AZ CPA Feb 2014

AZ

CPA FEBRuary 2014

The Arizona Society of Certified Public Accountants

Tax Implications for Rentals Five-Step Revenue Recognition Model

Documenting Client Communications

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AZ

CPA FEBRUARY 2014

Volume 30 Number 2

Management Accountants — Delivering Value Beyond the Numbers

17

Finance teams are transforming and re-energizing themselves in the wake of the uncertain economy.

Document Your Way to Better Client Communications

19

Capturing your advice in writing helps clients make informed decisions and guards against liability issues.

by Randy R. Werner

Features How the New Five-Step Revenue Recognition Model Impacts Your Organization

11

This new model promises to improve financial statements and eliminate differences between GAAP and IFRS.

by Peter A. Margaritis, CPA, CGMA

Tax Implications for Residential Rentals for Non-Resident Aliens

14

A case study and loss prevention tips help to clarify the most common conflicts of interest.

by Anne Davison, CPA, MBA

Columns & Departments 6

Chair’s Message by Karen Abraham, CPA

7

Focus on Members

9

A Dash of SALT by James Busby, Jr., CPA

22 Classifieds 23

Arizona Society of Certified Public Accountants 4801 E. Washington St., Suite 225-B Phoenix, Arizona 85034-2021 www.ascpa.com

4 AZ CPA y FEBRUARY 2014

In the Black ... Adventures in Accounting

AZ

CPA

The Arizona Society of Certified Public Accountants\

President & CEO

Cindie Hubiak

Editor

Patricia Gannon

Copy & Advertising Deadline The first of the month one month prior to publication date.

Board of Directors Chair Chair-Elect Secretary/Treasurer Directors

Karen Abraham Anita Baker Rob Dubberly Diane Groover Sandra Hieb Debra Johnson Jimmy Lovelace Adam Miller Molly Montgomery CW Payne George Raysik Andy Spillum Leslie Stackpole Jared W. Van Arsdale Craig Van Slyke

Immediate Past Chair Armando Roman AICPA Council Members Jim Buhr Rick Goldenson Chapter Presidents Southern Chapter Northern Chapter Southwest Chapter North-Central Chapter

Flo Zenblu Jennifer Nordstrom Jayne Wright Richard Joliet

AXIOM

Financial Advisory Group, LLC

AZ CPA is published by the Arizona Society of Certified Public

Accountants (ASCPA) to provide information, news and trends in the profession of accounting. It is distributed 10 times a year as a regular service to members of the Society. The ASCPA, its members, board of directors and administrative staff assume no responsibility for advertisements herein. The ASCPA and the above people also assume no liability for business decisions made by readers in reference to statements and/or claims in advertisements within this publication. Opinions expressed by correspondents and contributors are not necessarily those of the ASCPA.

Arizona Society of CPAs 4801 E. Washington St., Suite 225-B Phoenix, AZ 85034-2021 Telephone (602) 252-4144 AZ Toll-Free (888) 237-0700 Fax (602) 252-1511

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Chair’s Message

by Karen Abraham, CPA

The Affordable Care Act When gathering with family at parties and events or traveling the state to meet with ASCPA members, the topic of the Affordable Care Act (ACA) is always a hot issue. As the CFO of Blue Cross Blue Shield of Arizona (BCBSAZ), this is hardly surprising. People typically have an opinion one way or the other about the ACA. What does surprise me is the number of people who are truly confused about the details of the law or how it is being implemented. Admittedly, the bill is more than 2,600 pages and at least 30,000 pages of regulations have been issued. So it is not unexpected that people do not know the details of how the law will affect them or their opportunities for coverage.

Since the start of the healthcare reform process, all aspects of our business have had to remain smart and quick, as the speed and magnitude of change is immense. However, our focus has remained steadfast on the 1.3 million customers we serve every year. BCBSAZ continues to help people navigate the healthcare system, especially at this time when many people are confused and unsure of what healthcare reform means to them.

I also know that our ASCPA members are challenged with the law when trying to provide coverage for their own employees or assisting clients with their healthcare needs and tax compliance.

Accounting under the ACA Due to certain provisions in the ACA, some unanticipated accounting complications have arisen. At the time of this writing, the National Association of Insurance Commissioners (NAIC) has not given direction for some of the accounting aspects of the bill. There is division among state regulators about the proper Statutory Accounting, and concern the requirements may conflict with Generally Accepted Accounting Principles (GAAP). Let me give you a

6 AZ CPA y FEBRUARY 2014

few examples of the challenges insurers face in their accounting: The bill has several premium stabilization programs called the 3Rs — risk adjustment, temporary reinsurance and temporary risk corridors. These programs include a retrospective settlement process, and annual financial statements must include estimates of amounts payable or receivable. In some cases, the magnitude of these estimates may be large compared to net income, especially in the individual and small group market.

