Today's CPA May/June 2014 by The Warren Group

Today’sCPA MAY/JUNE 2014

T E X AS S O C IET Y OF

C ERT I F I ED PU BL IC AC C OU NTANT S

S ’ A P TSC -2014 2013 Pension Sharing and QDROs Going Green is Doing Well … Does Research Show it Pays to Tell?

Winstead, PC v. Combs Strikes Down Comptroller Rule Disallowing Deductions of Employee Benefits Simplifying the Annual Impairment Tests

r a e Y in w e i v e R

Also: Demographic Reality vs. Political Expediency

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CHAIRMAN William Hornberger, CPA

EXECUTIVE DIRECTOR/CEO John Sharbaugh, CAE

EDITORIAL BOARD CHAIRMAN

Contents 22

MAY/JUNE 2014

VOLUME 41, NUMBER 6

Winford Paschall, CPA

Staff MANAGING EDITOR DeLynn Deakins ddeakins@tscpa.net 972-687-8550 800-428-0272, ext. 250

12 34

TECHNICAL EDITOR C. William Thomas, CPA, Ph.D. Bill_Thomas@baylor.edu

COLUMN EDITORS Greta P. Hicks, CPA Mano Mahadeva, CPA, MBA James F. Reeves, CPA C. William (Bill) Thomas, CPA, Ph.D.

WEB EDITOR Wayne Hardin whardin@tscpa.net

CONTRIBUTORS

cover story

Ali Allie; Melinda Bentley; Rosa Castillo; Jerry Cross, CPA; Anne Davis, ABC; Avery Elander; Donna Fritz; Wayne Hardin; Chrissy Jones, AICPA; Rhonda Ledbetter; Craig Nauta; Judy Neathery; Catherine Raffetto; Katey Selph; Rori Shaw; Patty Wyatt

22 TSCPA’s 2013-2014 Year in Review

DIRECTOR, MARKETING & COMMUNICATIONS Janet Overton

26 An Update on Today’s CPA

Design/Production/Advertising

society features

The Warren Group thewarrengroup.com custompubs@thewarrengroup.com

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

Editorial Board Arthur Agulnek, CPA-Dallas; Kristan Allen, CPA-Houston; James Danford, CPA-Fort Worth; Melissa Frazier, CPA-Houston; Greta Hicks, CPA-Houston; Baria Jaroudi, CPA-Houston; Tony Katz, CPA-Dallas; Jeffrey Liggitt, CPA-Dallas; Mano Mahadeva, CPA-Dallas; Alyssa Martin; CPA-Dallas; Dawne Meijer, CPA-Houston; Winford Paschall, CPA-Fort Worth; Marshall Pitman, CPA-San Antonio; Mattie Porter, CPA-Houston; Kamala Raghavan, CPA-Houston; James Reeves, CPA-Fort Worth; Barbara Scofield, CPA-Permian Basin; Brinn Serbanic, CPA-Central Texas. © 2014, Texas Society of CPAs. The opinions expressed herein are those of the authors and are not necessarily those of the Texas Society of CPAs. Today’s CPA (ISSN 00889-4337) is published bimonthly by the Texas Society of Certified Public Accountants; 14651 Dallas Parkway, Suite 700; Dallas, TX 75254-7408. Member subscription rate is $3 per year (included in membership dues); nonmember subscription rate is $28 per year. Single issue rate is $5. Periodical POSTAGE PAID at Dallas, TX and additional mailing offices. POSTMASTER: Send address changes to: Today’s CPA; 14651 Dallas Parkway, Suite 700; Dallas, TX 75254-7408.

38 Simplifying the Annual Impairment Tests

columns 5 Chairman’s Message

14 Spotlight on CPAs

Full Circle – New TSCPA Auditor is a Past Society Scholarship Recipient

20 Capitol Interest

Demographic Reality vs. Political Expediency

technical articles 27 Pension Sharing and QDROs 30 Going Green is Doing Well … Does Research Show it Pays to Tell? 34 Winstead, PC v. Combs Strikes Down Comptroller Rule Disallowing Deductions of Employee Benefits

Closing Out the 2013-2014 Year

6 Tax Topics

Oil and Gas Royalty Owners’ Tax Issues

7 Business Perspectives

A Peek Around the Bend

8 Accounting and Auditing

FASB Clarifies Definition of Public Business Entity

10 Emerging Issues Bitcoin: A Primer for CPAs

12 Chapters

Diamond Jubilees

departments 16 Take Note 46 Classifieds

Today’sCPA MAY/JUNE 2014

OF TEX AS SO CIET Y

AC C OUNTAN T S CERTIFIE D PUBLIC

PA’S TSC -2014 2013 QDROs Pension Sharing and Well … Going Green is Doing it Does Research Show Pays to Tell? Strikes Winstead, PC v. Combs Rule Down Comptroller of Disallowing Deductions Employee Benefits Simplifying the Annual Impairment Tests

See the digital version of

Yeairn w Revie

Also: Demographic Reality vs. Political

Today’s CPA online at tscpa.org.

