January/February 2016 by New Jersey Society of CPAs

Magazine of the

New Jersey Society of Certified Public Accountants

Revenue Recognition Evaluating the Impact of ASU 2014-09, p. 6 When Is the Cash Method of Accounting Acceptable for Tax Purposes? p. 10 Revenue Recognition and Corporate Finance CPAs, p. 12 The Tax Auditor’s Search for Unreported Income, p. 14

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Ralph Albert Thomas, CGMA Chief Executive Officer & Executive Director rthomas@njcpa.org

Ellen C. McSherry, CGMA Chief Operating Officer emcsherry@njcpa.org

features 6

Don Meyer Chief Marketing Officer dmeyer@njcpa.org

David Plaskow Managing Editor dplaskow@njcpa.org

Jeanette L. Miller Editorial Assistant jmiller@njcpa.org

Editorial Advisory Board Daniel R. Arcuri, CPA Neil B. Becourtney, CPA Salvatore A. Collemi, CPA Rebecca B. Fitzhugh, CPA Catherine Z. Horn, CPA Barry S. Kleiman, CPA Victoria Kosuda, CPA Ryan J. Lapinski, CPA David A. Lopez, CPA Anthony F. Marone, CPA Marc D. Mintz, CPA Sean Stein Smith, CPA Michael R. Steiner, CPA Margaret Van Brunt, CPA

The New Jersey Society of Certified Public Accountants 425 Eagle Rock Avenue Roseland, NJ 07068-1723 973-226-4494 njcpa.org #njcpamag Read New Jersey CPA digital at njcpa.org/newjerseycpa.

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Evaluating the Impact of ASU 2014-09 Use this five-step test to determine how and when you might be impacted by ASU 2014-09, Revenue from Contracts with Customers. When Is the Cash Method of Accounting Acceptable for Tax Purposes? To answer this question, we need to examine the other possible methods of accounting, along with the gross receipts test.

2 Close Up AICPA Proposes New CIMA Association

22 Tax Talk New Health Care Reporting Requirements

4 News Briefs

23 Tech Center Should You Upgrade to Windows 10?

16 A&A Buzz Changes in Revenue Footnote Disclosures

17 Best Practices Communicating the New Revenue Recognition and Revenue Recognition Corporate Finance CPAs Standard to Clients Learn how the contract, principlesbased judgment, and financial 18 Corporate Finance systems and controls are areas you Simplifying the Presentation need to zero-in on now, in order to of Debt Issuance Costs be ready for the new guidance. 19 Financial Planning Choosing a Lump Sum or The Tax Auditor’s Search for an Annuity Unreported Income Discover some of the techniques 20 Forensic File you can use to help make sure How to Handle a clients don’t get any unwelcome Deposition with a Report surprises during an audit. Error

30 Young Professionals Soft Skills: Your Professional Edge 31 Legislative Views NJCPA Plays Prominent Role with New Business Coalition 32 Member Profile Take Me to the River Society Pages CPE Offerings and Events, 25 Member Benefits, 25 Get Involved, 26 NJ State Board of Accountancy Report, 28 Classifieds, 29

21 Small/Sole Practitioner 4980D Small Business Excise Tax Liability New Jersey CPA (ISSN 1534-6692) is published six times per year by the New Jersey Society of Certified Public Accountants, 425 Eagle Rock Avenue-Suite 100, Roseland, NJ 07068. Issue No. 55 Copyright © 2016 New Jersey Society of Certified Public Accountants. Annual membership dues includes $8 for a one-year subscription to New Jersey CPA magazine. Members may not deduct subscription price from dues. Periodicals postage paid at Roseland, NJ, and at additional mailing office. POSTMASTER: Send address changes to New Jersey CPA, 425 Eagle Rock Avenue, Suite 100, Roseland, NJ 07068-1723. The materials and information contained within New Jersey CPA are offered as information only and not as practice, financial, accounting, legal or other professional advice. The opinions expressed herein are those of the authors and not necessarily those of the New Jersey Society of CPAs. Publication of an advertisement in New Jersey CPA does not constitute an endorsement of the product or service by the New Jersey Society of CPAs.

AICPA Proposes New CIMA Association B Y DON MEYER, NJCPA C HI E F M ARK E TI NG O F F I C E R

he CPA profession has a history of anticipating—and adjusting to—changing market demands. The profession has grappled with and developed strategies to address increasingly complex technology, specialization and evolving business structures; these drove such evolutionary steps as CPA Exam computerization, non-CPA firm ownership and the adoption of cloud computing solutions. Approximately 50 percent of most state CPA society and American Institute of CPAs members work in all types of businesses. In response to the needs of members working in corporations of all ownership structures and sizes, the AICPA formed a joint venture with the Chartered Institute of Management Accountants (CIMA) in 2011. Founded in 1919, the CIMA is the world’s largest professional body of management accountants, representing more than 227,000 members and students in 179 countries who practice in industry, commerce and not-forprofit organizations. In January 2012, the two organizations launched the Chartered Global Management Accountant (CGMA) designation. The number of CGMA designation holders is now more than 150,000 worldwide, with 50,000-plus in the U.S. Creating the CGMA offered these professionals a complementary designation and enhanced resources. Since the designation’s launch, the AICPA and CIMA have delivered nearly 120 reports and tools, plus online events and career development resources to members seeking to increase their knowledge and hone critical skills for the future. The organizations also developed the CGMA Competency Framework and the Global Management Accounting Principles.

In October 2015, the governing Council of the AICPA approved a resolution authorizing an additional U.S. pathway for the CGMA designation. This pathway would allow other qualified professional candidates who satisfy rigorous education, examination and experience requirements to obtain the CGMA, aligning the designation with other credential holders around the world. “Business and finance are increasingly complex and therefore employers are seeking professionals with a skill set that’s aligned with the CGMA competency framework,” said Arleen Thomas, CPA, CGMA, senior vice president, management accounting and global markets at the AICPA. All holders of AICPA designations or credentials are required to meet CPE/ CPD requirements and adhere to the AICPA Code of Conduct. The AICPA and CIMA are beginning a conversation with their respective members about a proposal to integrate their operations, strategy and management through a newly formed association. The AICPA would continue to serve members and protect, promote and grow the CPA profession. The new association aims to maximize efficiencies and provide a broader platform for further enhancing advocacy, promoting public and management accounting on campuses and with employers and clients, and developing new research and educational offerings. Strengthening the bond between the two organizations would streamline resources and create efficiencies to help both organizations move faster to market and produce content with broader perspective, especially on international business issues, which are increasingly impacting CPA firm clients. The AICPA cites the gains in advocacy that could be realized when speaking on behalf of more than

600,000 current and next generation accounting professionals. The AICPA and CIMA association would form the most influential body for the accounting profession—within the U.S. and globally—advocating on tax, audit, financial reporting and other issues important to members. Gaining member insights into the AICPA and CIMA evolution is critical to helping the Institute’s governing Council determine its next course of action. Council will assess member feedback and consider authorizing a member ballot in spring 2016. Moving forward would require a majority of members to vote in support of the proposal. The CIMA has a similar requirement and timeline. We encourage you to visit aicpa. org/horizons to find out more about what you could gain from a deeper relationship with the CIMA as well as provide feedback on the proposal.

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2015/16 Board of Trustees EXECUTIVE COMMITTEE President – Frank R. Boutillette, CPA President-Elect – Walter J. Brasch, CPA Secretary – Edward I. Guttenplan, CPA Treasurer – Lynn L. Albala, CPA Immediate Past President – Brad E. Muniz, CPA CEO & Executive Director – Ralph Thomas, CGMA TRUSTEES Jean I. Abbott, CPA Sharon J. Bishop, CPA Leonard N. Brooks, CPA Joseph C. DiFalco, CPA Carol Donatiello Iocca, CPA Sarah Krom, CPA Roy H. Kvalo, CPA Edward G. O’Connell, CPA Stephen O. Richard, CPA William J. Ryan III, CPA Audrey J. Sherrick, CPA Lorenzo T. Vanore, CPA

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NEWS

briefs

SBA: New Authority Will Bolster Women-Owned Small Businesses The U.S. Small Business Administration (SBA) issued a final rule authorizing federal agencies to award sole-source contracts to women-owned small businesses eligible for the Women-Owned Small Business (WOSB) Federal Contract Program. The SBA’s WOSB program was implemented in 2010. Learn more at sba.gov/wosb.

New Jersey Tops Toll Collections New Jersey’s Turnpike Authority— which collects tolls on the NJ Turnpike and Garden State Parkway—is the nation’s most prolific toll collector. This is according to the International Bridges, Tunnels and Turnpike Association’s report, 2015 Report on Tolling in the United States. 1. New Jersey Turnpike Authority, $1.42 billion 2. Port Authority of New York and New Jersey, $1.33 billion 3. Metropolitan Transportation Authority, $1.23 billion 4. Illinois Tollway, $943 million 5. Pennsylvania Turnpike Commission, $812 million 6. Florida’s Turnpike Enterprise, $756 million 7. Bay Area (California) Toll Authority, $670 million 8. New York State Thruway Authority, $649 million 9. North Texas Tollway Authority, $572 million 10. Harris County (Texas) Toll Road Authority, $560 million

Companies Not Protecting Consumers’ Personal Information According to a global survey of privacy and risk professionals, more than half of the 780 respondents say consumers should not feel confident that companies are adequately protecting their information. The study, conducted by global IT association

the Information Systems Audit and Control Association (ISACA), also found that only 29 percent of the respondents are very confident in their enterprise’s ability to ensure the privacy of its sensitive data. In fact, nearly one in five said they have experienced a material privacy breach. According to ISACA’s survey report, Keeping a Lock on Privacy: How Enterprises Are Managing Their Privacy Function, the seven key components of an effective privacy program are: 1. Appropriate staffing 2. Positioning of privacy function at a high level in the organization chart 3. Privacy-protection culture 4. Privacy awareness training 5. Globally accepted frameworks/standards 6. Metrics and monitoring program effectiveness 7. Compliance with data-protection legal requirements Respondents cite a complex international legal and regulatory landscape and lack of clarity on roles and responsibilities as the two main barriers to establishing a successful privacy program. The most commonly reported privacy failures are the lack of training or poor training, data breach/leakage and not performing a risk assessment. Visit isaca. org/2015-privacy-survey-report.

an improved means of verifying the tax compliance of taxpayers using offshore banking and investment facilities and improves detection of those who may attempt to evade reporting the existence of offshore accounts and the income attributable to those accounts. Visit irs.gov.

SBA Empowers Small Businesses to Be Cyber Safe The U.S. Small Business Administration unveiled a new cybersecurity webpage for small businesses to discover online courses, training opportunities, blogs and webinars, as well as learn cybersecurity information tips and more. A 2013 survey by the National Small Business Association indicates that 44 percent of small businesses reported being the victim of a cyberattack, with an average cost of approximately $9,000 per attack. Visit sba.gov/cybersecurity.

Get Your Copy of the 2015/16 NJCPA Compensation & Benefits Study of Public Accounting Firms in New Jersey

IRS Begins Reciprocal Exchange of Tax Info Under FATCA The Internal Revenue Service (IRS) has announced the exchange of financial account information with certain foreign tax administrations related to the Foreign Account Tax Compliance Act (FATCA). To achieve this, the IRS developed the information system infrastructure, procedures, and data use and confidentiality safeguards to protect taxpayer data, while facilitating reciprocal automatic exchange of tax information with certain foreign jurisdiction tax administrators as specified under the intergovernmental agreements implementing FATCA. The information now available provides the United States and partner jurisdictions

How important is accurate, timely, comprehensive compensation data? Of course, the answer is extremely important. The 2015/16 NJCPA Compensation & Benefits Study of Public Accounting Firms in New Jersey is unlike other compensation studies on the market. Not limited to strictly salary—but overall compensation—the study includes results for all levels of accountants as well as support personnel, such as IT and administrative staff.

