issued will qualify as long as the item is ordered and paid for during the holiday period.

If an item purchased during the holiday is later exchanged for another eligible item of equal or lesser value, no sales tax will be due.

Vendor Guidelines

If the business is located in a jurisdiction not participating in the sales tax holiday, they will receive a long form Sales Tax Return (Form 53-1).  This return will replace the normal filing method for this period only.  All sales not qualifying and taxed at the full tax rate must be indicated on one line, and all sales that would qualify for the reduced rate will be treated as an item tax on a separate line.

If the business is located in a jurisdiction participating in the sales tax holiday, the will use their normal filing method for this period by using the total gross sales receipts for all sales made and entering the holiday sales as a negative adjustment on the return.

The sales tax holiday may not apply to any retailer when less than two percent of the retailer's merchandise offered for sale qualifies for the sales tax holiday. However, the retailer must provide the taxpayer a refund of the sales tax paid if the customer requests one.

All businesses that do not sell qualifying items may continue to use the normal filing method or voucher filing for this period.

For more information regarding the Missouri sales tax holiday refer to http://dor.mo.gov/business/sales/taxholiday/school/ or contact us.

Missouri Unemployment Loan: It's Time to Pay the Piper

Sandy Piper, CPA

In February of 2009 Missouri began borrowing money from the federal government in order to meet its unemployment payment obligations.  As of July 23, 2012, Missouri owed a total of 568,819,264.71 to the Federal Unemployment Account, according to the U.S. Department of Labor.  For Missouri employers, who are required to repay the loan with interest, there is a two part whammy.

Part I

Interest charges on the loan, which had previously been delayed for two years by the 2009 federal economic stimulus legislation, must now be paid.  Beginning in 2011, the Missouri Division of Employment Security will notify each employer of its share of the interest payment beginning with the second quarter 2012 Contribution and Wage Reports.

The interest assessed which may not, due to federal law, come out of normal unemployment fund money, is based on the employer's taxable payroll during the previous calendar year and will be printed on line 8, Interest Assessment Due to Federal Advances.  Interest charges will continue for the foreseeable future, with interest payments being due with the 2^nd quarter MODES return.

Part II

Since Missouri is in a long term borrowing situation, federal law mandates an increase in the effective rate of federal unemployment tax (FUTA).  This is separate from the interest charges. 

Currently FUTA is 6.0% of the first $7,000 paid to each covered employee.  Since Missouri has what is termed an approved unemployment insurance law, employer's receive a credit of 5.4% which normally makes the effective federal rate 0.6%.

At the end of 2011, employers were subject to a credit reduction of 0.3% which was payable by the end of January 2012, making the 2011 FUTA rate 0.9%.  This year the credit reduction will be 0.6%, essentially doubling what employers were paying for FUTA two years ago.  The money attributable to this current 0.6% reduction will be payable in January of 2013. 

As an example, if an employer paid total FUTA in the amount of $5,000 for 2012, they will have to pay an additional $5,000 by January 2013 as part of their 2012 obligation. 

When will it end?

While the amounts yielded from these reductions are being used to pay down the loan, there have been additional borrowings and, in fact, the loan balance increased from June to July.  According to the Missouri Unemployment Office, the state does not currently have an available projection indicating when full repayment may be expected.  This is due to the continued volatility of unemployment payment requirements in the state.

At one point, says a state employee, it was thought that the loan might be repaid by 2017.  However, the state no longer believes the loan will be repaid by that time and, at present, does not have a published projection for retirement of the loan.  For the foreseeable future, paying the "piper" will be more expensive, not less, as credit reductions will increase 0.3% per year until the loan is repaid. 

For information about how this may affect your overall tax picture, consult your tax professional.  If you are in need of a tax professional, please contact us.

Healthcare Rebate: What do you do with that check?

Holly Breuer, CPA

Because some health insurance providers were deemed to have "overspent" on their 2011 overhead expenses by the Patient Protection and Affordable Care Act (Obamacare), some health insurance policyholders have received rebates of a portion of the premiums they paid or they will be getting that rebate soon.  Getting a check in the mail is always nice, but then the question comes up:  what do you do with it once it arrives?  Well, if you're a business owner, that will depend on several things:   

·         How much of the premium did you, as the employer, pay for your employees?

·         How many of your employees were part of your plan in 2011?

·         Were the original premium payments paid pre-tax or post-tax?

If you as the  employer paid all of the health insurance premiums as part of your benefit package for employees, then really nothing needs to be done except to cash the check.  If, though, as is generally the case, the employees pay for some part or percentage of their monthly premiums, then you have the responsibility to make sure that the employees’ share of the rebate is allocated to them in a fair manner and then paid either through a direct refund or through reduction  of their share of future premium costs. 

Example:  You paid 50% of the health insurance premiums for your ten employees and they paid the other 50%.  If you receive a rebate check for $5,000, then the business will keep $2,500 of the rebate and the remaining $2,500 is allocated to the employees.  Assuming there has been no employee turnover, it should not be burdensome to either refund the amount using a formula relative to what each employee paid in premiums; or use the total to reduce their future premiums.

What if the amounts allocable to each employee are negligible or what if they had paid for their insurance premiums on a pre-tax basis and the rebate would be a taxable item to them?  You could decide to forgo the refund route and  instead use that rebate money to lower your current employees' future health insurance premiums.  This is also a good option for a business with a high turnover of employees since you will not be required to find employees that paid premiums in 2011 who may no longer be with your company.

If you want more information, the IRS has an FAQ sheet regarding these rebates, called "Medical Loss Ratio" rebates.  You will find that information here: http://www.irs.gov/newsroom/article/0,,id=256167,00.html

Of course, you can also call me if you have any questions.