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Chairman’s Message By William H. Hornberger, CPA | TSCPA Chairman

Closing Out the 2013-2014 Year Editor’s Note: In the final Today’s CPA issue of TSCPA’s fiscal year, Chairman William Hornberger, CPA-Dallas, provides a recap of 2013-2014. As I reflect back on the year, it has been my honor and privilege to serve as your TSCPA chairman. One of my goals for 2013-2014 was to reach out to all parts of the state and meet members throughout Texas. I traveled extensively in our vast state – from El Paso to the Valley, from Dallas to Corpus Christi, and many places in between. It was amazing to see the commitment that CPAs share, serving in leadership roles for their employers, their professional organizations and in their communities. It also inspired me to see the dedication of the young CPAs entering the workforce and coming up in the profession. They have a distinct desire to make the profession better and build something greater than themselves. I know that the future is in good hands. Together, we achieved a number of goals in 2013-2014, including development of a new strategic plan that will serve as a blueprint for the organization during the next three years. Input was gathered from leaders, volunteers, staff and members at large to create the new plan. In December, the Strategic Planning Committee and Executive Board met for a strategic planning retreat that culminated in a draft of the new plan that was presented to the Executive Board for approval at the end of April. Since recruitment and retention efforts are so vital in keeping membership numbers solid and enabling the Society to speak with a powerful voice, TSCPA and the chapters worked on a year-long campaign. It was centered on a theme that CPAs share a common

responsibility to protect the certificate they worked so hard to earn. One of the significant professional issues of the year was the progress made for private company financial reporting. In 2012, the Financial Accounting Foundation (FAF) Board of Trustees established the Private Company Council (PCC) to determine accounting standards for private (non-public) companies. TSCPA member Billy Atkinson, CPA-Houston, chairs the PCC. I know that the PCC moved quickly to recommend alternatives to simplify accounting for most private companies. You can read more about the PCC’s activities on their website at www.fasb.org/pcc. Another significant issue was implementation of health care regulations associated with the Patient Protection and Affordable Care Act (PPACA). TSCPA’s continuing professional education (CPE) programs covered topics related to the act. Keep in mind that no matter which area of accounting practice you’re in, you’ll find CPE programs that meet your needs. It’s incredible to see what TSCPA’s CPE department does to keep members up to date. There’s a wide variety of topics and formats offered, including live conferences and seminars, webcasts, webinars, on demand

and more. Be sure to check out the extensive course catalog. It’s available online in the CPE area of the website at tscpa.org. TSCPA’s legislative team works hard to protect the CPA certificate in Texas. This year, attention was focused on the elections, since the state Legislature was not in session in 2014. The Society’s regulatory and political advocacy activities ensure that TSCPA remains an effective advocate for the profession. For more details about TSCPA’s programs and activities this year, I hope you’ll read the cover article, “TSCPA’s 2013-2014 Year in Review,” in this Today’s CPA magazine. Early in my career, I became involved with this great organization, and it’s been one of the best experiences of my life. As your chairman, I’ve enjoyed the opportunities I’ve had to travel around to different parts of the state to meet and talk with TSCPA members and leaders. I wanted to ensure that our professional organization was providing you with the tools you need to be a successful leader both personally and professionally. I believe that by keeping TSCPA strong for the future, we can all continue to serve our employers and communities with excellence. ■

Willie Hornberger can be contacted at whornberger@jw.com.

Today’sCPA

| MAY/JUNE 2014

Tax Topics By Greta Hicks, CPA | Column Editor

Oil and Gas Royalty Owners’ Tax Issues With the recent oil and gas drilling boom and new pipelines crisscrossing the farm and ranch land of Texas, some of us may need an update on basic oil and gas taxation for royalty owners and landowners. Those CPAs who are in the tax business for an extended period of time may be operating on old law, and newer tax preparers may not have been exposed to the unique tax situations for this client base. Let’s review and see what’s old and what’s new. The first money a royalty owner receives is a lease sign-on bonus. The Form 1099 that comes has the amount in the “rental” box, which means that the lease bonus is reported on Schedule E as rental income with no depletion. Percentage depletion is taken against gross income from the property. IRS definition: “Gross income from the property does not include lease bonuses, advance royalties, or other amounts payable without regard to production from the property.” The royalty owner may have incurred legal, clerical, copy and postage expenses, but no percentage depletion. If there is a producing well, the royalty owner will be asked to sign a division order and will receive a percentage of the production sold out of the well(s). A check may arrive monthly, quarterly or annually based on the amount of production. The check will be a net check, and there will be an accounting for the “severance taxes” paid to the state of Texas. At the end of the year, a Form 1099 will arrive with the gross royalties earned in the “royalty” box. On the income tax return, report the gross royalty income on Schedule E and deduct the year’s severance taxes as an expense. Most royalty owners qualify for percent depletion allowable at 15 percent of gross oil royalties. Gas royalties vary; see IRS Publication 535. Other types of

expenses will be various county and school district property taxes assessed on the value of the oil still in the ground, the reserves. These property taxes are deductible along with any other types of expenses incurred, such as legal, clerical, copy or postage expenses. If no well has been drilled within the lease period, usually three years, the oil company may pay delay rentals for the right to drill at a later date. The amount will be in the 1099 “rental” box and no depletion is allowed, but there may be legal and other expenses in negotiating the delay rental amount. Many royalty owners are also landowners, and the oil company and/ or pipeline company will negotiate the amount of damages paid to the landowner for well sites, roads and/or pipeline right of ways. The damages may result in income, a reduction of all or part of the basis of the property, or both. There are two types of damages: permanent damages and crop damages. Below is an example of tax treatment of easements and right of ways. Example: Sam granted a right of way for a gas pipeline through his property for $10,000. Only a specific part of his farmland was affected. He reserved the right to continue farming the surface land after the pipe was laid. Treat the payment for the right of way in one of the following ways.