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Perhaps more importantly, this study breaks down compensation levels for northern, central and southern New Jersey—where differentials can be significant. So don’t overpay for talent or lose that perfect candidate because your compensation is below par. Get it just right. To order your copy of the 2015/16 NJCPA Compensation & Benefits Study of Public Accounting Firms in New Jersey, visit njcpa.org/compensationstudy or call 973-226-4494 x246.

NJ Adopts New Education Requirements to Become a CPA

business. Previously, only 15 semester hours in accounting were required from a graduate school program. Undergraduate and graduate credits are counted equally. Under the new proposed rules, the references to levels of school accreditation have been removed. An applicant will need 24 semester hours in accounting, whether or not his or her college/university has obtained AACSB or ACBSP accreditation.

PCAOB Encourages Auditor Action Regarding Deficiencies The Public Company Accounting Oversight Board (PCAOB) issued a report detailing significant deficiencies in registered audit firms’ implementation of and compliance with certain auditing standards related to the auditor’s assessment of and response to risk in an audit. Auditing Standards No. 8 through No. 15—the risk assessment standards—are designed to address the auditor’s assessment of and response to risk of material

In September 2015, New Jersey adopted regulations that impact the education requirements for students seeking to become licensed CPAs. These new regulations go into effect on July 1, 2017. In order to sit for the CPA Exam in NJ, an applicant must possess: • A bachelor’s degree or higher from an accredited school/university. • 24 semester hours in accounting and 24 semester hours in business. • A minimum of 120 semester hours. • The degree can be in any field of study.

misstatements and the auditor’s evaluation of the results of procedures performed in an audit. The PCAOB report discusses findings under the eight standards for inspections conducted in 2012, 2013 and 2014. The board is concerned with the number and significance of deficiencies in compliance with these auditing standards. The eight auditing standards address procedures performed in all stages of the audit, from initial planning through the evaluation of audit results to support an opinion. Deficiency examples include failing to perform substantive procedures specifically responsive to fraud risks and other significant risks identified, not evaluating the accuracy and completeness of financial statement disclosures, and not testing the accuracy and completeness of information produced by the company. The report also explores potential noncompliance causes of the risk assessment standards and potential remedial actions firms can take. Visit pcaobus.org.

njcpa.org Spotlight

To be licensed in NJ, the applicant must: • Obtain 150 semester hours from an accredited school. These credits can be obtained within or beyond a degree program. • Obtain one year of experience (1,750 hours) working under a CPA whose active license is from NJ or a state substantially equivalent to NJ. Currently, all states are substantially equivalent. The experience must be in auditing or accounting.

A New Connection to CPE

What has changed? The new regulation reinstates the intended requirement of 120 credits to sit for the exam, including 24 credits in accounting and 24 credits in other business courses for all candidates, which was in place prior to April 2011. An applicant no longer needs any specific courses in these areas (just 24 semester hours overall in accounting and 24 semester hours in business). If an applicant is obtaining graduate credits, he or she will need 24 semester hours in accounting and 24 credits in

The top section provides a snapshot of your CPE progress for the current year and the current New Jersey triennial. Be sure to enter CPE you’ve taken from non-NJCPA providers into your CPE Tracker (njcpa.org/cpetracker) so that your monthly summary is accurate.

In January, the New Jersey Society of CPAs introduced a redesigned version of CPE Connection, the monthly e-newsletter highlighting continuing professional education opportunities. The new version is completely customized to each recipient.

date; we’ve recently added a number of new choices (njcpa.org/profile).

CPE Credit Summary

Find out about recent changes to CPE regulations, tools for managing your CPE and more.

Featured Events This section highlights up to four upcoming events that match your areas of interest. Make sure your areas of interest are up to

CPE News and Resources

CPE Calendar This section will list all of the upcoming events in the next two months that match your areas of interest. Events taking place in your local chapter will also be included here. With these new changes, we hope CPE Connection becomes a vital tool to help you manage your CPE requirements.

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Evaluating the Impact of ASU 2014-09 Whether you are in public practice or private industry, you couldn’t miss the release of the new revenue recognition standard, ASU 2014-09 Revenue from Contracts with Customers.

By Margaret Gallagher, CPA WithumSmith+Brown

It was immediately trailed by a high volume of business articles, thought knowledge and expanded continuing professional education offerings. This coverage frequently emphasized the new framework’s core principle: “Recognize revenue to depict the transfer of goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services.” At a high level, many observed that nothing about the core principle appeared radically different from how we currently account for revenue. ASU 2014-09’s implementation date was recently deferred by one year to allow for proper transition. Essentially, the deferral requires application of ASU 2014-09 in 2019 and 2018 for nonpublic and public entities, respectively (see ASU 2015-14, Revenue from Contracts with Customers [Topic 606]: Deferral of the Effective Date, at fasb.org for details). It is unlikely that these dates will be deferred further. The combination of the non-offensiveness

of the core principle and the one-year deferral provided incentive for many to assign ASU 2104-09 to the back burner. It is certainly tempting to postpone dealing with a standard that contains approximately 150 pages of new guidance, 360 pages of amendments to the existing Accounting Standards Codification and 190 pages of background information. Given the potentially significant industry-byindustry ramifications, this may not be prudent. Do you need to plan (panic) now, never or later? The answer is it depends on the industry. At a minimum, now is the time to identify if ASU 2014-09 will meaningfully impact an entity’s present accounting for revenue recognition. An efficient way to accomplish that is to apply the five-step model to a few representative revenue arrangements. By now, most are generally familiar with the five steps outlined in ASU 2014-09. But have you considered a practical application of them to a few real-world cases? Think of it as a preliminary impact study. Walking a few test transactions through the five steps in a thoughtful manner will provide an insightful snapshot of what you and your clients are facing. It will flag the areas where a deeper dive is justified, as well as better inform the roll-out of your execution plan.

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In certain industries, application will be challenging and produce different outcomes than current practices. All will need to gather qualitative, and possibly quantitative, information to meet the new disclosure requirements. Everyone needs to plan for retrospective application. For example, most agree that many technology, real estate and telecommunications entities will likely recognize revenue earlier. Asset managers will likely recognize revenue later. A typical wholesaler, on the other hand, will probably not experience a material change in the timing of revenue recognition. Thus, it is certainly possible that some can safely kick this can down the road for now.

Here we provide a deeper understanding of the five steps and contrast them to our present revenue recognition framework. We encourage you to apply them to a few representative revenue transactions in order to form a preliminary evaluation of the impact of ASU 2014-09 on your business.

Step 1: Identify the Contract with a Customer Basic concept – A contract does not mean a legal document. It is essentially an agreement between the entity and its customer that creates enforceable rights and obligations. The principles here are similar to our

current model, “persuasive evidence of an arrangement.” Further considerations – An important concept, collectability, is embedded in this step. Under our existing framework, we evaluate collectability in order to determine whether or not to recognize revenue. We know this as the collectability-mustbe-reasonably-assured concept. This generally carries over to ASU 2014-09, but with a twist. Think of collectability under ASU 2014-09 as a gating issue, since it appears in the first step of the five-step revenue model. Here, in step one, an entity must evaluate the customer’s ability and intention to pay the agreed-upon consideration when

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it is due. Known as the collectability threshold, it is used to identify whether a contract with a customer exists and filters out unacceptable contracts and arrangements. It is not intended to require the determination of any uncollectible amounts. Therefore, it is not appropriate to record revenue net of probable bad debts expense. In fact, ASU 2014-09’s scope does not alter the current accounting for receivables. This step also provides guidance on whether a subsequent contract modification is a separate contract requiring individual revenue accounting. If the arrangement or subsequent modification meets the definition of a contract, then advance to step two. Revenue is not recognized until step five.

Step 2: Identify the Performance Obligations in the Contract Basic concept – The contract may contain more than one distinct good or

service and, if so, the related revenue streams should be accounted for separately. Once again, this is not a new idea. What is different is that the new revenue framework establishes guidance on what constitutes a separate deliverable or performance obligation. This was not formally defined in legacy U.S. Generally Accepted Accounting Principles (GAAP). Under ASU 201409, separate performance obligations may even be implied through customary business practices or customers’ valid expectations. The identification of performance obligations will be less constrictive than current practice; therefore, the potential exists that more performance obligations will be identified than before. Our current practice permits inconsequential deliverables and marketing incentives to be excluded from revenue accounting when certain requirements are met. Under the new standard, granting an option to purchase additional goods,

or providing a future when-and-ifavailable software upgrade, may be a distinct performance obligation. Further considerations – ASU 201409 provides insights into what is an administrative activity and not a separate transfer of a good or service, which will be helpful in applying this step. While a new approach with distinctive terminology, most experts believe that for many industries this should not significantly change our current conclusion as to whether a deliverable has stand-alone value from a customer’s perspective.

Step 3: Determine the Transaction Price Basic concept – Current U.S. GAAP considers whether the fee is fixed and determinable and permits recognition of variable revenue elements only when the related contingency is resolved. Under ASU 2014-09, all variable consideration that is probable (likely

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to occur) is determined at the inception of the contract and included in the transaction price. Consequently, the new revenue guidance will generally allow earlier recognition of revenue in contracts with variable consideration. Variable consideration arises from such things as performance bonuses, milestone payments, discounts, rebates, price concessions or penalties. Further considerations – If variable revenue elements are identified, key points under the new guidance are: • It is subject to a probability constraint. Only variable revenues that are probable (likely to occur) of not being significantly reversed are included in the transaction price. This is not as stringent as our current fixed-and-determinable concept. The new guidance provides two methods for estimation. • Judgment will likely be required when identifying the variable elements and arriving at the most probable amount to recognize. This may create diversity in practice until best practices and implementation guidance emerges. • Estimates of variable consideration should be updated each subsequent reporting period. • The transaction price under the new guidance should not include estimates of future change orders for additional goods or services. The transaction price does not consider sales tax or the customer’s credit risk (e.g., bad debts). Nonrefundable, up-front fees will require careful consideration as to whether they relate more to the transfer of a good or service or an advance payment for future goods or services.

Step 4: Allocate the Transaction Price to the Performance Obligations in the Contract Basic concept – Under ASU 201409, the transaction price is allocated to performance obligations using the relative standalone selling price of each good or service. Current U.S. GAAP

applies a strict hierarchy of evidence before revenue can be allocated. When standalone selling prices are not known, ASU 2014-09 allows them to be estimated and discusses suitable methods to employ. There are similarities here to legacy GAAP’s guidance on multipleelement arrangements. However, the nuances relating to variable consideration and allocation of discounts could result in a different amount of revenue being allocated. Further considerations – Identifying the standalone selling price for each performance obligation at inception may require judgment. Further, entities that don’t currently account for revenues in this manner will need to develop processes and documentation to support their estimates. This is a significant change for the software industry in particular, because of the rigid extant requirement that an entity must have vendor-specific objective evidence in order to recognize revenue in multiple-element software arrangements.

Step 5: Recognize Revenue When or as the Entity Satisfies a Performance Obligation Basic concept – Under ASU 201409, revenue is recognized when or as control of the asset or service is transferred to the customer. Indicators to consider in arriving at whether control has transferred are provided. This is an important theoretical change from current U.S. GAAP, which stresses recognizing revenue when the risks and rewards of ownership have transferred. Further considerations – The emphasis on transfer of control may likely affect the timing of revenue recognition for some industries. It is evaluated separately for each identified performance obligation. The transfer of control may occur at a point in time or over a period of time. This distinction is not addressed in our legacy GAAP. Construction of a commercial building under a long-term construction contract is an example that would be accounted for over time. This over-time versus a

point-in-time determination must be made at contract inception for each performance obligation. Given the shortcomings of our current guidance, the timing of revenue recognition may be impacted. Certain industries, such as service providers under long-term arrangements, may be scooped into this over-time approach that previously were not.