There are many new taxes and fees established by the ACA, including an insurer tax that is $8 billion year one, $11 billion in 2015, $13 billion in 2016 and so on — this is nondeductible for income tax purposes.

Each insurer pays a pro-rata amount of this tax based on their prior years’ book of business. There are also per-capita reinsurance contributions that will be collected and submitted, causing a mis-match of income and expense.

There are premium subsidies and cost-sharing reductions for people who are eligible and buy insurance

on the Federally Facilitated Marketplace (FFM) or the State Exchanges.

Year-over-year comparability of earnings will be difficult. Publicly traded companies who report GAAP earnings may be able to show more comparable results than non-publicly traded companies who only report on a Statutory Accounting basis.

Claims liabilities and contract reserves are reviewed each month.

It is unclear how the ACA will affect these existing liabilities and how long it will take to stabilize the provisions.

Lastly, all CFOs are concerned about cash flow and ultimate payment of receivables. It is not a secret that the government is behind in its programming efforts for the ACA. The back-end payment systems have not been developed and the reconciliation process with the FFM will be another challenge starting with the January 2014 enrollment of exchange members.

With all the changes before us, I’m confident that my company, as well as the members of the ASCPA, will continue to work hard to make 2014 a success while serving the needs of our AZ CPA customers.

Focus on Members Lisa Lumbard, CPA, was elected to the A&A Committee of the Arizona State Board of Accountancy.

Debbi Fitzgerald, CPA, a partner at EY, received an Outstanding Alumnus Award from Beta Alpha Psi at Northern Arizona University.

James Busby, Jr., CPA, joined the The Cavanagh Law Firm.

The following members were elected to seats on the Arizona Tax Research Association Board of Directors for terms ending in 2018: James Busby, Jr., CPA, The Cavanagh Law Firm; Sarah Lang, CPA, Viad Corp.; Tom Marin, CPA, EY; and Hugh Donahue, CPA, Freeport-McMoRan. Sandy Abalos, CPA, stepped into her new role as principal-in-charge of REDW’s Phoenix Office. Mike Allen, CPA, principal, who rejoined the firm in 2011 after a 16-year hiatus, will assume the role of department head of the

Audit & Consulting department and Steve Harris, CPA, will join the REDW Board of Managers effective Jan.1.

Cheryl Folkerth, CPA, has joined the firm in a permanent position as a tax manager. Steven Schwartz, CPA, has joined the firm as a tax manager.

Jerry Miles, CPA, CFP, joined Wallace, Plese + Dreher as a senior tax manager and Ariel E. SimonWestreich, CPA, was promoted to audit manager.

Robert Steffen, CPA, Jack Rose, CPA, Ralph Williams and the staff of The CPAs of Yuma, PC joined the firm of Brown, Bench, Wright & McLeod, PC in Yuma.

Olivia Brasher, CPA, became a shareholder and was elected as an audit director at Fester & Chapman P.C. Jennifer Nordstrom, CPA, will serve on the Greater Flagstaff Chamber of Commerce Board of Directors.

Newsworthy CPAs James Busby, CPA, and Robert Hockensmith, CPA, were interviewed for an article, “Year End Ways to Cut Your 2013 Taxes,” in The Arizona Republic.

Bill Parker, CPA, was quoted in an article, “What Happens to a Reverse Mortgage when the Borrower Dies?” on www.loan.org. He was also quoted on SmallBusinessesDoItBetter.com.

Brenda Blunt, CPA, wrote an article for The Journal Entry (Utah Association of CPAs) on nonprofit revenue streams.

Joy Partridge, CPA, president of Accounting World CPA & Consulting PLC, was featured in the Phoenix Business Journal for her work as cofounder and business manager of the non-profit Scottsdale Philharmonic Orchestra. She plays violin for the orchestra.

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ASCPA Members Serving on American Institute of CPAs Committees Corey Arvizu — Definition of Client Task Force, IFAC Convergence – Breaches of the Code, Nominations Committee, Professional Ethics Executive Committee, The Practice Monitoring Task Force for Single Audits Anita Baker — Designated Council Representative, Employee Benefits Plans Audit, Quality Center Executive C o m m i t t e e , Te c h n i c a l S t a n d a rd s Subcommittee David Baldwin — Individual & SelfEmployed Tax Technical Resource Panel Jeffer y Bridgens — State & Local Government Expert Panel James Buhr — Council - Elected Members

Michael Carreon — Airline Revenue Recognition Task Force

Mark Landy — Technical Standards Subcommittee

Nicholas Daddario — Hospitality Revenue Recognition Task Force

Lela Lawless — Business Valuations Committee

Marianne DeVries — Board of Examiners, Content Committee

Raelynn Mackenzie — Joint Trial Board

Michael Fahlman — Forensic and Litigation Services Committee Richard Goldenson — Council - Elected Members Suzanne Heidenreich — PRB Oversight Task Force, Technical Reviewers Advisory Task Force Cr aig Isakson— Air line Revenue Recognition Task Force