If the payment is less than the basis properly allocated to the part of the land affected by the right of way, reduce the basis by $10,000. If the payment is equal to or more than the basis of the affected part of the land, reduce the basis to zero and the rest, if any, is gain from a sale. The gain is reported on Form 4797 and is treated as Sec. 1231 gain if the land was held for more than one year. If construction of the pipeline damaged growing crops and a settlement of $250 (for example) was received later for this damage, the $250 is income and is included on Schedule F as income. Crop damages do not affect the basis of the land. See IRS Pub 225, Farmer’s Tax Guide. The above is an over-simplified discussion. For more in-depth coverage on this subject, check the resources below before making your final decision on tax treatment of oil and gas transactions. Resources available at www.irs.gov: • IRS Publication 535 • IRS Publication 225 • Internal Revenue Manual (IRM) 4.41.1, Oil and Gas Handbook • Petroleum Industry Overview Series, Complete Version, LMSB-41208-056, Date: December 2008 • Petroleum Industry Overview Series, Alternative Issue Resolution Considerations & Industry Resources, LMSB-4-1208-056, Date: December 2008 ■

Greta Hicks, CPA, is a consultant on IRS problems, seminar discussion leader, author of continuing education courses and web content provider. She can be reached at gretahickscpa@yahoo.com or www.gretahicks.com.

Today’sCPA

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Business Perspectives By Mano Mahadeva, CPA, MBA | Column Editor

A Peek Around the Bend Forecasting plays a critical role in our lives. Much of our personal and business lives rely on forecasts. Pollen counts, rain, hurricanes, lending or borrowing money, capital spending, hiring personnel – all these activities are based on predictions about a condition or situation at a future date. Although many events that may affect us are unpredictable, credible forecasts can be used to guide our decisionmaking, help exploit trends and give us a competitive edge. For a business, true insight is knowing what is around the next bend. Knowledge of what is ahead helps prepare a business for any type of future economic condition and toward long-term profitability. Confronted with issues critical to our competitive future, we have to find better ways to deal with novel and fast-changing environments so that we can take meaningful action today, to prepare ourselves for the future. A typical approach to forecasting supposes the forecaster has all the time in the world to gather and evaluate information. A state of certainty and continuity in assumptions is expected. A conservative historical basis is used as a starting point. Participants work in silos with no communication between them. The process is more politically driven through a non-antagonistic form. A call for greater accuracy drives an incredibly time consuming, complicated model with many inputs. The forecaster becomes a passive receiver in the process, operating purely as a processor of information. A mood of optimism prevails, which leads to a sense of followership in one’s beliefs, with the outcome. Behavioral economists would argue that, during this process, there may be limited considerations given to individual psychological predispositions, namely emotional biases, and to any mechanical or physical limitations of individuals, such as cognitive errors, resulting in biases that impact the outcome of forecasts. These biases contribute to many irrational behaviors by people – euphoria, fear, herding, panic, optimism, overconfidence, loss aversion and cognitive dissonance,

to name a few – which makes forecasting a more difficult task. Pure quantitative models do not provide answers, as shown by the fiscal unraveling in 2008, as patterns rapidly change. And yearly budgets cause distractions from the long term, as we focus in excess on the very short term, as it is incentive driven. A forecast is a systematic and disciplined application of common sense, oriented to planned action. It is based on a set of assumptions and estimates, which provides us with scenarios of opportunities and risks looming ahead so that we can manage and influence our future. However, these assumptions and estimates are influenced by the collective behaviors of people, the physical world and complex organizations. Therefore, there is a great likelihood that our outcomes will be different from what we expected, due to errors or variations, as a result of misjudgments. In today’s rapidly changing environment, businesses must have processes that are nimble and adaptable to accommodate these changes in a timely manner. To make these changes, the forecasting and strategy-setting capabilities have to be integrated and aligned across the business. A business intelligence dashboard can help by measuring and monitoring key metrics. Sound decision-making is enhanced by focusing on critical metrics that “drive the business.” Clear communication to, and feedback from, all employees across a business can provide insight into the habits of consumers. Input from the various internal departments, bankers, lenders, suppliers and vendors can help offer diverse

opinions and varied expertise. A good working knowledge of the economy and its indicators, the industry and the local markets is a must. How reliable have your forecasts been over the past few cycles? Have they been consistently poor with significant variations from actual results or within expectations? If not, what worked and what did not? Have you tried a build-up approach, or a simultaneous “top-down” and “bottomup” process? Take a look at the historical economics of the business over a longer term. Some factors don’t change over the longer term, and you may want to identify these. Variances are created by unplanned factors, so it is critical that we identify precursors to significant events and that we separate a “signal” from a “noise,” where a signal indicates an impending change. Yes, forecasting is an ongoing, iterative process, adjusted to accommodate changes or contingencies in the economic environment. That the future is uncertain is a certainty. And that uncertain future keeps changing. To prepare for our future, we need to work with a spirit of teamwork, communicating and coordinating activities and information across a business in a timely manner. We have to be able to look at any collective forecast honestly and discredit it upon completion to improve upon it. We all have to be active, sophisticated participants in the process and not simply passive receivers and processors of data. We have to put our hearts into the process; after all, we own it! Sound preparation, agile planning and flexible decision-making leads to good decisions and to very productive outcomes. ■

Mano Mahadeva, CPA, is Chief Financial Officer with Solis Health in Addison, Texas. He serves on the Editorial Board for TSCPA. Mahadeva can be reached at mmahadeva@solishealth.com.

Today’sCPA

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

FASB Clarifies Definition of Public Business Entity Until recently, there was no distinction between financial accounting and reporting standards for private and public companies under U.S. generally accepted accounting principles (GAAP). We either followed GAAP issued by the Financial Accounting Standards Board (FASB) or adopted another comprehensive basis of accounting (OCBOA). In 2012, however, the Financial Accounting Foundation (FAF) established the Private Company Council (PCC) to establish accounting standards for private (non-public) companies. In 2013, FASB and the PCC jointly issued the Private Company Decision-Making Framework: A Guide for Evaluating Financial Accounting and Reporting for Private Companies, under which private entities are enabled to elect simplified reporting alternatives not available to public entities. Which entities are eligible for simplified reporting? To answer this question, FASB has issued Accounting Standards Update (ASU) No. 2013-12, Definition of a Public Business Entity: An Addition to the Master Glossary. The primary purpose of both the framework and the ASU is to assist FASB and the PCC in better serving the needs of the users and preparers of private company financial statements. The Private Company Decision-Making Framework, informally known as the Guide, will help private companies cut costs and reduce the complexity of preparing financial statements. The definition provided in ASU 2013-12 helps determine the Guide’s scope and addresses any previous inconsistencies between multiple definitions of public and nonpublic entities within U.S. GAAP. THE GUIDE The goal of the Guide is to assist regulators in dealing with the issue of who is eligible to elect reporting alternatives and when those entities are able to do so, and to ensure that the quality of information in financial statements of private entities remains high. The Guide will be used in addition to the existing FASB conceptual framework when making relevant decisions