Resources So before you hastily dismiss this new revenue recognition standard, walk a few transactions through the five-step model. If your revenue walk-throughs identified implementation issues, we recommend the following resources for further information. The AICPA’s 16 industry task forces (e.g., construction and not-forprofit) are developing a new revenue recognition accounting guide that will provide you illustrative examples and industry insights for how to apply ASU 2104-09. Refer to aicpa.org for details. The New Jersey Society of CPAs offers a wealth of information on this topic at njcpa.org/revenuerecognition. The FASB’s Joint Transition Resource Group (TRG) is studying and filtering implementation issues and provides a forum to learn more about the new guidance from others involved with implementation. Three proposed ASUs concerning performance obligations and licenses, reporting revenue gross versus net, and other narrow improvements are outcomes of the TRG. FASB and TRG resources and white papers addressing users’ implementation questions are available at fasb.org. Stay tuned. Margaret Gallagher, CPA, is a member of WithumSmith+Brown’s technical resources department. She is chair of the NJCPA Accounting and Auditing Interest Group. Contact her at pgallagher@ withum.com.

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When Is the Cash Method of Accounting Acceptable for Tax Purposes? To help answer this question, let’s first define the term “accounting method” and then examine the other possible methods of accounting. Accounting Method

By Barry S. Kleiman, CPA Untracht Early LLC

An accounting method is a set of rules used to determine the timing of reporting income and expenses on a tax return. Aside from the cash method of accounting, taxpayers either can or must use what is known as the accrual method of accounting. There are also special methods of accounting for certain items of income and expense. Finally, utilizing a hybrid method containing components of the other methods may also be possible. Under the cash method of accounting, all items of income— whether money or the fair market value of property or services actually or constructively received during the tax year—are included in gross income. Conversely, expenses are deducted in the tax year in which they are actually paid. Income is constructively received when the amount is credited to an account or made available without restriction or limitation. For example,

placing checks received in December in the drawer until January will not allow someone to postpone the income until the following year as the income was constructively received in December. Notwithstanding the doctrine of constructive receipt, there are tax planning opportunities when the cash method of accounting is used. For example, payment of business expenses may be accelerated before year-end in order to maximize tax deductions, and billing may be postponed until after year-end in order to defer income. While there is no prohibition against accelerating deductions or deferring income, there are more extreme manipulations that can occur in order to minimize taxable income. This is why there are restrictions on who may utilize the cash method of accounting.

More on the Cash Method of Accounting Individuals and many small nonmanufacturers can and do use the cash method of accounting. But what are the aforementioned restrictions on the use of this method? If you keep an inventory, you must use an accrual method of accounting for sales and purchases of merchandise.

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multiplying the gross receipts for the short period by 12 and dividing by the number of months in the short period. A partnership applies the test at the partnership level. For example: XYZ Inc. recorded gross receipts of $4 million, $5 million, $6 million and $7 million in tax years 2012, 2013, 2014 and 2015, respectively. For purposes of tax year 2014, average annual gross receipts are $5 million ($15 million divided by three), thus the cash method is permissible. However, for purposes of tax year 2015, average annual gross receipts are $6 million ($18 million divided by three), thus the cash method is not permissible. XYZ Inc. must use the accrual method of accounting for tax year 2015 and all subsequent years.

How to Elect a Method of Accounting

An exception is made for businesses that are not tax shelters with average annual gross receipts of $1 million or less (see the computation of average gross receipts below, substituting $5 million with $1 million). A further exception is made for certain small businesses with average annual gross receipts of $10 million or less (see the computation of average gross receipts below, substituting $5 million with $10 million). The following entities are prohibited from using the cash method of accounting: • A corporation other than an S corporation with average annual gross receipts exceeding $5 million. • A partnership with a corporation other than an S corporation as a partner with average annual gross receipts exceeding $5 million. • A tax shelter.

is effective for the tax year in which the entity fails to meet this test. Conversely, a corporation or partnership other than a tax shelter that meets the gross receipts test for all tax years may use the cash method of accounting. Individuals, certain farming businesses and qualified personal service corporations may use the cash method of accounting without being subjected to the gross receipts test.

Gross Receipts Test

A corporation or partnership that fails to meet the gross receipts test for any tax year is prohibited from using the cash method of accounting and must change to an accrual method of accounting. It

Let’s examine the gross receipts test. A corporation or a partnership meets the test for any prior tax year if its average annual gross receipts are $5 million or less. An entity’s average annual gross receipts for a given tax year is determined by adding the gross receipts for that tax year and the two preceding tax years and dividing the total by three. If the entity was not in existence for the entire three-year period, the computation is based upon the number of years the entity has been in existence. Gross receipts for a tax year of less than 12 months are annualized by

Make the election by reporting the accounting method to the Internal Revenue Service (IRS) on the first tax return filed for the entity. In the case of a sole proprietorship, make the election on the first applicable schedule (e.g., Schedule C) filed for the entity. While no single accounting method is required across the various types of businesses and taxpayers, choose the method that clearly reflects income and expenses, and maintain records that will enable the filing of a correct tax return. In addition to permanent accounting books, you must maintain any other records necessary to support the entries on the books and tax returns. Use the same accounting method from year to year in order to reflect items of income and expense consistently. It may be possible to change an accounting method; but, in most cases, the IRS must first grant approval. Barry S. Kleiman, CPA, is a principal at Untracht Early LLC. He is a member of the New Jersey Society of CPAs Federal Taxation and State Taxation interest groups and the New Jersey CPA magazine Editorial Advisory Board. Contact him at bkleiman@untracht.com.

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Revenue Recognition and Corporate Finance CPAs In 2014, the Financial Accounting Standards Board (FASB) and the International Accounting Standards Board issued guidance on recognizing revenue in contracts with customers.

By Stephen F. McCarthy, CPA The Presidents Forum

According to the FASB, “The objective of the new guidance is to establish the principles to report useful information to users of financial statements about the nature, timing and uncertainty of revenue from contracts with customers.” These new standards affect all entities that have contracts with customers. Current FASB guidance on revenue recognition is industry-specific, linked to specific transactions (e.g., the timing of delivery of goods and services) and is extremely detailed. Current guidelines have led to inconsistent treatment of similar types of transactions across industries. Frequently, the current guidelines do not apply in a smooth, standard way in particular industries (e.g., technology, real estate, entertainment and health care) where revenue tends to be contract-driven and subject to the delivery of linked goods and services.

The new standards will be principledriven, not transaction-driven, which may have major implications for many companies. The main feature of this new guidance is that companies will recognize revenue upon transfer of goods and services to customers in amounts that accurately reflect consideration for those goods and services. These principles will require some judgment in their application. While we, as practitioners, may think these new standards are unnecessarily complex, the goal is to standardize and simplify how we record revenue. It will become easier for stockholders, investors and customers to compare companies’ performances in the global environment. Because of the complexity, much of the reporting change has been moved to 2018. It is critical that companies begin now to get accounting reporting systems and internal processes in compliance with the proposed standards before the deadline. In some cases, contracts may need to be rewritten. These new standards may alter both the timing and method of how companies recognize revenue. The planning should include the communication and disclosure to all users of financial statements so that

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they can understand the impact on financial statements. While there will be implications in accounting, financial reporting, tax, internal audit, sales operations, IT, legal and human resources, the three most significant areas you need to consider now are (1) the contract; (2) the new judgment required by the principlesbased approach; and (3) financial systems and controls.

1. The Contract The need for contracts with provisions for case-specific enforceability has assumed increased importance. Christopher E. Hartmann, Esq., who represents many closely held businesses, believes identifying performance obligations, collectability provisions, implied warranties, indemnity rights and reciprocal rights to terminate are contract provisions that should be well-crafted in every contract. “One size does not fit all,” says Hartmann. “Irrespective of these changing standards, companies should regularly review their customer and vendor contracts; otherwise, they risk being at a competitive disadvantage in the future.” “Most companies will need to change or amend contracts with existing customers if they feel specific performance obligations are not clearly spelled out in existing ones,” notes Marc Fogarty, CPA, an audit partner at EisnerAmper. “An industry that could be dramatically affected by the new standards is the software industry,” cautions Hartmann. “When drafting contracts for intellectual property, such as software, be clear whether the copyright holder is granting a right to use or a right to access. The contract should add explicit terms about how the recipient can use software and whether updates (performance obligations) are included. Limitations should be fully and precisely defined.”

2. Judgment With a principles-based approach, judgment will need to include an

evaluation of how the standard will affect non-financial measures and metrics, compensation plans (especially sales commissions), accounting policies and tax matters. Addressing these quantitative and qualitative measures will require additional, well-thoughtout disclosures. “Identifying performance obligations in contracts will require a significant amount of judgment for clients,” adds Fogarty. “Determining if delivered items have standalone value can vary from client to client, even if clients are in the same industry.” The new standard requires significant judgment in distinguishing between customer credit risk (e.g., bad debt) and implied price concessions (e.g., transaction price). Due to the financial reporting treatment of these, taxpayers will need to revisit the related temporary tax difference calculation. Retrospective reporting also requires increased judgment. Retrospective application will include only the direct effects of a change in accounting principle, including the related income tax effects. Regarding comparability of revenue recognition practices across entities, industries, jurisdictions and capital markets, there may be clients in the same industry with different outcomes, depending on how they identify performance obligations. However, if those performance obligations are clearly disclosed, the issue should be mitigated.

3. Systems and Controls The new standards will likely affect an entity’s financial statements, business processes, internal control over financial reporting, as well as costs associated with obtaining and fulfilling a contract. Companies—particularly ones using multiple reporting systems or decentralized systems—can expect sizable changes. Make sure your systems can capture all of the identified performance obligations as well as maintain data integrity processes, including error checking and validation methods.

Changes are also expected to internal controls and processes. The internal control systems needed to capture the level of information to make estimates on revenue recognition and new disclosures (including the additional qualitative and quantitative disclosures) must be changed as necessary.

The Plan When developing your revenue recognition implementation plan, review all contracts, paying particular attention to key revenue streams with the greatest possible impact. Think hard about the other metrics impacted and develop a plan for them, too. Also, make sure all systems are capable of handling the expected changes. Revenue is the lifeblood of a company. It impacts employees, management, vendors, stockholders/ investors, not to mention business advisors. That is why proper revenue recognition is paramount. Getting a handle on these new standards sooner rather than later will help keep that lifeblood flowing. Stephen F. McCarthy, CPA, CGMA, M.B.A., is the owner of The Presidents Forum. He is a member of the New Jersey Society of CPAs. Contact him at stevemccarthy@thepresidentsforum.com.

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The Tax Auditor’s Search for Unreported Income Unreported income is the leading challenge for the Internal Revenue Service (IRS). In 2014, the IRS estimated that $270 billion in revenue would be lost due to unreported income.

By Glenys J. Merejo, CPA Citrin Cooperman

Also in 2014, the IRS announced that 43 percent of small businesses have unreported income. Rather than think of small businesses as tax cheats, the more realistic reason for this elevated percentage is largely due to small businesses having very limited resources. They tend to have weak internal controls and disparate segregation of duties, which increase the risk of oversight and discrepancy. The IRS has changed its approach to the problem by implementing new techniques and adding dedicated resources to discourage potential violators. Unreported income creates controversy and scrutiny. An audit takes potential violators through a difficult and demanding review, which can be expensive and penalty-laden. It also poses a problem for tax professionals, who may also face IRS penalties. The IRS relies on its examiners to properly conduct audits by employing specific techniques and accurately documenting all aspects of their work.