Armando Roman — Financial Literacy Commission Thomas Selling — Financial Accounting & Reporting (FAR) Subcommittee Kevin Yeanoplos — BV Exam Task Force

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®

A Dash of SALT

The Statute of Limitations for Audit Assessments from the ADOR and Arizona Tax Refund Claims, and How to File an Arizona Tax Refund Claim This month’s state and local tax (SALT) column explains how long the Arizona Department of Revenue (Department) has to issue audit assessments, how long taxpayers have to file Arizona tax refund claims, and how to request an Arizona tax refund claim.

Arizona Has an Extra Year to Issue Standard Audit Assessments The IRS generally has three years from the time that a tax return was due to issue an audit assessment. In situations where the income on a return was understated by 25% or more, the IRS has six years from the time that the tax return was due to issue an audit assessment. In cases involving fraud, there is no limitation on how long the IRS has to issue an assessment.

On the other hand, the Arizona Department of Revenue has four years from the time that a tax return was due or filed, whichever period expires later, to issue a normal audit assessment. Like the IRS, in situations where the income on a return was understated by 25% or more, the Department has six years from the time that the tax return was due to issue an audit assessment and, in cases involving fraud, there is no limitation on how long the Department has to issue an assessment.

In practical terms, that means taxpayers normally are exposed to potential Arizona audit assessments for one more year than they normally are exposed to federal audit assessments.

But, Taxpayers Also Have an Extra Year to File Arizona Tax Refund Claims Because Arizona’s statute of limitations for refund claims is tied to Arizona’s statute of limitations for audit

assessments, taxpayers have four years from the time that a tax return was due or filed, whichever period expires later, to file a refund claim.

How to File An Arizona Tax Refund Claim Tax refund claims for taxes collected by the Department must: • Be filed in writing within four years from the time that the tax return was due or filed, whichever period expires later; • Identify the taxpayer by name, address, and tax ID number; • Specify the amount of refund requested along with the tax period involved; and • State the specific grounds for the claim.

For income tax refund claims, the easiest way to file a claim generally is to file an amended return using a form prepared by the Department.

Practice Tip! — An Easier Way to File Sales or Use Tax Refund Claims Involving Multiple Periods Because transaction privilege (sales) tax returns generally are due on a monthly basis, taxpayers who want to request refunds for excess sales or use taxes paid for multiple periods often are better off not preparing and filing as many as 48 amended returns.

Rather than file amended returns for multiple periods, taxpayers who want to request refunds for excess sales or use

taxes paid for multiple periods may prepare a spreadsheet showing, by month, how much sales and/or use tax they paid, how much sales and/or use tax they should have paid, and how much should be refunded. Then the taxpayer should submit the spreadsheet to the Department (or, if the tax was collected by an Arizona municipality rather than by the Department, to the municipality’s tax department) along with a cover letter including the rest of the required information identified above.

When CPAs submit sales and/or use tax refund claims for their clients using a spreadsheet and cover letter rather than by filing amended returns, they need to include the appropriate power AZ CPA of attorney form.

James G. Busby, Jr., is a state and local tax attorney and CPA at The Cavanagh Law Firm. Busby previously worked in the SALT departments at Arthur Andersen and Deloitte & Touche. Before entering private practice, Busby was in charge of all transaction privilege (sales) tax audits at the Arizona Department of Revenue.

A Dash of SALT ™ is provided for educational and informational purposes only and does not constitute legal counseling or other professional services. If you have any questions, please contact the author.

He can be reached at (602) 322-4146 or jbusby@cavanaghlaw.com.

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How the New Five-Step Revenue Recognition Model Impacts Your Organization

by Peter A. Margaritis, CPA, CGMA

For several years the Financial Accounting Standards Board (FASB) and the International Accounting Standards Board (IASB) have worked to develop a single standard revenue recognition model. This new standard will apply to all industries and companies using either the U.S. GAAP and IFRS accounting standards. The intention of the new revenue recognition model is to improve financial statements and eliminate differences between GAAP and IFRS.

FEBRUARY 2014 y AZ CPA

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In November the FASB and IASB voted to move forward with preparation of the final standard which is expected to be issued in the first quarter of 2014.

What does this mean to you and your organization?

This new standard on revenue recognition is a principles-based approach (with some guidance) rather than a “bright line” rules-based approach. It will be a single revenue recognition model applied across all industries and transactions. When the new standard becomes effective, industry-specific revenue recognition accounting will no longer exist. This is a significant change.