and evaluations for private companies. Five major factors that differentiate the reporting considerations of private and public companies are discussed in the Guide. The factors include: (a) the number of primary financial statement users and their access to management; (b) the investment strategies of primary users; (c) the ownership and capital structures; (d) accounting resources; and (e) the manner in which preparers learn about new financial reporting guidance. In addition to clarifying the different considerations of the two types of entities, the Guide explains five areas, or modules, where the guidance for public and private companies might be different in the financial reporting aspect. Those five modules include recognition and measurement, disclosures, display (presentation), effective dates, and transition method. The five factors and the five modules will be a huge help to FASB and the PCC when providing guidance to private companies. THE DEFINITION FASB, the PCC, and the Emerging Issues Task Force (EITF) will use the updated standard and definition when both determining the scope of the Guide and identifying what types of companies are included or excluded from that scope. ASU 2013-12 provides a single definition of a public business entity for use in U.S. GAAP. A private entity is then defined by exclusion as an entity that does not meet the definition of a public entity.

The final ASU states that a public business entity is one that is not an employee benefit plan or a not-for-profit entity. In addition, it must meet one of the following criteria: (a) it is required to submit financial statements to the U.S. Securities and Exchange Commission (SEC) or voluntarily files statements with the agency; (b) it is required by the Securities Exchange Act of 1934 to provide financial statements to a regulatory agency other than the SEC; (c) it is required to provide financial statements to a regulatory agency in preparation for a sale of securities; (d) it has issued or acted as a conduit for a state or local government issuing securities for sale on an exchange or an over-the-counter market; or (e) it has one or more securities that are not covered by contractual restrictions and it is legally required to prepare financial statements in accordance with U.S. GAAP that are made available to the public periodically. The Guide and ASU 2013-12 were both issued on Dec. 23, 2013. An effective date of the definition is not provided in the ASU, but an entity needs to use the definition in the future when the adoption of the first ASU that uses the term “public business entity” occurs. Any private entity that is considering becoming a public entity needs to take a careful look at the new criteria and guidelines to make the transition correctly. For more information about the Guide and ASU 2013-12, log on to the FASB website (www.fasb.org). ■

C. William Thomas, CPA, Ph.D., is the KPMG/Thomas L. Holton Chair and the J.E. Bush Professor of Accounting in the Hankamer School of Business at Baylor University in Waco. Thomas can be reached at Bill_Thomans@baylor.edu..

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Emerging Issues By James F. Reeves, CPA | Column Editor

Bitcoin: A Primer for CPAs Hardly a day goes by that the business press doesn’t have a new twist or angle on bitcoin, the decentralized digital currency and payment system. Based on a peer-to-peer computer network that records all transactions in a public ledger, the privately issued digital currency exists only as a string of computer code that acts as real-world currency (bitcoins) used to pay for goods and services.

Third-party exchanges and ATMs allow bitcoin users to exchange their bitcoins into government-issued currencies, such as the United States dollar. Users send and receive bitcoins using digital wallet software accessible from any device with a web browser. Merchants have a financial incentive to adopt the virtual currency, because transaction fees are far lower than the 2 to 3 percent typically charged by credit card processors. Bitcoin has been around for about five years, and until recently was only a blip on most people’s radar (if that). I first became aware of bitcoin last year when a story broke in BNA’s Daily Tax Report about a Tennessee man who tried to extort $1 million from Mitt Romney for not releasing the former presidential candidate’s 2010 tax returns, which he claimed to have stolen from PwC’s internal network. The scheme, according to the Department of Justice, required Romney to deposit $1 million of bitcoin into a specific bitcoin account. Since bitcoin transactions can be anonymous, traceable only

to a bitcoin address that does not contain any personally identifiable information, the system has attracted the scrutiny of law enforcement and regulators concerned about everything from drug trafficking and money laundering to consumer protection, and tax compliance and evasion. Like other currencies, bitcoin can be traded electronically, and exchange rates relative to government-issued currencies have fluctuated wildly since its inception. This volatility has caused some to question whether it should be viewed as a commodity as opposed to a currency. Government officials in Japan, home to a high-profile failure of a bitcoin exchange earlier this year, have defined bitcoin as a commodity, similar to gold, and not as a currency subject to banking laws and regulatory oversight. Banks in Japan are prohibited from handling bitcoins, and security firms are barred from brokering bitcoin trades. On the other hand, purchases made with bitcoin are subject to Japan’s consumption tax, and trading gains will be taxed, according to the Nikkei Asian Review. In the United States, bitcoin has become a regulatory hot potato. While for the most part operating in a regulatory vacuum, bitcoin has attracted the attention of a number of federal agencies trying to figure out their particular level of responsibility. The Treasury Department’s Financial Crimes Enforcement Network issued guidance in 2013 subjecting virtual currency exchangers and administrators to register and comply with provisions of the Bank Secrecy Act, but partially reversed course earlier this year, recognizing that the technology is evolving and people are using bitcoin for legitimate business and investment purposes. The Commodity Futures Trading Commission, which regulates swaps and futures, is currently looking into whether bitcoin falls under its purview as a futures contract, a position supported in a recent Goldman Sachs report. On the flip side, the Securities and Exchange Commission is evaluating whether bitcoin qualifies as a security subject to its jurisdiction. The Federal Trade Commission and the Consumer Financial Protection Bureau each have a mission to protect consumers and have held staff briefings recently. Federal Reserve Chairwoman Janet Yellen told the Senate Banking Committee the Fed does not have the authority to regulate bitcoin, because it operates outside the banking

James F. Reeves is a CPA in Fort Worth. Contact him at jimreeves@charter.net, or visit his blog at http://jamesfreeves.blogspot.com.