Tax professionals can also employ these techniques to make recommendations to their clients in order to avoid unwanted surprises during a future IRS audit. Tax professionals are not obligated to audit or review a client’s information in order to prepare a tax return, but they do have an obligation to inquire about inconsistent or incorrect information. Some of the techniques that the IRS employs when searching for unreported revenue include the following:

Bank Deposit Analysis Auditors analyze bank deposits to verify that all taxable income is reported on a tax return. Therefore, all bank deposits should be reconciled and compared to the income reported in accounting systems and on tax returns. If there are discrepancies, determine whether the additional amount is taxable or not, such as a gift received from a relative, proceeds from a loan and so on.

Financial Status Analysis This is referred to as a Cash-T analysis, which is an audit procedure that identifies differences between income and expenditures. Examiners can determine if a taxpayer’s funds are sufficient to cover his or her living expenses. The IRS uses data from the U.S. Bureau of Labor Statistics and

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sponsors and/or benefactors. The taxpayer’s website and e-commerce activities will be carefully scrutinized. Part of the tax professional’s quality control review in preparing and reviewing tax returns is a review of a client’s website. The review may trigger questions about possible additional income related to a new line of business, new location or a possible footprint into global markets.

Matching of Reported Revenue to Third-Party Issued Documents

comparable statistics to determine minimum living expenses. Tax professionals should recommend this exercise to clients to reconcile their lifestyle expenses with the income reported on their tax returns. If the analysis determines that there is not enough income to support a lifestyle, the same questions should be raised as with the bank deposit analysis method: Did the client borrow money? Did the client receive a gift or financial support from a relative? Did the client use a prior year’s savings to supplement his or her income? Upon concluding the Cash-T analysis, the auditor must indicate whether the taxpayer’s income is sufficient to support lifestyle expenses or if there is a significant discrepancy, which may represent underreported income or overstated expenses. When the discrepancy is $10,000 or more, the auditor is instructed to scrutinize the income further and if no legitimate reason for the discrepancy is found, the auditor must issue an assessment of additional taxes, interest and penalties.

Ratio Analysis Depending on the type of business, a ratio analysis may be useful to determine the financial health and relative performance of a company.

In many industries, cost of goods sold bears a direct relationship to sales. If this applies to your client, consider performing an analysis to determine if there is consistency between prior and current year ratios and if the client’s ratios are consistent with industry standards. Auditors perform their due diligence by using bizstats.com to determine industry standards and to compare industries and professions. There will be additional scrutiny if sales figures are significantly inconsistent with industry standards.

Physical Site, Website and e-Commerce Analysis Auditors tour physical business site(s) to gain familiarity with the taxpayer’s business operations and internal controls, identify potential sources of unreported revenue and confirm asset existence. During an audit, it is best for a client’s representative under a power of attorney to walk the examiner through the site(s) to oversee the process and limit interactions with employees and business owner(s). Websites and related e-commerce portals provide insight into business lines, types of goods and/or services sold, payment methods accepted, customer profiles and data, and information about business partners,

This is also known as the specific item method and involves the use of direct evidence. This method allows you to test client records by taking a 1099 Form that your client received from a third party and track it back to a specific customer. Your client’s records should present the same amount paid by that customer. If that is not the case, the client must be able to explain the differences, such as timing differences or a failure to post a payment received. A Circular 230 Case Study, by Karen Hawkins, IRS director of the Office of Professional Responsibility, states that “reliance on client information in good faith without verification is acceptable, but tax professionals cannot ignore implications of other information furnished and actual knowledge and must make reasonable inquiries for incorrect, inconsistent information.” Tax professionals should endeavor to eliminate the element of surprise for clients going through an IRS audit. The best way to accomplish this is to do proper due diligence during tax preparation and employ analysis methods in accord with the scrutiny of IRS examiners. Glenys J. Merejo, CPA, M.S.T., is a tax manager at Citrin Cooperman. She is a member of the New Jersey Society of CPAs Federal Taxation and State Taxation interest groups. Contact her at gmerejo@citrincooperman.com.

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A&A

buzz

Changes in Revenue Footnote Disclosures B Y ELIZABETH B . H ARP E R , C PA, SOB E L & C O. , LLC

ore than 18 months ago, the Financial Accounting Standards Board and the International Accounting Standards Board issued a new converged accounting standard relating to revenue from contracts with customers. This new converged accounting standard was designed to help users of financial statements better understand the nature, amount, timing and uncertainty of revenue and cash flows from contracts with customers and assets recognized from the costs to obtain or fulfill a contract. The new standard will go into effect for public companies with annual reporting periods beginning after December 15, 2017, and will commence for nonpublic companies after December 15, 2018.

Prepare to Implement Although the deadlines are far off, now is the time to review the new standard and begin the process of making the required changes in financial reporting.

Required Disclosures The new standard is certain to pose challenges for financial statement preparers as they adjust to the new revenue recognition guidelines. Even though public companies currently provide investors with revenue disclosures, many details have not been required. Companies will need to adopt a common global standard, which will require them to disclose revenue and impairment losses from contracts with customers separately from other sources of revenue or impairment.

Major Changes in Disclosure Information Disaggregation of Revenue – Disclosures will be required for the amount of

revenue recognized from contracts with customers separately from other revenue sources; the amount of revenue disaggregated into categories that demonstrate how the nature, amount, timing and uncertainty of revenue and cash flows are affected by economic factors (type of goods or services sold, geographic region, type of customer or market, type of contract, contract duration, sales channel); the relationship between the disaggregated amounts disclosed; and revenue information that is disclosed for each reportable segment in accordance with reporting standards. Contract Balances – Disclosures will be required for both the opening and closing balances of receivable and contract assets, the contract liabilities from contracts with customers, revenue recognized in the reporting period that was included in the contract liability balance, and revenue recognized in the reporting period for performance obligations (during previous periods). Performance Obligations – Disclosures will be required for when they typically satisfy performance obligations, significant payment terms, the nature of the goods or services the company is transferring, obligations for returns and refunds, and types of warranties and related obligations. Remaining Performance Obligations – Disclosures will be required for when the entity typically satisfies its performance obligations; the significant payment terms; the nature of the goods or services that the entity has promised to transfer; obligations for returns, refunds and other similar obligations; types of warranties and related obligations; the amount of the transaction price allocated to remaining performance obligations; and when

the company expects to recognize the remaining contract revenue. Significant Judgments and Estimates – Disclosures will be required for whether revenue is recognized at a point in time or over time, and estimates regarding transaction price and allocation to separate performance obligations. Policy Decisions – Disclosures will be required for whether the company used practical expedients to avoid capitalizing the incremental costs of obtaining a contract or to ignore the effects of a significant financing component because the time from the transfer of goods or services to payment is less than one year. The aforementioned guidelines pertain only to public business entities, certain nonprofit entities, or employee benefit plans that file or furnish financial statements with or to the Securities and Exchange Commission. Entities not required to provide such disclosures must, at a minimum, disclose revenue disaggregated according to the timing of transfer of goods or services, along with qualitative information about how economic factors affect the nature, amount, timing and uncertainty of revenue and cash flows. This overview provides you with just a glimpse of what’s to come. Change is always a challenge, but your clients will appreciate access to this information, which can help them make smart strategic business decisions. Elizabeth B. Harper, CPA, is the director of quality control at Sobel & Co., LLC. She is vice-leader of the New Jersey Society of CPAs Accounting & Auditing Standards Interest Group. Contact her at elizabeth.harper@sobel-cpa.com.

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BEST

practices

Communicating the New Revenue Recognition Standard to Clients B Y SHERI L . FABIAN, CPA, GRANT THOR NTO N LLP AN D J O S E P H G R A Z I A N O, C PA

n May 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2014-09, Revenue from Contracts with Customers, which creates a new principles-based revenue recognition framework that will affect substantially all revenue-generating entities. The ASU replaces substantially all existing U.S. Generally Accepted Accounting Principles on revenue recognition, including industry-specific guidance. Although the effective date has been deferred until annual reporting periods beginning after December 15, 2017, for public entities, as defined, and until annual reporting periods beginning after December 15, 2018, for all other entities, entities should not delay in assessing the impact of the new standard and planning for its implementation. If practitioners have not already opened up a dialogue with their clients about the new standard, they need to get moving. Your initial discussions with clients should center on (1) education; (2) impact assessment; (3) implementation; and (4) resource assessment.

Education You should first have high-level discussions about the significant provisions of the new standard with clients. You may find that they are aware of the new standard, but have not delved deeply into it. Therefore, you should refer them to available sources of information to enhance their knowledge. The ASU and other information on the new standard are available at fasb.org. The American Institute of CPAs (aicpa.org) has also created 16 industry task forces to identify and address certain implementation issues. Training

programs on the new revenue standard are also available from the New Jersey Society of CPAs (njcpa.org).

Impact Assessment Next, management should assess the provisions in the standard compared to the entity’s current revenue recognition accounting and evaluate whether to apply the full retrospective or modified retrospective transition method. The assessment could include the impact of the new guidance on revenue recognition and financial statement disclosures; taxes; information systems; internal control systems; and contracts, including loan agreements and compensation arrangements. Management should establish a timetable for completing the assessment and assign an individual(s) to be responsible for its completion.

Implementation If, after completing the assessment, management believes that the new standard will have a significant impact on the entity’s revenue recognition accounting, it should consider establishing a detailed implementation plan. (In certain cases, a less-formal implementation process may suffice.) A detailed plan could include the following: • Selecting a transition method. • Applying the provisions of the new standard to existing revenue transactions. • Developing new financial statement disclosures. • Updating information systems. • Revising internal control systems. • Modifying contracts, if necessary. • Communicating the effects of the new standard with stakeholders, considering applicable disclosure rules and regulations.

Management should establish a timetable for completing the implementation plan, assign an individual with overall responsibility for it and identify the individuals responsible for performing each step of the plan.

Resource Assessment Learning about the standard, performing an impact assessment and completing an implementation plan will require resources. Management should assess whether internal resources will be sufficient to adopt the new standard or whether external accounting services will be required. Also, discuss the extent of your involvement in the client’s process to adopt the new standard, given the requirement for an independent public accountant to maintain independence.

Going Forward Meet with your clients regularly to discuss new developments on the standard, including amendments or interpretive guidance that have been issued or are being proposed. Check the status of the entity’s implementation plan. Discuss the timing of your testing the entity’s application of the new standard, the information you will need to perform those tests and the fee impact. Waiting until the last minute to address a new comprehensive revenue standard is risky for all concerned. Practitioners need to encourage their clients to act now to plan for adoption of this significant new standard. Sheri L. Fabian, CPA, is a partner at Grant Thornton LLP. Contact her at sheri. fabian@us.gt.com. Joseph Graziano, CPA, is a retired Grant Thornton LLP partner. Contact him at jgraziano53@yahoo.com. Both are members of the New Jersey Society of CPAs.