At the time of this writing, the proposed effective date for publicly held entities with annual reporting periods beginning on or after Dec. 15, 2016 (with no early adoption) and for privately held entities with annual reporting periods beginning on or after Dec. 15, 2017, with early adoption allowed but no sooner than Dec. 15, 2016.

The core principle is that “an entity must recognize revenue when it transfers promised goods and services to the customer and the amount recognized should be the consideration to which the entity expects to be entitled.” (FASB Exposure Draft Revenue Recognition (Topic 605), Issued November 14, 2011) Businesses will determine the correct revenue recognition using this FiveStep Model: • Identify the contract(s) • Identify the separate performance obligations • Determine the transaction price • Allocate the transaction price to the separate performance obligations • Recognize revenue when the entity satisfies a performance obligation The Five-Step Model appears manageable, but let’s look more closely at each step.

Step 1: Identify the contract A fairly straightforward step whereby specific criteria must be met in order to have a contract. Specifically, the contract must have commercial substance, the promised goods and services must

12 AZ CPA y FEBRUARY 2014

be identified and approved, and the payment terms identified.

Step 2: Identify separate performance obligations This is applicable when an entity transfers more than one good or service to the customer and the additional good or service is distinct. In order for a good and service to be distinct, it could be sold separately or the customer can benefit from the good or service either on its own or together with readily available resources. However a good or service is not distinct if it’s bundled with other goods and services; if the business services are highly interrelated; and if the goods and services are significantly customized. As an example, if you sold a car with a five-year warranty included in the purchase price and sold a separate three-year extended warranty, the three-year extended warranty would be a separate obligation.

Step 3: Determine the transaction price According to the new revenue recognition model, the transaction price “is the amount of consideration to which the entity expects to receive for

the transfer of the promised goods and services.” In determining the transaction price, management will need to take into consideration the variable consideration, time, value of money, non-cash consideration and consideration payable to the customer.

The determination of variable consideration will require a significant amount of judgment. Variable consideration includes items such as discounts, rebates, refunds and royalties. In estimating the transaction price, the entity would use either the expected value method or the most likely amount method. I state the obvious here, but both of these methods require management’s best guess.

In addition, for an entity to estimate the variable consideration, the entity must have relevant experience with the item and the probability of significant reversals would not occur.

Step 4: Allocate the transaction price to the separate performance obligations A business determines this based upon the relative standalone-selling price of each performance obligations.

In determining the standalone-selling price, management needs to identify

Annual Meeting — May 14 observable evidence. If none exist, management will need to use a method of estimation to determine the standaloneselling price. Once this has been determined they allocate the amount of consideration expected to each of the separate performance obligations.

Step 5: Recognize revenue when the entity satisfies a performance obligation This is accomplished when the customer obtains control of the good or service. If the performance obligation is satisfied over time (construction of an asset), and there exists continuous improvement of the asset, the entity would use a progress method (output or input method) to recognize revenue.

The percent of completion method would not be used during the step.

The new model requires that management make more estimates and judgments in areas of identifying separate performance obligations, determining the transaction price, variable consideration, the allocation of the

transaction price, and when control has been transferred. This increase in estimates and judgments mean that management should assess and update internal controls and processes to avoid fraud.

Additionally, management will need to forecast revenue changes to determine any significant changes in the financial metrics in order to avoid any covenant violations. These changes in forecasted revenue should also be analyzed for any potential tax planning opportunities when the standard becomes effective.

What does this mean for your organization? Entities will be required to show two-year comparative data, either on the face or in the notes to the final statements, when they file their 2017 financial statements. In other words, you will need to be ready by the end of 2015.

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4/1/13 8:53 AM

Tax Implications for Residential Rentals for Non-Resident Aliens

by Anne Davison, CPA, MBA

Rental income from real property located in the U.S. (and any gain from the sale) will always be U.S. source income subject to tax compliance imposed by IRS regulations. The U.S. tax code provides specific guidelines on this matter with two methods for tax compliance depending on whether the rental income is elected to be investment income or income considered to be effectively connected to a U.S. trade or business.

Two Methods for Tax Compliance

If the NRA elects the income to be as an investment, the method for tax compliance is the Gross Method and requires IRS form W-8BEN. Under this method, an amount of 30 percent of each rental payment is withheld by the property manager or the tenant and remitted to the Internal Revenue Service. The gross method does not require the NRA to file a U.S. tax return, nor will he receive any refund from the withholdings. While the gross method is considered the simplest method, it

14 AZ CPA y FEBRUARY 2014

is generally more expensive than the alternative Net Method.

Under the net method, which requires IRS form W-8ECI, withholdings from rental payments are not required; however, estimated tax payments may be required. Once elected, the NRA would need permission from the IRS to discontinue this method.