Today’sCPA

| MAY/JUNE 2014

system. And the General Accounting Office recently identified various tax compliance risks associated with virtual currencies, including underreporting, mischaracterization, and evasion, and recommended the Internal Revenue Service (IRS) find ways to provide information to taxpayers on the basic reporting requirements for virtual currencies, a conclusion echoed by the National Taxpayer Advocate earlier this year. In response, the IRS issued Notice 2014-21 that clarified for federal tax purposes that virtual currency such as bitcoin is treated as property and treated under general tax principles applicable to property transactions. Thus, if bitcoin is held for investment, any gains or losses are capital gains or losses. A taxpayer who receives bitcoin as payment for goods or services must include its fair market value, measured in United States dollars, in gross income as of the date received, and that amount becomes its basis. Further, bitcoin will not be treated as a currency that can generate foreign currency gain or loss. Meanwhile, the New York State Department of Financial Services recently announced that in light of the demonstrated need for stronger oversight of virtual currency firms, it will consider formal proposals and applications in connection with the establishment of regulated virtual currency exchanges operating in New York. It expects to propose a regulatory

framework in the second quarter of this year, and following a comment period, it expects to issue the first licenses. Despite the failure of certain bitcoin exchanges and the association with illicit activities, the overall volume of usage is growing exponentially, in the United States and around the globe. The National Taxpayer Advocate reported bitcoin usage has increased to over 3,000 transactions per hour, and that the market value of bitcoins in circulation was $5.8 billion as of the end of March. A website called coinmap.org lists merchants that accept payment by bitcoin, and while the number is small (about 100 in Texas), the media focus is undoubtedly driving interest. The Wall Street Journal recently published a bitcoin user guide, along with a story about the NBA’s Sacramento Kings, which has decided to allow fans to purchase everything from tickets and jerseys to hot dogs and beer with bitcoin. Whether bitcoin will flame out as a fad or eventually compete with PayPal and Mastercard is open to speculation. Today, it’s still on the fringe, but with the level of media attention and venture capital investment it has been attracting, bitcoin may be moving toward a tipping point. Paradoxically, the regulatory infrastructure it set out to disrupt may, in fact, be what provides the credibility that gives buyers and sellers the comfort they need to make it work. ■

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Chapters By Rhonda Ledbetter | TSCPA Chapter Relations Representative

Diamond Jubilees

Two TSCPA chapters – Austin and San Antonio – recently celebrated their 75th anniversary. AUSTIN A reception was held at the Headliners Club. Approximately 150 members and special guests were there. Attendees included several chapter scholarship recipients, as the event benefited the Austin CPA Chapter Scholarship Fund. There were proclamations from the City of Austin, as well as the Texas Legislature. The mayor proclaimed Jan. 16, 2014, as CPA Day in Austin. Two videos were shown. One was The Accidental Accountant, featuring the oldest living female member of the chapter, Barbara DeBusk, CPA. At the age of 96, she is going strong and is a fascinating individual. The video included interviews with several longtime chapter leaders who provided insight into why they are CPAs, why they joined the Society, what motivated them in their work as accountants, and their respective career journeys. Another highlight of the evening was a video with photos from various events over the years and headshots of members. The chapter was first organized in 1939 as the Austin-Waco Chapter of the Texas Society of CPAs. Eight members attended the first chapter meeting. In 1940, a separate group was formed and Howard Cox, CPA, became the first president of the new Austin Chapter. The mission of the chapter was – and continues to be – to advance the standards of the profession and its members, to promote the interest of certified public accountants, to cultivate cooperation and interaction amongst members and other organizations, and to provide resources to enhance and support opportunities for members to prosper in an ever-changing environment. In the 1954-55 fiscal year, the chapter published its first newsletter. College scholarships were awarded for the first time during 1965-66. The first woman to serve as president of the chapter was Nancy Boyd, CPA, in 1975-76. The chapter’s first office space was established in 1980. In 1954-55, there were 50 members; by 1960, the number had doubled to 100. It grew to 500 by 1981-82 and doubled again 12

to 1,000 by 1984-85. Today, the chapter has more than 2,100 members. To prepare for the anniversary event, a task force worked for 18 months to plan the festivities and secure more than $30,000 in sponsorship support. SAN ANTONIO Almost 300 people – including 19 past presidents – braved icy roads to attend the chapter’s celebration luncheon on Jan. 28, 2014. Held at The Club at Sonterra, the luncheon included an electronic look back at members’ activities through 50 years of photographs, recognition of the 12 graduates of the Chapter’s Institute for Developing Excellence in Accounting Leadership (iDEAL) program, election of officers and directors, a vote on bylaws changes, a food drive for the San Antonio Food Bank, and a keynote speech by TSCPA Chairman Willie Hornberger, CPA-Dallas. Those in attendance were also treated to a champagne toast, medals featuring the chapter’s 75th anniversary logo and cupcakes festooned with 75th anniversary flags. Specially designed flower arrangements were available for sale following the luncheon, with proceeds going to the chapter’s Academic Matching Gifts and Scholarship Fund. Among the fun facts included in the PowerPoint photo album were the following: • The chapter officially came into existence on Nov. 16, 1939, with 23 members; W.T. Chumney, CPA, was elected as the first president. • In 1942, to encourage attendance at meetings, the chapter charged 50 cents for each missed meeting. • At the end of 1948, there were 58 members. • The first chapter office was opened in 1975 in the Bank of San Antonio Building, and Patty Burkett was hired as the part-time executive director. • In 1975-76, average attendance at the six chapter meetings was 161. Today’sCPA