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CORPORATE

finance

Simplifying the Presentation of Debt Issuance Costs B Y A N TH ONY F. MARO NE J R . , C PA, THE B LAC K STONE G RO U P L . P.

istorically, the costs incurred to borrow money or to issue debt have been deferred and recorded as a separate asset entitled “deferred financing costs” on the borrower’s balance sheet. These costs are amortized into interest expense over the life of the debt instrument as an additional cost of borrowing funds, similar to debt issue discounts. Discounts, however, are recorded as a contra-liability that reduces the carrying value of the related debt instrument, which is inconsistent with the gross presentation of deferred financing costs as a separate and distinct asset. The current treatment is also different than the convention for issuing equity—whereby the related costs are recorded as a reduction in the value of capital raised—and the convention for lending money—whereby the costs to originate a loan are recorded as a contra-asset that reduces the size of the loan receivable asset. As part of the Financial Accounting Standards Board’s (FASB) ongoing simplification project, the FASB issued Accounting Standard Update 201503, Simplifying the Presentation of Debt Issuance Costs (ASU 2015-03) in April 2015. This guidance requires debt issuance costs be presented as a contra-liability, consistent with the presentation of a debt discount with the goal of simplifying the accounting for these transactions and also aligning U.S. Generally Accepted Accounting Principles with existing International Financial Reporting Standards. The new guidance does not impact the amortization of such costs as a component of interest expense. One topic not clearly addressed in ASU 2015-03 is how costs incurred to obtain a revolving credit facility should

be accounted for. These costs represent an incremental cost of borrowing money and could be considered as a contra-liability—similar to issue discounts or other costs. However, with a revolving credit facility it is possible that no liability (e.g., debt outstanding) is available to be reduced. Alternatively, these costs can be viewed as an asset that provides for access to liquidity over a future period of time and, therefore, something that should be separately accounted for on the borrower’s balance sheet. At the June 18, 2015, Emerging Issues Task Force meeting, the Securities and Exchange Commission (SEC) observer indicated that the SEC’s staff would not object to a separate accounting for costs associated with revolving credit facilities, or similar instruments, and so diversity in practice may evolve as reporting companies adopt ASU 2015-03 and determine their accounting policies in this area. An incidental impact of ASU 201503 for entities that report on a fair value basis is that it aligns the impact of deferred costs in general between investments and debt. When costs are capitalized into the cost basis of an asset, such as the acquisition of real property, and the asset is reported at fair value, the costs are essentially expensed because the fair value of that asset has not increased by the amount of the deferred costs—and so would be marked-to-market down to zero. By classifying the cost of obtaining debt as a contra-liability, entities that report their debt at fair value will also essentially expense these items through mark-to-market accounting, because the value of the debt upon issuance will not be reduced by such deferred costs. ASU 2015-03 will ultimately simplify a long-standing presentation difference

between the cost of issuing debt and other, similar transactions. ASU 201503 is effective for fiscal years beginning after December 15, 2015, and for interim periods within those fiscal years for public companies or within fiscal years beginning after December 31, 2016, for entities other than public companies. Early adoption is permitted and, upon adoption, ASU 2015-03 will be applied on a retrospective basis. Anthony F. Marone Jr., CPA, CGMA, is a senior vice president at The Blackstone Group L.P. He is a member of the New Jersey Society of CPAs Student Programs & Scholarships Committee and the Editorial Advisory Board of New Jersey CPA magazine. Contact him at 646-4823179 or tony.marone@blackstone.com. The views expressed in this article are those of the author and are not those of the Blackstone Group L.P.

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FINANCIAL

planning

Choosing a Lump Sum or an Annuity B Y GUY MCPH AIL , CPA , THE GM GROU P

ne of the more common questions I get from my financial planning clients is should I take a lump sum or an annuity payment in regard to my pension? Exactly how do you determine the better deal from getting a monthly stream of payments for life (and possibly a spouse’s life also) or getting a large cash payment?

Client Goals First, I get to know the client, if I don’t already, and try to clearly understand his or her goals. It is extremely important to know the client’s overall financial picture. For example, what if a client has other annuities or investment assets? Those must be considered when making client recommendations. After I obtain all of the client’s financial information, we run the numbers to see how the pension compares to investing the money in a conservative allocation. Usually, the numbers indicate that the lump sum is the better option. This is because pension checks are based on current interest rates, and with the historically low-rate period we are experiencing we are locking in a low rate of return for the rest of the client’s life.

Questions In addition to showing the numbers, I also ask clients hard questions. Would you be tempted to use the lump sum for luxury purchases? If you are planning to manage the money yourself, are you equipped to do so? Health and longevity issues also must be explored candidly. If someone expects to have a shorter life, then the lump sum is generally the better option.

Annuity Risk One drawback of an annuity payment is that pensions are rarely indexed for inflation. With medical costs being one of retirees’ major concerns, and these

costs escalating rapidly, this is a major consideration. At an annual 3-percent inflation rate, a monthly check worth $2,000 today would be worth only $1,488 in 10 years and $1,107 in 20 years.

Lump-Sum Risk Once I show the client the numbers and the inflation risk with an annuity payment, I then explain the risks of investing the lump sum. I show clients the possible average returns of various portfolio allocation models on a historical basis. However, if I stopped there I would be doing the client a disservice, because the markets do not get the same rate of return each year. So, I show the client what the worstcase scenario is for that allocation. For example: If it looks like a diversified 60/40 allocation would be appropriate, the client needs to know that that particular portfolio could possibly lose approximately 19 percent in a given year. If the lump sum is for $500,000 and in the first year it lost $95,000, would the client compromise his or her retirement? If the client moved to a 40/60 allocation, he/she could reduce the risk down to a loss of around 10 percent, or $50,000. Would that be acceptable?

Heirs Another critical issue to consider is if the client wishes to leave money to children, grandchildren or some other heirs. The company annuity ends when the individual and/or the spouse dies, and the children would receive none of the inheritance. If someone takes the lump sum, then the spouse, children, grandchildren or other beneficiaries would get whatever remains. Because many clients have a strong desire to leave an inheritance to heirs, this becomes the deciding factor for the lump-sum approach.

Taxation Taxation implications are where CPAs can provide tremendous client value. The client is going to owe taxes on every monthly pension statement, but with the lump sum being rolled into an IRA the client doesn’t have to take the money until age 70½ when minimum required distributions take effect. We will usually run tax projections for the client for five to 10 years out, while looking at all of the various income sources. This is where you can save clients potentially thousands of dollars by taking money out of the lump-sum IRA during years at the most favorable tax brackets. Guy McPhail, CPA, PFS, CFP, is president of The GM Group. He is a member of the New Jersey Society of CPAs. Contact him at gmcphail@ njbizcpa.com or 609-737-6600.

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FORENSIC

file

How to Handle a Deposition with a Report Error B Y M ICHAEL A. S ACCOM ANNO, C PA, F R I E D M AN, LLP

inding an error in a forensic report is not fatal in and of itself. What the expert does when he or she finds the error is what determines the outcome and, consequently, risks being fatal if handled improperly.

Oops Let’s say you were hired to prepare a forensic report. During the engagement, you received all of the relevant discovery needed for the case and access to each party for the interviews that the client requested. After preparing your findings and conclusions, you issue your report prior to the court-ordered deadline, feeling confident in your findings. After the exchange of expert reports, you review the other expert’s findings and notice his/her findings are materially different than yours. With settlement not in sight, the other side notices you for a deposition. In preparing for your deposition, you review your report, taking into consideration the major assumptions and calculations that were utilized. You then realize there is an error in your calculations, and the error materially impacts the findings in your report. You are now at a very important fork in the road. You can turn left, hope for the best and assume that your adversary didn’t catch the error, which is very unlikely. Or, you can turn right, acknowledge the error and prepare an update to your original calculations to issue in a supplemental report.

Making It Right We all know (or should know) that there is only one way to handle an error in a report—acknowledge the error and correct it. It is not uncommon for a report to contain an error or two. So, the best way to diffuse the situation is to tackle it head on.

First, as soon as possible, contact the attorney you are working with and notify him/her, both verbally and in writing. Second, provide the attorney with an updated calculation and report that discloses and corrects the error.

The Witness Will Answer I have witnessed this throughout my career. An expert issued a forensic report greatly impacting the outcome of the case. After the report was issued, the expert noticed an error in the calculations. In one particular case, the expert notified the attorney immediately and issued a supplemental report. Prior to the issuance of the supplemental report, the other side noticed the expert for a deposition. When it came time for the deposition, the expert was ready to address the issue head on. After the attorney’s introduction, the expert requested to make a statement, which was granted. On the record, the expert indicated that during the preparation he noticed an error in the calculations and issued a supplemental report. Obviously, the expert knew that the attorney was fully aware that the expert issued a supplemental report, but he wanted to make sure he was in front of the issue.

This allowed the expert to take the steam out of the attorney who was ready to expose the error on the record.

There Are Errors and Then There Are Errors There is a difference between an expert issuing a report with an error or two, and an expert who notoriously issues sloppy work or, worse yet, issues reports that manipulate data in an effort to arrive at an advocacy position or finding. This article does not address that type of expert. Hopefully, the Daubert standard will handle those particular “experts.” Experts are human; we all make mistakes. Each of us has issued a report with an error. It is how we handle the issue that sets us apart as valued business advisors. Michael A. Saccomanno, CPA, ABV, CFF, CVA, CDFA, is a partner in the forensic and litigation services practice at Friedman, LLP. He is a member of the New Jersey Society of CPAs Business Valuation Forensic Litigation Services Interest Group. Contact him at 856-8301720 or msaccomanno@friedmanllp.com.

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SMALL/SOLE

practitioner

4980D Small Business Excise Tax Liability B Y TONY NOVAK, CPA

he Affordable Care Act added Section 9815 to the Internal Revenue Code, which requires employer-provided health plans to comply with a number of market reform provisions. Internal Revenue Service (IRS) Notice 2013-54 explains that some of the most popular health benefit arrangements used by small businesses violate market reform provisions. The most common examples of non-compliance are an employer’s payment for individual health insurance or payment of health benefits that are not integrated with an employer-sponsored group health insurance plan. Employer-paid health benefits for common law employees must now be integrated with a qualified employersponsored group health insurance policy, excepted by law or subject to an excise tax penalty. There are exceptions for one-person businesses, S corporation shareholder employees, church plans and union plans. The excise tax penalty for small business employers took effect in January 2015. IRS Notice 2015-17 delayed enforcement of the excise penalty during a correction period that extended until June 2015. Efforts to repeal implementation of this potentially harsh penalty have thus far failed.

New Reporting Requirements Self-report excise taxes payable by a small business employer under IRC 4890D on Form 8928, Part 2, which must be filed by the due date of the 2015 return, including extension. There are two types of excise tax penalties: Section A – Failures Due to Reasonable Cause and Not to Willful Neglect, and Section B – Failures

Due to Willful Neglect or Otherwise Not Due to Reasonable Cause. The Section A penalty is 10 percent of the total amount paid for employee health benefits for affected employees. The Section B penalty is a potentially larger $100-per-employee per-day excise tax. We presume that for 2015 some impacted employers will take the position that the failure was not discovered, despite exercising reasonable diligence, or was corrected within the correction period and was due to reasonable cause. If so, then the Section A penalty would apply for 2015.

Recognizing a Penalty Situation Employers and their tax preparers should look for and address arrangements that may trigger an excise tax. Watch for these common warning signs that may indicate exposure to 4890D excise tax liability: • Lack of health plan documents or documents that have not been updated since before ACA implementation. • Commercially marketed “workaround” arrangements that use wording like “Section 105 Plan.” • Employer payments for individual health insurance premiums. • Employer payments for health care expenses that are not administered together with the group health insurance policy.

Penalty Relief The IRS issued relief from this penalty to small business employers with noncompliant health plans for the first six months of the year (IRS Notice 2015-17). As such, the Section 4980D penalty would apply to health benefits beginning July 1, 2015, through

December 31, 2015. For example: If an employer made a payment to a single employee for health benefits of $300 per month for all of 2015, then the tax under Section A would only be $180 (10 percent of $300 x six months), but the tax under Section B would be $18,400 ($100 per day for 184 days). It appears that in the most common types of small-business health-plan violation scenarios a strong statutory argument could be made for the more severe Section B penalty. The IRS can grant penalty relief in this matter. Given the severity of the Section B penalty, and its potential to even bankrupt some small employers, we presume that the IRS may liberally concede to accept a Section A penalty from affected small business employers for 2015. However, once an employer claims an unintentional violation for 2015 and assumes the lower Section A penalty, it appears unlikely that the employer could continue to claim that the very same violation was unintentional again on the 2016 tax return. Thus, it may be urgent to correct the non-compliant provisions in the underlying health benefit plans that are triggering the excise tax as early as possible, and certainly before the 2015 tax return filing date in early 2016. Tony Novak, CPA, is a member of the New Jersey Society of CPAs Health Care Interest Group. Contact him at tonynovakcpa@gmail.com and follow him on Twitter at @tonynovak.