The net method requires a U.S. tax return be filed, normally that would be a 1040NR with a Schedule E for the rental activities. Net income is determined for each rental property and taxes assessed in the same manner as for a U.S. citizen; rental net income is determined by gross rental income less qualified expenses such as repairs, taxes, and HOA fees.

Example of a Canadian Buyer

Following is an example for a Canadian buyer that has purchased a residential home in the state of Arizona with the intention to use as a rental.

Assume a home is purchased by an NRA and rented for $2,000 per month.

The landlord is acting as the property manager and the property was rented by his real estate agent. There is no other property management company involved. The tenant is unaware of any tax liability that might be due as his agent has not disclosed this; the tenant moves in and begins paying his rental payment of $2,000 monthly to the landlord in Canada. The tenant lives in this home for three years, at which time the home is sold by the Canadian owner. No 30 percent withholding has ever been withheld and the Canadian owner never filed a U.S. tax return nor paid any tax liability on the rental.

At the time of sale, the FIRPTA law will come into play for the sale of the home. However, now it comes to light that for the past three years, no taxes have been paid on the net rental income of ($24,000 per year less $4,000 in yearly expenses.) $20,000 per year - $60,000 net for the three years. The sale closes and the IRS now looks to be paid for the tax liability for the three years of rental income.

The Canadian citizen is not easily

The number of non-resident aliens purchasing residential properties in the state of Arizona and other states considered “sun” enriched has increased greatly in the past few years.

reached because he does not live within the U.S. jurisdiction. The next in line to bear the tax consequences of this scenario could be the real estate agent – the IRS could possibly consider the agent for the owner as the U.S. withholding agent. The tax code states that if a W-8ECI has not been presented, then the withholding agent must ensure the 30 percent withholding for each rental payment is remitted to the IRS. The total amount owed in this scenario would be 30 pecent of the gross rental payments for the three years the property was rented. Additionally, the tax code may impose fines up to $10,000 for non-filing.

Tax Compliance

The number of non-resident aliens purchasing residential properties in the state of Arizona and other states considered “sun” enriched has increased greatly in the past few years. CPAs should be aware of the tax compliance issues for any clients that are NRAs or could be considered a U.S. withholding agent, which could include a real estate agent or a property manager. AZ CPA Anne Davison, CPA, MBA, holds an active real estate broker license in the state of Arizona. Contact her through her LinkedIn account or by email at annedavison@aol.com.

Definitions

Non – Resident Alien (NRA) Not a U.S. citizen Does not have a green card Does not meet “substantial presence test” Withholding Agent Following is the definition from the Internal Revenue website tax code: “A real property manager who collects rent on behalf of a foreign owner of real property is considered a withholding agent and is personally and primarily liable for any tax that must be withheld.

The liability of the withholding agent includes amounts that should have been paid plus interest, penalties, and where applicable, criminal sanctions. Property managers who do not comply with these rules will be held liable (either individually or through their company) for 30 percent of gross rents, plus penalties and interest.”

Effectively Connected Income IRS designated term for income that has been earned within U.S. boundaries and should be taxed under U.S. tax code requirements.

FEBRUARY 2014 y AZ CPA

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2014 Arizona Tax Guide

Order the only comprehensive guide on Arizona taxes Authors: Ira Feldman, Pat Derdenger and Ed Zollars New legislation this year: The Arizona Income Tax Guide will provide updated information on significant changes in Arizona law first effective for 2013 returns including:

•Arizona’s new subtraction for certain long-term capital gains

•Arizona’s partial bonus depreciation rules

•Arizona’s §179 conformity The Sales and Use Tax Guide includes new information on:

•House Bill 2111 – Significant sales tax simplification changes and reporting, including new contractor rules

•House Bill 2535 – Elimination of the “permanent attachment” test The Arizona Tax Guide includes the following guides: Arizona Income Tax Guide Arizona Sales and Use Tax Guide Arizona Personal Property Tax Guide Arizona Unclaimed Property Guide

Spiral-Bound Book:

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❒ Nonmembers: $99 *Call (602) 324-4743 for special pricing on orders of five or more.

Order and learn more about the guides at www.ascpa.com

Name ___________________________________________ Company ________________________________________ Address ________________________________________ City ___________________State _____ Zip ___________ Phone __________________ Fax ____________________ Email ____________________________________________

❒ CPA ❒ Attorney ❒ EA ❒

Method of Payment: ❒ Check ❒ VISA ❒ MasterCard ❒ American Express Name on Card ___________________________________ Card Number ____________________________________ Exp. Date ____________ Amount $ ________________ Other: ___________________ Signature of Cardholder__________________________

Please return this form and payment to:

Arizona Society of CPAs 4801 E. Washington St., Ste. 225-B Phoenix, AZ 85034 credit2014 card orders to: 16 AZ CPA y Fax FEBRUARY (602) 252-1511

Sales tax, standard shipping and handling prices are included.