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• By June 1976, the chapter had 545 members. • Amy O’Neil, CPA, became the first woman chapter president in 1991-92. • In 1993, the Board of Directors voted to stop serving alcohol at regular chapter luncheons. • The chapter office was relocated to its current location in 1994. • Today, there are almost 2,500 chapter members. Two past presidents obtained contributions from 23 others to help underwrite the luncheon. The event steering committee also obtained donations from companies and

individuals, at five sponsorship levels. Additional activities and observances are planned throughout 2014. One is a series of Throwback Thursday photos from the archives on the chapter’s Facebook page, in hopes that members can identify some of the people in the long-ago images. Prizes are being awarded to participants. YOUR CHAPTER Be part of something historic by actively participating in your chapter. Contact information is in the Chapters section of the TSCPA website at tscpa.org. ■

The American Institute of CPAs Benevolent Fund was established in 1933 by AICPA members to assist other members through temporary periods of financial difficulty. When our members face difficult circumstances that are beyond their financial means, the Fund is here to help. Financial assistance grants are provided on a case-by-case basis, depending on financial need and circumstances surrounding that need. Some examples of the types of assistance available are temporary living expenses and temporary medical expenses. One-time emergency grants also are available to help with natural disasters and other unexpected events. If you need assistance, simply visit the Benevolent Fund web page on aicpa.org and follow the instructions to apply. You may also contact the Benevolent Fund administrator via phone at 866.527.2228 or email at Benevolent_Fund@aicpa.org.

The Benevolent Fund is a 501(c)(3) organization.

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If you wish to make a charitable gift to the Benevolent Fund, visit the web page on aicpa.org.

8/19/13 3:12 PM

Spotlight on CPAs By Anne McDonald Davis, ABC

Full Circle

New TSCPA Auditor is a Past Society Scholarship Recipient As a scuba enthusiast who explores the deep blue with her husband and two daughters, Kim Crawford, CPA-Fort Worth, knows the rule about diving with a partner. When she recently signed on as the new auditor for TSCPA, she suddenly recalled a time when she found a different kind of partner on the eve of taking a different kind of plunge.

As an upper classman at the University of Texas at Arlington (UTA), Crawford was enjoying her accounting classes and the scholarship that was funding her undergraduate studies; however, in order to continue on to become a CPA, she had to complete that fifth year, what is now known as the 150-hour requirement. “I got married halfway through college to my high school sweetheart,” explains Kim Crawford, Crawford. “And CPA-Fort Worth we were facing tuition for my grad school that was almost double. As we were figuring how we were going to pay for that, one of my professors recommended me for a TSCPA scholarship. It made such a big difference to us.” A native of Arlington from age two, Crawford grew up in a world governed by education and related opportunities. Her father was an engineering professor at UTA and her mother taught high school math. 14

She says: “Math always came easy to me, too, and I knew I probably had a career related to that … but even with a family full of engineers, I didn’t really want to go that route. Especially since I’d always been attracted to the business world, how business worked. I liked reading the newspaper to see who owned what company!” With the encouragement of a friend, taking one high school accounting class was all it took to propel Crawford toward her future career. She has never regretted her choice and encourages other students to consider accounting. “I want to sell the profession,” she enthuses. “For one thing, we have weathered the recent economic ups and downs well – not everyone can say that. It can also be a great profession when you have a family. There are demanding times, but it’s still possible to manage my time, maintain flexibility, watch my daughters play.” Crawford encourages others who decide to pursue accounting as a career to “work at some kind of accounting job in some capacity,” as early as possible. She emphasizes: “Get exposure. You should ‘try it before you buy it’ to make sure that it’s for you and it’ll help you

once you graduate. Not only does it look good on your resume, it gives you early knowledge of what to expect. Also important – take the exam as soon as possible. That certification will open a lot of doors. The first question after they notice your accounting degree is: ‘Are you a CPA?’ It carries a lot of weight, importance and credibility.” As she recommends, Crawford worked at a local firm in Arlington during college, later at a real estate firm postgraduation. By the time Sutton Frost Cary came calling in the mid-90s, she knew she was “a perfect fit” for them and was a partner by 1999. Although she’s been a TSCPA member since licensing, Crawford feels the time has come to start giving more back to her profession. “I’m excited to be (TSCPA’s) new auditor; nonprofits are my specialty,” she nods. In the civic arena, Crawford more than “gives back.” Among her many volunteer activities are treasurer for the Rotary Club, board member for the YMCA and treasurer for the cheerleaders’ booster club. She also stays “very active” with their family church. As mentioned, her husband, Scott (a U.S. history teacher at Shackelford Junior High) and her daughters, Nicole and Sarah, have been scuba diving as a family since 2011. “Most of our vacations center around that; we’ve always been a beach family,” smiles Crawford. Out of the ocean, the girls have cheerleading, dance and choir. And the clan identifies as Texas Rangers fans. Crawford says that a favorite sentiment of hers is the Rotary motto of “Service above self.” She said: “I take that to heart. I’ve been extremely blessed, and love being able to give back and help others.” ■ Today’sCPA

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Take Note

Membership Recruitment Campaign: Focus on Continuing Professional Education The Responsibility of Individuals is TSCPA’s member recruitment and retention campaign. Recognizing that each Texas CPA is one of a kind and has a responsibility to stay current on all matters related to the profession, TSCPA strives to offer continuing professional education courses that meet these unique needs. One of the most valuable resources provided by TSCPA is a distinguished offering of continuing professional education, with courses that are pertinent for members in a

variety of accounting practice areas. You’re encouraged to invite your nonmember colleagues to join TSCPA so they can also have access to a lineup of comprehensive educational courses that offer an unmatched career booster for CPAs. To learn more, please visit the website at www.tscparoi.org.