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New Health Care Reporting Requirements B Y JA MES A. L AWRENCE , C PA, T R APHAGE N F I NANC I A L G RO U P

ew reporting requirements, per the Affordable Care Act, began tax year 2015. Reporting depends on whether you are considered a small or applicable large employer (ALE), and whether you are fully insured or self-insured. Employers with 50-plus full-time employees, including full-time equivalent employees, are considered ALEs. Employers with fewer than 50 full-time and full-time equivalent employees are considered small employers. Fully insured plans are defined as an employer that purchases health insurance from an insurance company. Self-insured plans are defined as an employer providing health benefits directly to their employees.

Applicable Large Employers ALEs that are fully insured must provide information to the Internal Revenue Service (IRS) about the health care coverage offered to their full-time employees during a calendar year. Form 1095-C, Employer-Provided Health Insurance Offer and Coverage, and Form 1094-C, Transmittal of Employer-Provided Health Insurance Offer and Coverage, report the required information to the IRS. The reporting requirements are necessary for the IRS to enforce the employer mandate that ALEs offer minimum essential coverage that is affordable and provide minimum value to substantially all full-time employees and their dependents. The IRS also uses the information to identify individuals ineligible for the premium tax credit because they have been offered affordable employer-sponsored coverage that provides minimum value. For ALEs that offer self-insured coverage, the IRS also uses Form 1095-C to verify that an individual is not subject to the individual shared responsibility penalty because he or she is enrolled in employer-sponsored coverage.

An ALE must transmit Forms 1095-C to the IRS using Form 1094-C. If filed on paper, Forms 1095-C and 1094-C must be filed by February 28 of the year following the calendar year for which information is provided. If filing electronically, the due date is extended until March 31. A copy of Form 1095-C must be furnished to each individual who was a full-time employee for one or more months during the calendar year, regardless of whether the employee was offered coverage. The form must generally be furnished to each employee by January 31 of the year following the year for which the information is reported. Health insurers and carriers will file Form 1095-B (Health Coverage) for fully insured ALEs. A copy of Form 1095-B must be provided to the responsible individual identified on the form. There is no 1095-B filing requirement for self-insured ALEs.

be filed on or before February 28 of the year following the calendar year for which information is provided. If filing electronically, the due date is extended until March 31. A copy of Form 1095-B must be furnished to each person identified as the responsible individual on the form by January 31 of the year following the year for which the information is reported. (See Figure 1 for reporting requirements.) Figure 1

1095-B

Small Employer Fully insured

Insurer files

Not applicable

Self-insured

Employer files

Not applicable

Applicable Large Employer (ALE) Fully insured

Insurer files

Employer files, completing Parts I and II

Not applicable

Employer files, completing Parts I, II and III

Small Employers Small employers that are fully insured have no filing requirements. Health insurance providers and carriers will file Form 1095-B with the IRS and provide a copy of the form to the identified responsible individual. Small employers that are self-insured must provide information statements to the IRS, reporting individuals covered by minimum essential coverage during a calendar year. Form 1095-B, Health Coverage, and Form 1094-B, Transmittal of Health Coverage Information Returns, report the required information to the IRS. These statements will report a taxpayer is not liable for the individual shared responsibility payment if he or she is covered by minimum essential coverage. The 1095-B must be transmitted to the IRS using Form 1094-B. If filed on paper, Forms 1095-B and 1094-B must

Self-insured

Penalties Penalties may be assessed for failure to timely file Forms 1095-C or 1095-B with the IRS, failure to include all required information or including incorrect information on the return. The penalty for 2015 information returns filed in 2016 ranges from $50 to $250 for each incorrect return sent to the IRS. James A. Lawrence, CPA, is a partner at Traphagen Financial Group. He is a member of the New Jersey Society of CPAs Federal Taxation and State Taxation interest groups. Contact him at jim@tfgllc.com.

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TECH

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Should You Upgrade to Windows 10? B Y A N THONY MONG E LUZO, PC S

s downloading Windows 10 to replace your existing program a no-brainer? Generally, the most important aspects of a program are usability and comfort level. If Windows 8 (or 7) is your current program, and you are comfortable with it because its performance provides everything you need (plus you’ve already invested in the learning curve), you might not want to bother with an upgrade. In short, does your current program do the job? If it does, you might not have a compelling reason to upgrade, especially given the inevitable frustration with learning something new. So why upgrade to Windows 10? Virtually every platform continues to tinker with improvements to make the end result easier, more efficient and sometimes even more elegant. (In computer lingo we call it “robust.”)

However, some features of Windows 10 make it worth exploring.

Start Me Up Loved by many, the start button— which took a vacation with Windows 8—is back. It’s amazing how many people hated its absence, which is living proof that not all decisions are logical. A nice feature is that the new start button can be customized. For example, you can resize or rearrange the tabs. This allows you to create the order that it appears on screen.

Where Are You? Windows 10 has improved search functionality, such as being able to talk or type your instructions. It will offer tips and suggestions, but the great new feature is typing in “My stuff.” It will deliver files, apps, settings, photos,

music and other relevant information from your PC and OneDrive (Microsoft’s cloud storage system). This is a terrific feature if you keep forgetting where you place files.

You’re Hot In other words, you have a Connectify Hotspot with Windows 10. This allows you to share your Internet connection with other computers, mobile devices and your friends. The idea is to have easy access anywhere, any time. It is best described as making “all of your devices happy;” it certainly makes them a family. This new version has improved user interface, and navigation is easier.

Cortana the Cool Cortana, introduced in Windows 8.1, is a digital personal assistant and knowledge navigator, competing

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“The Windows Support cycle, which includes improvements and security updates, enables Windows 10 to give you a longer support time.” directly with Apple’s Siri and Google’s Now. Its improvement includes learning about your behavior and preferences. Some have described it as a super Siri. Advantages are that its functionality improves the more you use it, and it gets to “know” you.

Need Support? The Windows Support cycle, which includes improvements and security updates, enables Windows 10 to give you a longer support time—five more years than Windows 7 and two years over Windows 8. Remember, there is obsolescence built into all Microsoft operating systems. Vista anyone?

Another factor to consider is that, for now, many Windows users can upgrade for free. That’s a powerful incentive if you know you’re going to upgrade in the future. The costs to upgrade vary, somewhere between $99 and $199. Don’t forget my common-sense rule about upgrades. Allow yourself some time to manage the learning curve, which often means doing it over a weekend. Learning the nuances when you’re not rushed or stressed will make the transition much easier. And spend an hour or two playing with the new system—kicking the tires. It’s surprising how much you’ll learn.

And for the Pro…

The Xbox Factor For gamers, the Xbox experience is far more dynamic with Windows 10. You could install the Xbox app in Windows 8, but many described it as listless. As one expert noted, Windows 10 now offers a “unified view of your games, the activity of your friends and your own gaming practices.”

Recommendation to Clients Oddly enough, given Windows 10’s improvements, we were actually circumspect about suggesting it to our clients. I wanted Microsoft to first fix any initial bugs, which usually takes three to six months, before we recommend it to clients. Because Windows 10 was released in July 2015, we are now out of the initial danger zone, so we will start recommending it to clients.

If there isn’t enough to consider between Windows 10 or your earlier version, there is still more room to maneuver if you decide to take the plunge. Do you download Windows 10 Home or Windows Pro? A basic truism: Windows 10 Home (basic version) is just fine for most users. For example, packed into Windows 10 Home are the all-new Virtual Desktops option and SNAP, which allows up to four apps on the screen. You also pick up Continuum, which allows you to switch from desktop mode to tablet mode, quickly and easily. And then there’s Microsoft’s Edge, the new browser that replaces the old Internet Explorer that was introduced with Windows 95 almost two decades ago. This is a more streamlined browser that should

make for smoother Web browsing. To quote Microsoft, “It lets you write on webpages, read without distractions and do more online. It’s a gas and you’ll enjoy it.” Finally, but very important, is Windows Update, which is part of the Home edition. This grabs automatic updates and you get the bonus of security features such as Microsoft Passport. So why download or possibly pay more for Windows 10 Pro? As noted, the home edition should provide what most people need. But if you want more muscle and security, then Pro is very powerful. For example, Pro (which has all of the Home features) also offers “connectivity and privacy” tools that include Domain Join, Group Policy Management, Bitlocker, Remote Desktop and other features. If you’re connecting to a network, you will need the Pro version. Bitlocker is an example. It is a powerful encryption tool that gives you the option of encrypting your external hard drive (especially important if you back up to a hard drive in addition to the cloud. Many businesses still do both). This is why the Pro version might be a better choice for power users and small and medium-sized businesses. Anthony Mongeluzo is the CEO and president of PCS. Contact him at anthony@helpmepcs.com or follow him on Twitter at @PCS_AnthonyM.

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SOCIETY

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CPE Offerings and Events Upcoming Education Foundation Events Date 1/21

Event/Code Getting Ready for Busy Season: A Guide to New Forms, Filing Issues and Other Critical Developments (E1601401)

Location

CPE Credit

Roseland

8/TX

1/21

New Jersey State Tax Update (E1601064)

Webcast

1/TX

1/27

New Jersey Law and Ethics (E1601364)

Webcast

4/PE

2/18

Federal Tax Update (Corporate) (E1602034)

Webcast

1/TX

2/24

New Jersey Law and Ethics (E1602094)

Webcast

4/PE

3/16

New Jersey Law and Ethics (E1603054)

Webcast

4/PE

3/17

Regulatory Update (State Board, Legislation) (E1603024)

Webcast

1/SK

Upcoming Chapter Events Date

Chapter

Event/Code

Location

CPE Credit

1/21

Morris/Sussex

Social Security (E1601199)

Mount Olive

4/CS

1/25

Southwest Jersey

Philadelphia Tax (E1601189)

Voorhees

2/TX

2/9

Bergen

Tax Season Hot Issues (E1602059)

Paramus

4/TX

KEY AA – Accounting & Auditing MT – Management

CS – Consulting Services PD – Personal Development SK – Specialized Knowledge

EC – Economics PE – Professional Ethics TX – Taxation

MC – Multiple Categories PM – Practice Management

Please note: Events are subject to change. For a full listing of all NJCPA events, visit njcpa.org/catalog.

Save – Once on PerkSpot, browse discounts by selecting a category from the drop-down menu. Peruse the “Everyday Savings” and “Popular Savings” sections for an array of in-demand deals from across different categories. Never miss an offer with PerkSpot’s intelligent search function. Your search results are conveniently broken into sections of relevant brands, offers and categories. Discover discounts in your neighborhood with PerkSpot’s streamlined Local Map. Filter your map results by categories: restaurants, health and fitness, retail and more. Get Deals – Opt into PerkSpot’s weekly email to receive a selection of discounts. Each week’s email features both new and popular deals, as well as seasonal and thematic offerings. Request a Merchant – Don’t see the retailer or product you want? Request a merchant through your PerkSpot account. Watch for new, featured discounts in PerkSpot’s weekly email. Follow – Follow PerkSpot on Facebook, Twitter, Instagram and LinkedIn. Visit the NJCPA Member Benefits Marketplace at njcpa.org/ marketplace to learn more about PerkSpot and other valuable member benefits.