*The ASCPA will be processing checks submitted in payment as an Electronic Funds Transfer (EFT) transaction. Funds may be withdrawn from your account as soon as the same day we receive your payment.

Management

Accountants

Delivering Value Beyond the Numbers

Few organizations, regardless of size or industry, have escaped the shadow of uncertainty that has long hovered over the business community. This uncertainty has exhibited itself in ways ranging from intensified competition and market volatility to complex regulatory requirements and widespread digitalization. In spite of the inherent challenges of this environment, a reengineered formula for organizational success has emerged and finance teams are transforming and re-energizing themselves in its wake.

Bridging the Talent Divide The finance team’s evolving remit is largely due to its greater role as a trusted partner with senior leadership and the higher demand for a specific combination of skills needed to guide the organization. Key decision makers are looking for financial professionals who combine analytical and financial expertise with strategic, management and decision-making insights.

An American Institute of CPAs (AICPA) and Chartered Institute of Management Accountants (CIMA) study, Rebooting Business: Valuing the Human Dimension, supports business savvy’s more prominent footprint in corporate America, with nonfinancial senior executives stating that 68 percent of the value provided to the organization is nonfinancial. However, according to Deloitte’s 2013 Global Finance Talent Survey, there is growing concern among many finance executives

over recruiting, retaining and developing finance employees with such an in-demand combination of skills.

Management accountants, specifically those awarded the Chartered Global Management Accountant (CGMA) designation, are setting themselves apart from other professionals in fulfilling this unmet need. With their proven talent in both financial and management areas, coupled with their business acumen, management accountants are advancing into key advisory roles that are critical to operations and strategy. In the process, they are filling a talent void that, if not met, could undermine sustainable growth and progress.

“As senior leaders continue to look to finance departments for insightful management advice and direction, opportunities will grow exponentially for CGMAs to prove their value to organizations, both in the U.S. and abroad,” said Michael R. Nall, CPA, CM&AA, CGMA, founder of Alliance of M&A Advisors. “Among the ways CGMAs can ensure that their expanded new role will endure in the years ahead is to reach out to fellow members of the CGMA community to share best practices, and participate in programs that can further develop their skills, expertise and leadership perspective.”

Redefining Capabilities and Contributions Similar to many of their peers from other leadership disciplines, management accountants’ contributions span the full range of activities, making a measurable impact on executive decisions, performance and competitive position. Whether managing risk across a portfolio of projects, formulating strategy or initiating and leading innovation and change, management accountants are helping finance departments more proactively respond to leadership’s call for deeper, more hands-on collaboration and partnership.

Further building management accountants’ value is a skill set that extends beyond domestic operations. “Management accountants and CGMAs are also making tremendous contributions to

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global and non-U.S. operations, especially in long-term strategic planning, short-term business planning, and monitoring and control,” said Hiroshi Miyamasu, CPA, CGMA, finance director at Nike Japan. “Among the benefits of their strengthening, multifunctional role has been a measurable improvement to the top- and bottom-lines at a time when organizations of all types need to be at their competitive best.”

As the new business mandate moves beyond core financial accounting skills, management accountants are using a wide range of financial processes to move business operations forward. The following examples underscore some of the diversity of their responsibilities: • Providing nonfinancial information and analysis of Big Data • Advising on internal and external drivers of cost, risk and value • Performing rigorous analysis of the data leading to performance improvements

• Sharing insights into product, sector and customer profitability to determine the success of marketing efforts • Driving cost-reduction strategies within finance and throughout the organization • Setting objectives to ensure that the business is run in the long-term best interests of stakeholders • Helping to ensure that remuneration policy supports longterm value creation • Leading the identification and assessment of new business opportunities • Developing financial awareness and expertise within the organization • Monitoring how organizational groups attain goals and contribute to performance • Ensuring that goals are shared across the business and appropriate resources are allocated

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Management accountants are increasingly preparing and being recognized for their expanded organizational role at a time when their contribution is strongly felt at all levels. According to a CGMA survey, New Skills, Existing Talent, 75 percent of global finance executives reported that when finance professionals support management, the organization better meets its objectives. In fact, there are few innovative organizations today that are genuinely successful without the influence of management accountants and other finance professionals.

The New Skills, Existing Talent Survey also provides insights into management accountants’ potential influence on future leadership initiatives. When finance professionals and business managers were asked whether finance provided an appropriate training ground for future business leaders, the majority of each group responded that it was equal to or greater than other parts of the organization.

Building a Sustainable Momentum Looking ahead, management accountants will further identify new opportunities to broaden their scope of responsibilities, grow their capabilities and deliver even greater value.