Clarification for ‘The Potpourri of Professional Certifications in Accounting: What Do They Stand For’ Article In the March/April 2014 issue, Today’s CPA magazine included an article titled “The Potpourri of Professional Certifications in Accounting: What Do They Stand For.” Under the listing for IRS enrolled agent (EA), the article states that an applicant is required to have a CPA certificate in good standing. The applicants do not need to have a CPA certificate to become an IRS enrolled agent. However, they must obtain a Preparer Tax Identification Number (PTIN). Please note the correction for the article.

Available on the TSCPA Website: Digital Version of Today’s CPA Did you know that each issue of Today’s CPA magazine is available online? The magazine is posted in a digital format, as well as .PDF files that can be downloaded. Members can access Today’s CPA from the home page on tscpa.org. Click on the link on the right-hand side of the home page just below News Alerts and the CPE Catalog. Then click on “Members Only: See articles and archived issues of Today’s CPA” and log in as a member to read featured articles and recent issues. 16

TSCPA Hosts CGMA Events The Chartered Global Management Accountant (CGMA) designation was created by AICPA and the Chartered Institute of Management Accountants (CIMA) for CPAs who work in business, industry and government. In conjunction with business and industry month in April, TSCPA hosted CGMA events in some of the large chapters. AICPA’s Barry Payne and Ash Noah were the speakers for the events. Their topics included how finance is evolving around the world, how CFOs are preparing themselves and their teams to create sustainable value for their organizations, and information about the CGMA designation. The presentation was followed by an hour of networking and attendees received one hour of CPE credit. Events were held in Austin on April 9, Dallas on April 11, and Houston on April 29. Have you considered the CGMA designation? By applying now, you will be exempt from the need to take a strategic case study exam that will be required in 2015 for new applicants. When you become a CGMA designation holder, you’ll have access to an exclusive suite of benefits, including: • A library of 30 thought leadership papers, real-world case studies, reports, tools and checklists developed by AICPA and CIMA. • Online access to Harvard Manage Mentor by Harvard Business Review, including 44 modules that address project management, leadership, marketing and more (a $399 value). • A weekly CGMA electronic newsletter and the semiannual CGMA Magazine, with in-depth analyses of key business issues and best practices for management accountants. • An online social network of management accountants worldwide. • An additional $50 discount on select AICPA conferences (when combined with your member discount, a savings of up to $350) and additional discounts on select CPE products.

Take a look at the resources available at www.cgma.org to find out more. Today’sCPA

| MAY/JUNE 2014

Succession Planning Resource for Members: Practice Management Institute TSCPA offers the Practice Management Institute to assist members with their succession planning needs. It’s a resource available only for TSCPA members. Developed in partnership with the Succession Institute, LLC, the Practice Management Institute provides free material and content on succession planning. There are also CPE self-study course offerings available at a discounted rate for those who would like to receive CPE credit. To learn more, please go to the CPE section of the website at tscpa.org, scroll down and select Practice Management under Tools and Information.

TSCPA’s Young CPAs Conference is on June 6 in Fort Worth The seventh annual Young CPAs and Emerging Professionals Conference will be held on Friday, June 6, at the Hilton Fort Worth. This daylong event designed for young CPAs, CPA candidates and accounting students offers up to nine CPE credit hours and will feature sessions on fraud, the franchise tax, leadership, negotiation, and emerging issues in the accounting profession. Two panels of your peers will also discuss work/life balance, the variety of careers available within the profession, their paths to leadership and more. Attendees will have the opportunity to network. Two receptions are planned, one hosted by the Fort Worth Chapter’s New CPAs group on Thursday evening and a wrap-up reception following the conference Friday afternoon. For those of you who can’t attend in person, you can now participate from your own home or office via webcast! The webcast registration price remains the same: $50 for students, $95 for CPA and candidate members, and $125 for nonmember CPAs and candidates. For more information, please go to TSCPA’s website at tscpa.org and search on “Young CPA.”

Accountants Confidential Assistance Network The Accountants Confidential Assistance Network (ACAN) is a peer assistance program that supports Texas CPAs, CPA candidates and/or accounting students who are addressing alcohol, chemical dependency and/or mental health issues. ACAN provides a confidential phone line at 1-866-766-ACAN to help people who need assistance. You can also contact TSCPA’s Craig Nauta at cnauta@tscpa.net. To learn more about the program, please go to TSCPA’s website at tscpa. org. Under the Resource Center tab, scroll down and click on Accountants Confidential Assistance Network. ACAN Groups and Friends of Bill Wilson meet at the following times and locations. Please call 1-866-766-ACAN for more information. Austin Covenant Presbyterian Church 3003 Northland Drive, Austin, Texas Noon on the third Friday of the month Dallas Saint Michaels and All Angels Church 8011 Douglas Ave, Dallas, Texas 6:15 p.m. every Monday Houston at LCL/ACAN Wortham Tower Cafeteria 2727 Allen Parkway Monday mornings at 7:30 a.m. San Antonio Eileen Lanagan, P.C. 11950 Starcrest, Ste. 201, San Antonio, TX 78247 210-828-1467 I410 and Broadway 2nd Monday evening, 6 p.m.