New PerkSpot Benefit Brings Members Benefits Discountson to Member You The New Jersey Society of CPAs welcomes PerkSpot as a new member benefit. PerkSpot, brought to you by Mercer Marketplace, is a one-stop outlet for exclusive discounts at leading national and local merchants. PerkSpot is completely free and optimized for use on any device. Enjoy access to thousands of daily discounts in dozens of categories. Register – Sign up at njcpa.perkspot.com/login. Follow simple instructions to create an account with your personal or work email address. Opt into the weekly PerkSpot email to find out about new offers and special promotions.

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Get Involved The Power of Partnerships

and other key groups. “These relationships spur on conversation at interest group meetings and have been a core part of the interest group’s value,” says Mark J. Philips, CPA, the group’s leader. “The State Taxation Interest Group provides members extended access to the NJ Division of Taxation.” This year, the group wrote a white paper in coordination with the NJ Chamber of Commerce and the NJ Business and Industry Association. “These white papers enhance our relationships with other organizations and position us as thought leaders with the administration in Trenton,” Philips adds. He’s right. Collaborative groups are seen as leaders according to the Amherst H. Wilder Foundation’s Collaboration Handbook. Most importantly, Philips and vice-leader Jodi D. Kleuskens, CPA, know their efforts help improve the state’s business climate.

In her book, A Simpler Way, author Margaret Wheatley explains, “Who we become together will always be different than who we were alone. Our range of creative expression increases as we join with others. New relationships create new capacities.” Below are a few real-life examples of how New Jersey Society of CPAs’ interest group leaders take this idea seriously, partnering not only with the usual suspects, but with others where shared resources and vision lead to shared rewards.

Nonprofit Interest Group Nonprofit Interest Group leader Amy Y. Both, CPA, and her vice-leader Catherine Syslo, CPA, connected the group with New Jersey’s Center for Nonprofit Corporations, Inc. The center provides advocacy, resources, training and information to strengthen nonprofits and help them thrive. The Nonprofit Interest Group provides interpretations of new standards through education and roundtables and is a resource for accounting and auditing issues affecting nonprofit organizations. The center wants to improve government grant and contracting procedures. With the common goal of supporting New Jersey’s nonprofits, both groups share a stake in the process and the outcome. “I didn’t know this group existed,” noted Both. “And now we’re supporting their recent white paper and working to strengthen the relationship through frequent communication.” It’s a great new contact for all of the interest group members who either work for or represent nonprofit organizations.

Governmental Accounting & Auditing Interest Group The Governmental Accounting & Auditing Interest Group holds its meetings at the NJ Association of School Business Officials. Group leader David J. Gannon, CPA, and vice-leader Carol A. McAllister, CPA, have had their group meet with the NJ Department of Education about changes to the NJDOE Audit Program. They’ve also met with the Municipal Court Services Division and various NJ school boards. The interest group has also been connecting with the NJ Division of Pensions over a new GASB standard related to pension plans. “Having in-person meetings with these divisions is a focal point for us,” says Gannon. But there’s more. Gannon says that because of these relationships, firms are sending more CPAs to their meetings. And while other CPAs are like-minded, everyone knows they’re also competitors. “I get a lot out of having professional interaction with my ‘competitors’ and having respectful relationships,” Gannon notes.

State Taxation Interest Group The State Taxation Interest Group meets regularly and has had speakers from the NJ Division of Taxation, the NJ Department of Labor

Collaboration Interest group members are able to recognize their similarities and differences and answer the question: “What do we want to create?” Peter Senge, author of The Fifth Discipline, says this is when the magic happens: “A shared vision is a vision that many people are truly committed to, because it reflects their own personal vision. When people are truly committed, things get done.” Margaret Gallagher, CPA, Accounting and Auditing Standards Interest Group leader, says NJCPA interest groups are “helping members meet today’s professional challenges in a very cost-effective and collaborative atmosphere.” Gallagher’s vice-leader, Elizabeth Harper, CPA, agrees: “There’s a strong camaraderie among the group members to share knowledge and discuss practice issues. There’s an openness to feel free to ask your peers questions.” June Toth, CPA, Committee Operations Committee vice-chair, says, “We all learn from each other. They really aren’t my competitors, they’re my collaborators.” Collaboration simply saves time. “I don’t always have the resources to research things,” adds Both. “But I can reach out to my NJCPA connections and get answers quickly.”

Kudos Career Guides! Carolyn Havlick, CPA (left), and Shauna J. Thomas, CPA (right), from Bowman and Company, LLP, along with Tamara L. Nelson, CPA, and Tankanari Tanahahi, CPA, from WithumSmith+Brown, served as Career Guides at NJCPA Career Night 2015. Career Guides greeted and networked with attendees and gave helpful insights into their first jobs, interview experiences and Society involvement.

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New Jersey young CPAs help sort food at the Community FoodBank of New Jersey in Hillside during the fall food drive sponsored by the NJCPA Young CPAs Council. Members of the New Jersey Society of CPAs (NJCPA) collected more than 3,000 pounds of food during its sixth annual September-to-November food drive that benefited the Community FoodBank of New Jersey. Donors brought nonperishable food items to NJCPA headquarters in Roseland as well as to 16 accounting firms across New Jersey. The NJCPA thanks the Society members, firms, chapters and committees that gave so generously to help those in need.

Sharing Is Caring

year—serving in six leadership positions. “The best thing about NJCPA involvement is the camaraderie and friendships,” comments KennedyRyu. “We’re different people in different circumstances, but we make things happen.”

Dave Brock, in his book Creating Effective and Strategic Partnerships, explains why these partnerships and relationships are successful. Effective partnerships are a combination of these factors: Shared Risk – Each partner has a fair and appropriate share of the risk. Shared Resources – Each partner commits to an appropriate proportion of the resources, whether they are capital, people, knowledge, technology or other resources. Shared Rewards – Each partner shares appropriately in the rewards; the partners work together to create mutual wins. Shared Vision – The partners share a common view of the objectives, results and outcomes. They share a common vision of the importance of the relationship. Shared Values – They share common value systems and complementary cultures, which is the bedrock of the relationship, providing the means, motivation and commitment to solve problems and grow the relationship.

Get Involved Now

NJCPA volunteer opportunities are available throughout the year. Let us know how you’d like to be involved at njcpa.org/getinvolved. Here is an activity that needs your support now: Be a Mentor and Make a Difference – CPA members under age 36 are needed to be mentors for the 2016 NJCPA high school scholarship recipients to provide guidance throughout their college careers. Apply online by Monday, February 15, at njcpa.org/mentor. Contact Carolyn Hook at chook@njcpa.org or 973-226-4494 x221.

Leading Leads to More Leading In organizations, real power and energy are generated through relationships. And the NJCPA is harnessing that power at Committee Operations Committee meetings. NJCPA interest group leaders and vice-leaders come together with a shared vision. They share tips, concerns, collaboration methods, professional updates and news. Chair Kelly Kennedy-Ryu, CPA, joined the Society in January 2004, joined her first interest group the next month and has been involved every

Jesse M. Herschbein, CPA, presents the NJCPA Pay It Forward program in November to students at Wallington High School on the benefits of pursuing an accounting career.

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SOCIETY

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NJ State Board of Accountancy Report Board’s e-Newsletter Edges Closer Newark (October 15) Committees Education – Committee Chair Ainsley Reynolds, CPA, mentioned that he had attended a New Jersey Society of CPAs’ accounting educators meeting. The discussion centered on the exposure draft of the proposed CPA Exam changes. The test would include more task-based simulations, rather than multiple choice questions. The goal is to test critical thinking versus memorization. Also discussed at the meeting were proposals to (1) add one hour to the BEC and one hour to the REG sections. (2) expand the window of taking the CPA Exam from 18 months to 24 months; (3) decrease the amount of black-out periods; (4) increase the amount of time for reporting grades; and (5) integrate Excel into the exam by 2018. If approved, the changes are scheduled to take effect in April 2017. The educators also suggested that the NJ State Board of Accountancy hold its meetings at various universities across the state in order to increase awareness of the board’s activities.

This may prove challenging as these meetings cannot be held in a “sponsored” space or where the host may have a stake in the proceedings. RMA – The Registered Municipal Accountants Exam is in the process of being written for 2015. The board approved the group of four test graders—accounting practitioners who have prior experience grading RMA exams. Peer Review Oversight – The committee will discuss the proper timeline for filing an annual exemption for the upcoming year. Communications – Committee Chair John F. Dailey Jr., CPA, inquired about the required protocol in obtaining approvals for a proposed board e-newsletter. The newsletter—which hopes to launch in the first half of 2016—will be produced by the National Association of State Boards of Accountancy, with oversight from the NJ State Board. Dailey also asked how long the approval process will take. The e-newsletter will first be reviewed by the board’s executive director Kaled Madin, then reviewed by the NJ Division of Consumer Affairs and finally back to Madin for a final review. The amount of time needed for this

process is to be determined. Dailey asked Madin to consider in the approval process that much of the information will be time-sensitive.

Public NJCPA President Frank R. Boutillette, CPA, mentioned that the Society participated in a NJ Chamber of Commerce Business Summit in September. The summit included more than 500 legislators, heads of business and other stakeholders. The four key issues discussed were transportation and infrastructure, regulations and mandates, workforce readiness and taxes. A steering committee will be formed to provide leadership and develop a mission statement for the group. The Society is positioning to be on this steering committee. In September, NJCPA and American Institute of CPAs representatives met with Verizon’s accounting and finance staff to provide them a professional issues update and to promote the CPA credential and CGMA designation. Finally, the Society would like the board to consider a previous recommendation that it conduct periodic audits of NJ Law and Ethics providers.

When it is time to transition out of your practice you want to do it right. Accounting Practice Sales is the largest facilitator in North America for selling accounting and tax practices. We provide a free estimate of your firm’s value, market extensively, assist in negotiations and find you the right situation. We understand your concerns and respect your confidentiality. Contact us today so your last decision will be your best. Bradley K. Holmes, CPA Toll Free: 800.397.0249 www.AccountingPracticeSales.com bradley@apsleader.com

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CLASSIFIEDS Mergers/Acquisitions Seize a merger/acquisition opportunity with benefits for you. Tired of dealing with issues of running a firm? We are looking for firms ranging from $300,000 to $5,000,000 eager to combine forces as we continue to grow across northern NJ, Westchester and the Hudson Valley region. Goldstein Lieberman & Company is ideally situated to service all types of industries. Visit glcpas.com; email me, Phillip Goldstein, CPA, managing partner, philg@glcpas.com; or call 800-839-5767 to have a confidential conversation. Thinking of selling your practice? Accounting Practice Sales is the leading marketer of accounting and tax practices in North America. We have qualified buyers waiting and the experience to help you find the right fit for your firm and negotiate the best deal possible. For information about our risk-free and confidential services, call Bradley Holmes at 800-397-0249, or email bradley@apsleader.com. Buyers see listings and register for free email notifications at accountingpracticesales.com. Union County, peer-reviewed CPA firm grossing approximately $500K. Retirement-minded owner plus two part-time CPAs and one part-time administrator. Interested in merger with three- to four-year transition and buyout. Practice is profitable, high-quality tax and accounting oriented. Please respond to njcpa645@gmail.com.

Essex County CPA looking toward retirement; gross $300K. Looking for CPA to take over practice. Having a small existing client base and a strong tax background are desirable. File No. 1248

Prime building on Route 17, Paramus. 1,000 square-feet available in CPA office. Includes shared conference room. Contact George Allen 201-262-7878.

Traphagen & Traphagen CPAs, a well-established firm in Bergen County with diverse client base and credentialed support staff is seeking small firms and sole practitioners for acquisition or merger. We are looking for firms ranging in size from $300K to $700K. This is an opportunity to align with a quality firm, while continuing to provide your clients with exceptional service. To confidentially discuss this opportunity, please email us at carolynn@tfgllc.com.