The result will be an organization that not only maximizes and benefits from the full potential of the finance team but is also poised for long-term AZ CPA success.

Access additional valuable resources and information on this topic and more at CGMA.org. Not a designation holder?

Find out more about the designation and eligibility requirements at cgma.org/ BecomeACGMA.

18 AZ CPA y FEBRUARY 2014

Document

Your Way to Better

Client Communications

by Randy R. Werner

A significant number of professional liability claims have resulted over the years from CPAs providing oral advice to clients without documenting it. When advice is provided to help clients make informed decisions, such advice should always be captured in writing. This will help CPAs avoid disputes later on as memories begin to fade or clients become unhappy with the results of their decisions.

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Jury studies have shown that jurors (i.e., members of the public) generally consider CPAs to be experts in documentation. Falling short of that expectation may cause CPAs to be viewed as falling below the standard of care for the services rendered.

Jury studies have shown that jurors (i.e., members of the public) generally consider CPAs to be experts in documentation. Falling short of that expectation may cause CPAs to be viewed as falling below the standard of care for the services rendered.

A general rule in any engagement is that advice that can result in adverse tax or financial consequences puts the adviser at risk, and the more adverse the consequences, the higher the risk.

Advisory and consulting services are good examples of areas where CPAs often keep insufficient records to support the work they have performed.

In some engagements CPAs should not only document the advice given, but also obtain the client’s written consent to the decisions made. This is often done with an “informed consent” letter that provides the advice and obtains the client’s understanding and consent.

The following are a few examples of how informed consent letters can be used effectively to better manage risk.

Entity Selection Issues Decisions about Sub-S or C Corporation selections or conversions are made because clients believe that the benefits of their choices will outweigh the detriments. But sometimes events occurring after the choice make it less beneficial than originally planned, exposing the CPA to liability. Sometimes CPA liability results from neglecting to provide adequate consultations with clients before these decisions are made. For example, a consultation should occur (which may not result in an S election)

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when a closely held C corporation holds substantially appreciated assets.

Loss Prevention Tips: Provide the client with a full consultation describing all negative and positive tax ramifications involved, and document the consultation in an informed consent letter, providing a summary of the issues discussed. Also, provide an area at the bottom of the letter that: 1) allows the client to indicate they have read and understand the summary letter; and 2) provides the client an opportunity to affirmatively indicate whether they want an S election. Informed consent is important in these situations because of the technical nature of the tax ramifications and the difficulty of discerning the pros and cons without a written explanation. Documentation will also inhibit the client from later asserting that your firm is responsible for unexpected events or less-thanoptimal results.

Estate Tax Planning There is generally a long period between the time that estate planning decisions are made and the time that the results of the decisions are known.

Memories of the CPA’s advice and the client’s decisions fade over time, making documentation of the advice and decisions all the more important.

Sometimes the client dies, and the CPA is then dealing with unhappy, litigious beneficiaries. Since heirs are typically not involved in the planning process, they may allege that the decisions were not fully understood by the deceased. Documentation of the original planning and decision-making

process then becomes the CPA’s primary line of defense against these and other allegations.

Loss Prevention Tips: Implement a policy to detail all planning advice in an informed consent letter, outlining the pros, cons and options in terms the client will understand, and obtain client consent. Effective informed consent letters clarify that the CPA advises and informs, and the client decides. With this letter, it is difficult for claimants to make it appear that the CPA made the decisions.

Tax professionals must be certain of their competency in this area and must be sure to document reliance upon the attorneys drafting the estate plan. Also be sure to document which professionals are responsible for each aspect of the plan.

Aggressive or Gray Tax Strategies In some tax planning situations, the tax advantages of a plan may be negated or offset by the taxing authorities later applying rules in a manner that creates adverse effects such as additional tax liabilities. Or a taxing authority may successfully challenge certain amounts shown on a tax return and assess additional taxes, penalties and interest. If the CPA does not prepare the client for the possibility of such situations, the client may then turn to the CPA to pay the additional liabilities. Failure to advise your client of this possibility may be construed as falling below the standard of care and professional standards.

Loss Prevention Tips: Good risk management in this area involves advising clients on the consequences and risks of taking an aggressive or gray tax position in filing a tax return and documenting the advice. Put all tax planning advice in an informed consent letter outlining the pros, cons, alternatives and risks associated with each tax alternative, including potential additional fees. Obtain the clients’ consent to the risks before filing the return. If the client takes a gray position without disclosing it on a tax return, document the client’s decision as well as the client’s acceptance of responsibility for all tax, penalty or interest.

After completing your due diligence, if you are still uncertain whether the position the client wants you to take is reasonable, it may be appropriate to have the client provide you with an opinion from tax counsel confirming that the position has a realistic possibility of being sustained on its merits if challenged.

If you’re advising on ADP adp128816a Proof 4a- client ASCPA

a complex transaction or exchange, you may want to have your legal counsel review the documentation before passing it on to your client.

Documentation should be factual, professional, and without personal comments that may be inappropriate and damaging to the integrity of the documentation. Ask yourself whether you or your client would be harmed if the documentation was presented to the “ladies and gentlemen of the jury.” The answer to that question may indicate whether the firm has a problem with the adequacy or appropriateness of its AZ CPA documentation.

Randy R. Werner, J.D., LL.M./Tax is a CPA and is a loss prevention executive with CAMICO (www.camico.com). She responds to CAMICO loss prevention hotline inquiries and speaks to CPA groups on various topics.

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Classifieds Business Opportunities/ Practices for Sale OUR CPA FIRM IS LOOKING TO BUY BUSINESS CLIENTS — With 30 years in the valley, we are a wellestablished and growing practice who seeks business clients of every level.

While our main firm is in Scottsdale, we have satellite offices in Phoenix and Glendale. Our firm is experienced at transitioning new clients after a sale and welcome CPAs looking to retire.

Contact craig@awcpas.com or call (480) 990-2727 with any questions about how we can help you.

Employment Associate Director Financial Services Tax — Arizona State University — The Associate Director of University Tax Services provides leadership and guidance in tax issues to the ASU community helping to advance the University’s internationally recognized knowledge enterprise, research discovery and community engagement activities.This position monitors areas of university tax compliance and performs in-depth research into complex tax issues. The Associate Director works closely with university administration, university and outside counsel,

outside tax consultants, and university academic and administrative business officers. Apply for job number 674BR at www.asu.edu/asujobs.

CFO For Innovative and Growing Charter School Network— Academies of Math & Science —The CFO will oversee all financial staff and functions; budget and cash flow projections and preparation; financial reports to various agencies; large acquisitions, relationship management with key partners, banks, and vendors; coding of funds; journal entries; and oversee the bookkeeper in deposits and payroll. Knowledge of GAAP, school finance, quickbooks, and human resources is expected. At least 5 years experience in a comparable role.

Preference for applicants that carry an MBA or higher in Finance, Accounting, Economics or related field. Send resumes to: jobs@amstucson.org.

Controller/CPA — Royal Oaks is a successful and prominent retirement community in Sun City, AZ. We offer a tremendous career opportunity as the CONTROLLER where your knowledge, skill and experience will be recognized, and where you can make a real difference in the lives of our current and future residents.Responsibilities will include: operating budgets, manages

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annual audit, cash management functions to include forecasting/investing, assemble capital plans, prepare tax returns such as 990s. Required Bachelor’s degree in accounting, CPA designation and at least 5 years accounting/finance experience. To be considered please apply at www.royaloaks.com.

SENIOR TAX ACCOUNTANT — Mesa, AZ CPA firm seeking a senior tax accountant to prepare individual, partnership, trust and corporate returns. Strong income tax, accounting, analytical and communication skills required. Minimum of five years recent income tax experience with a CPA firm desired. A working knowledge of Lacerte, Quickbooks and Excel preferred. CPA license required.Full-time preferred, but will consider part-time (four days a week). Flexible work hours, competitive salary, health and retirement benefits, paid vacation and CPE. E-mail resume to craig@satzcpa.com or fax to (480) 464-1465.

TAX STAFF ACCOUNTANT — Morrison & Associates CPAs has an opening in the tax department for a CPA or serious CPA candidate, 0-3 years of experience desired. Morrison & Associates CPAs is a construction industry CPA firm that goes beyond the numbers and really guides the financial aspects of every client’s business, life and legacy.

We do the typical accounting and tax work, but beyond that, we pull business and personal into one plan that business owners can implement to better their own and their families’ lives, now and for the future. Submit resume to Julie@ maacpa.com or call (480) 424-7855.

Miscellaneous PEER REVIEW SERVICES — Alan L. Grothe, CPA, LLC is interested in doing peer reviews in Arizona. Firm has performed several hundred peer reviews in a number of states. Contact Alan Grothe for proposal, qualifications and references. Available to do system reviews in Arizona, Can do reviews on short notice normally. 210 Interstate N..Pkwy SE,

Su. 150, Atlanta, GA 30339. Contact agrothe@ix.netcom.com, (770) 952-8544 (o) and (770) 843-9419 (c).

BUSINESS PROPERTY TAXES TOO HIGH? I’ve been successfully appealing property tax assessments for over 15 years, both real estate and personal (business) property on a contingent fee basis. The annual business property reports are also filed for a flat fee.

Reasonable rates. Arizona CPA. Visit my pages on Linked In, Facebook and Twitter. Call John at ASMR Consulting LLC, (480) 204-1289. http://www. asmrconsulting.com.

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