Share 1,122 sf office, Columbia Turnpike, Florham Park, with CPA and consultant. Corner office, reception area with shared conference and file room. Call 973-377-3722.

Classified Advertising Replies to ads with file numbers should be sent to: File______________________

Morris Merker and Company, LLC, a firm in Passaic County, is seeking to acquire/merge with retirement-minded CPA practitioners. Reply in confidence to jpetrella@mmccpanj.com.

Real Estate

Class A office building located on Route 208, Fair Lawn, share 3,000 square-feet office space with two other CPA firms. Two private offices and shared conference room available. Call Bruce Kaminer at 201-794-6400 or Pat Merrit at 201-796-6400.

New Jersey CPA Classifieds 425 Eagle Rock Avenue, Suite 100 Roseland, NJ 07068-1723 To see additional classified listings or to place an ad, visit njcpa.org/classifieds.

ADVERTISERS INDEX Accounting Practice Sales accountingpracticesales.com

Artha Systems LLC arthasystems.com

Rutgers University rutgers.edu

3, C4

March/April – Coming Attractions

Fraud 2.0 • Why Is Fraud Still an Issue? • The CPA’s Emerging Role in Fraud Protection Magazine of the

New Jersey Society of Certified Public Accountants

March • April 2016

• Elder Financial Abuse • Interview IRS Office of Criminal Investigation

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YOUNG

professionals

Soft Skills: Your Professional Edge B Y K ATH ERINE E. ZECH , C PA, O ’ C O NNO R DAVI E S, LLP

fter hours of continuing education and andyears yearsof of on-the-job on-the-job training, training, I’m rather confident in my technical skills and abilities. As a young professional looking to advance her career, I understand that I also need to master soft skills like leadership and networking. One area of concern I have as a young CPA in public accounting is bringing in new clients and generating business. With that in mind, I was excited to attend the 2015 American Institute of CPAs E.D.G.E. Conference in San Antonio as a representative of the NJCPA Young CPAs Council. I met colleagues from all across the country, learned new ways of communicating and managing effectively, and enjoyed the famous River Walk and some delicious Tex-Mex cuisine. One of the most informative sessions I attended detailed how to obtain new business without feeling like a used-car salesman.

Selling Versus Networking The outdated sales pitch focuses on the short term, utilizing a what’s-in-it-forme approach. People often hand out and collect as many business cards as possible, rather than focus on people who can expand their networks in a positive way. Young professionals should utilize their burgeoning networking skills; these skills should generally focus on the long term and helping others. Make it your goal to establish and cultivate relationships with a large cross-section of people, and act as a useful link between them. By getting to know others personally and professionally, you can provide solutions without necessarily expecting something in return. It’s usually more effective to get people to talk about themselves and their needs (soft sell), rather than monopolizing the conversation and ramming talking points down peoples’ throats on how

you have the best product or service in existence (hard sell).

Making Your Own Rain Everyone knows those natural rainmakers who effortlessly network and bring in a lot of new business. There are many things you can do to tap into your inner rainmaker. Meet informally with regular clients to get to know them personally and gain additional insight into their businesses and industries. Build your self-confidence and your network by presenting to a local Rotary Club, bar association or chamber of commerce. Contact your trade publications or local newspaper and offer to write articles that will benefit their readers. Start you own blog. It can be related to work or a personal pursuit that interests you, be it sports, gardening, food or something else. Volunteer for a nonprofit that you’re passionate about. Speaking, writing and volunteering have tremendous incremental value when building your network.

Working Your Age While being part of the Millennial Generation sometimes has its negative connotations, 75 to 80 percent of practicing CPAs are eligible to retire in the next five to 10 years. And the reality is firms need to figure out where Millennials fit in succession plans, and those Millennials will need to step up. Clients want to know that their needs will be met, even if they outlast senior partners’ tenure at firms. These partners need to have young professionals be active participants. For example, bring emerging professionals to client meetings, and review clients’ tax returns and financial statements with them. The earlier you build relationships with existing clients, the more quickly you’ll be able

to sell them additional services as well as handle referral business from clients.

Building Your Personal Brand Now is the time for you to figure out what you’re passionate about and learn how to articulate that to others in your network. Remember: People do business with people they like and they trust. Sure, it takes time. It’s taken me a few years to build my network and be in a position to be a valuable resource to others. So, whether it’s attending the E.D.G.E. Conference or writing this article, I’m constantly sharpening my skills so I’ll be ready to close that next deal with ease. Katherine E. Zech, CPA, is an accounting supervisor at O’Connor Davies, LLP. She is a member of the New Jersey Society of CPAs Young CPAs Council, on the Union County Chapter Board and an NJCPA scholarship recipient mentor. Contact her at kzech@odpkf.com.

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LEGISLATIVE

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NJCPA Plays Prominent Role with New Business Coalition B Y JEF FREY T. KAS ZERM AN, NJ C PA NJ C PA GOVE R NM E N T R E L AT I O N S D I R E C TO R

ore than 500 business and government leaders from across the state flocked to the Borgata Hotel in Atlantic City in September for the first-of-its-kind New Jersey Business Summit. Organized by the NJ Chamber of Commerce, 40 organizations, including the New Jersey Society of CPAs, participated. The summit was designed to identify the most pressing legislative/regulatory changes needed in order to boost the state’s economy. The event also focused on how the various business groups could work more closely to develop a common agenda and establish stronger relations with lawmakers from both parties. There was general agreement that the different organizations need to collaborate more closely to generate bipartisan support for targeted, high-priority issues fundamental to improving the state’s economy and generating more jobs. A guiding theme was that participants should look ahead on how to build bipartisan support for their agenda and not waste time

assigning blame to any particular lawmakers or political party. To help address those aforementioned high-priority issues, the summit featured expert panels that addressed four key areas: (1) transportation/infrastructure; (2) workforce readiness; (3) taxes; and (4) regulations/mandates. NJCPA CEO Ralph Thomas, CGMA, moderated the panel on taxes. Linda Bowden, New Jersey regional president of PNC Bank, kicked off the tax panel discussion stating that “New Jersey has the worst death taxes in the nation.” She added that “New Jerseyans are fleeing to other states to avoid these taxes, noting there were 87,630 fewer individual tax returns in 2010 versus 2009.” This hurts the state via lost revenues and declining economic activity. Other panelists remarked on how the state’s burdensome tax structure is chasing small and mediumsized businesses out of the state or discouraging businesses outside of NJ from coming here. Ted Zangari, chair of the real estate department at Sills, Cummis & Gross, delivered some good news/bad news when it comes to businesses paying a premium to operate in New Jersey and the Northeast: “The good news is that most businesses are willing to pay a little more for being here. The bad news is, with the exception of New York City, the surrounding states and area are less expensive in which to operate.” Joe McNamara, director of the New Jersey Laborers’ NJCPA CEO Ralph Thomas moderates the tax panel at the Employers Cooperation and inaugural New Jersey Business Summit. Education Trust and vice-

chair of the Economic Development Authority, stressed that incentives can help level the playing field when it comes to the cost of doing businesses in the Garden State. “Without those incentives, we’re not even in the game,” noted McNamara. Some of the tax reform recommendations released by the panel were to raise the estate tax exemption or eliminate the inheritance tax, help small businesses with capital gains losses when they are in the startup and growing phases, provide tax deductions for charitable contributions, raise the retirement income exclusion for individuals, and provide tax relief/ incentives for small and medium-sized businesses. The summit concluded with a discussion panel comprised of the legislative leaders from both parties. All four leaders expressed support for the event’s goals and agreed to meet with representatives from the summit on a regular basis. Since then, leaders from the groups have met with all of the legislative leaders to continue the positive dialogue started at the summit. NJCPA leaders participated in all four of those meetings. The summit was followed by a smaller meeting in October with leaders from the 40 participating organizations where they agreed to form a coalition to hone a legislative/regulatory agenda and strengthen relations with state lawmakers. NJCPA CEO Ralph Thomas, CGMA, was chosen to sit on a leadership committee that will work on organizing and defining the coalition’s mission, which is seen as a long-term project that should span several years. To learn more about the summit and see the final recommendations made by all four panels, visit njchamber.com/ index.php/2015-business-summit.

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MEMBER

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Take Me to the River BY DAVID PLASKOW, NJCPA COMMUNIC ATIONS MANAGER

“M

y first class at college was a three-hour lecture in organic chemistry,” says Jonathan E. Perelman, CPA. “I knew then that I wouldn’t follow in my father’s footsteps and become a physician.” But Perelman felt that he could get a good job, not to mention a wealth of experience, by having an accounting background. So, he did just that, graduating in 1976 with a B.S. from the University of Pennsylvania’s Wharton School and later from Seton Hall with an M.S. in taxation. After getting that wealth of experience by working at a series of accounting firms, Perelman put out his own shingle in 1981. “We were a general practice that specialized in health care,” comments Perelman. In 2002, Perelman’s practice merged with Friedman LLP, where today he is a partner who specializes in physician and dental practices. “As the son of a doctor and a teacher, my parents always stressed an education,” notes Perelman. “In obtaining the CPA designation, I wanted to get a significant credential and stand out from the crowd.” Another way to stand out was to join the New Jersey Society of CPAs. “The Society’s CPE programs are excellent, and its events are a fun way to catch up with colleagues in a relaxing atmosphere,” says Perelman, one of the founding members of the NJCPA young CPAs group. And when he’s not advising clients on the financial intricacies of the Affordable Care Act? Perelman likes to put the top down on his sport car and road-trip taking in the fall foliage. He’s also a diehard NY Giants fan who enjoys hiking and photography, and has

a comprehensive stamp collection—his oldest stamp dating back to the mid1800s. “In 2001, I founded the NJ/ Wharton Business School Alumni Association,” says this 2014 NJ CPAList winner. “With about 300 members, we’ve had Chris Christie, Meredith Vieira and prominent CFOs as speakers. The alumni association experience has been very gratifying.” But what he really falls for hook, line and sinker is fishing. “When I was a kid, we’d go to the Catskills every year. And while my dad golfed, my brothers and I would fish on the streams running through the golf course,” recalls Perelman. Jump ahead to 2004 when Perelman’s brother, Robert, took him fly fishing on the Upper Delaware River and he got “hooked” so to speak. “Fly fishing is much different than rod-and-reel fishing,” notes Perelman. “You generally go for trout, which is one of the most challenging fish to catch. There’s also a lot more technique involved with fly fishing: how to cast, where to cast in the river and what type of fly to use. And it’s more about catch-and-release for the next person.” Perelman has fished in some exotic and not-so-exotic locations. “I’ve fished in Wyoming, Idaho, Montana, the United Kingdom and right here in New Jersey’s Raritan River,” says the

Chatham resident. He’s also joined fly fishing clubs in New Jersey and Pennsylvania. He calls the South Fork River in Idaho the most beautiful, with bald eagles flying around and the fish literally jumping out of the water; the Upper Delaware in New York the most challenging; and the Garden State’s Raritan River the site of his largest catch, a 26-inch rainbow trout. Perelman also notes the time he was fishing in Pennsylvania and had a close encounter with a black bear. Perelman has even gotten his son, Max, into fishing. While Max isn’t at fly-fishing status just yet, he’s holding his own with the rod and reel. “He just caught a three-foot pike in the Passaic River,” comments Perelman. “Believe it or not, thanks to some conservation efforts, the Passaic River is slowly becoming a mecca for pike fishing.” Fishing has become so enjoyable for Perelman, he’s put away his golf clubs. “Every September, me, my brothers and some friends get on a plane and go somewhere to fish,” notes Perelman. “We fish, have a few beers, meet some interesting people on the river and bond over the experience.” “Breathing the clean air and seeing such scenic landscapes, fly fishing is such a peaceful, relaxing experience,” says Perelman. “It’s the perfect antidote for a stressful tax season.”

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