Membership Suspensions The following people have had their membership in TSCPA suspended by the Executive Board for non-compliance with TSCPA Bylaws Article III, Section (4A)(1) for non-compliance with the Texas State Board of Public Accountancy’s continuing professional education requirements. Suspended for a period of three years – • Jan B. Dabney, CPA, Livingston; • Fred H. Falls, CPA, San Antonio; • Pamela K. Lawhon, CPA, Lake Jackson.

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Members Expelled The following people have had their membership in TSCPA expelled by the Executive Board under TSCPA Bylaws Article III, Section (4B). This action was a result of the revocation of their CPA certificate by the Texas State Board of Public Accountancy. • James W. Allen, San Antonio; • John B. Gersch Jr., Brenham.

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Notice of 2014 TSCPA Annual Meeting of Members and Board of Directors Meeting, June 27-28, 2014 The 2014 TSCPA Annual Meeting of Members and Board of Directors Meeting will be held June 27-28, 2014, at the Hilton Santa Fe Buffalo Thunder in Santa Fe, New Mexico. Situated under the picturesque Sangre de Cristo Mountains, Hilton Santa Fe Buffalo Thunder is only 15 minutes from downtown Santa Fe, and about an hour and 40 minutes from Albuquerque International Airport. Enjoy all the hotel facilities,

Hilton Santa Fe Buffalo Thunder 20 Buffalo Thunder Trail Santa Fe, NM 87506 Main: 1-800-HILTONS (1-800-445-8667) Internet Reservations Changes: 1-800-774-1500 Group Code: TSCPA Rates: $189 single or double; $209 triple; $229 quad Hotel Cut-off Date: May 29, 2014 (The room block may sell out before this date. Make your reservations early!) For more information and a schedule of events, please visit TSCPA’s website at tscpa.org. Under “About TSCPA,” click on Meetings/Calendar and then go to 2014 Annual Meeting of Members: June 26-28 at the Hilton Santa Fe Golf Resort and Spa; View preliminary information.

TSCPA Thanks 2013-2014 Student and Faculty Reps TSCPA would like to extend a special thanks to the 2013-2014 student and faculty representatives. Through the campus rep program, representatives strengthen TSCPA’s presence on Texas campuses by sharing information and learning more about what we can do to support them. The campus rep program also serves to promote student membership and gain valuable feedback from students. To learn more about the program, please go to the Students section of the website at tscpa.org. The following students and educators represented TSCPA well throughout the year. Faculty Reps Sheila Ammons, CPA - Austin Community College Dr. Carie Ford, CPA - Baylor University Anthony B. Ross Sr., CPA - Concordia University Debra L. Moore, CPA - Dallas Baptist University Michael R. Daub, CPA - Howard Payne University Gisele Moss, CPA - Lamar University Emily Bellamy, CPA - LeTourneau University Karen Russom, CPA - Lone Star College System Dr. Bob Thomas, CPA - Midwestern State University Michelle Avila, CPA - Our Lady of the Lake University Suzanne N. Cory, Ph.D. - St. Mary’s University Lisa Hull - Tarleton State University - Waco Campus Mike Shaub, CPA - Texas A&M University Ray Pfeiffer - Texas Christian University Kim Webb, CPA - Texas Wesleyan University Veronda Willis, CPA - The University of Texas at Tyler Rob Walsh, CPA - University of Dallas Susan Rhame, CPA - University of Dallas Robert H. Barr Jr., CPA - University of Houston Mattie C. Porter, CPA - University of Houston-Clear Lake Tiffany DeLuze - University of Mary Hardin-Baylor Allison McLeod - University of North Texas Art Agulnek, CPA - University of Texas at Dallas Linda R. Vaello, CPA - University of Texas at San Antonio Rod Elrod, CPA - University of the Incarnate Word Ramon Fernandez, CPA - University of St. Thomas 18

Student Reps Christopher Capehart - Austin Community College Jonathan Webster - Lamar University Michele Adriana Garcia - LeTourneau University Cynthia Yerby - Midwestern State University Rogelio Cuevas - Our Lady of the Lake University Virginia Kapchinski - Schreiner University Renee Townsend - St. Edwards University Marissa Mata - Texas A&M International University Carmen Osier - Texas A&M University-Corpus Christi Luis Martinez - Texas A&M University-San Antonio Maigon O’Reilly - Texas Lutheran University Faith Otieno - Texas Southern University Samuel Fowler - The University of Texas at Tyler Karen Taylor - University of Houston-Clear Lake Jennifer DePierri - University of St. Thomas-Houston Ahmad Abdallah - University of Texas at Dallas Nathan Hawks - University of Texas at Dallas Amy Janke - University of Texas at San Antonio Tyne Cox - University of Texas at San Antonio Jesse Vick - University of Texas of the Permian Basin Jennifer Heimer - University of the Incarnate Word

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1/30/12 11:09 AM

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

Demographic Reality vs. Political Expediency Beware! It’s soapbox time. The primary elections are behind us, the run-offs are here and the general election is yet to come. Today, I’m sharing my political campaign frustrations. I hope these opinions are informed, but they are opinions. A congressman once told me that Congress rarely acts unless there is a burning platform. The failure of politicians to look long term is the source of interminable ills suffered by our society. At the federal level, burgeoning budget deficits (the feds can’t even agree on a short-term budget), a lack of sound energy policy (or any energy policy) and the inability to reach agreement on almost anything meaningful are prime examples. When the feds do act, they don’t resolve problems; they just create unending bureaucracies that produce little and impede much. Texas is not yet the mess we see in Washington, D.C., but the political rhetoric seen in the primary and run-off elections is troubling. Texas appears to be falling into an election routine where there is a certain mantra required of all politicians, and that mantra has very little to do with the long-term problems facing the state. Here’s an example. DEMOGRAPHIC REALITY Rep. Dan Branch is running for attorney general. In all of his television ads, he ends the ad by saying, “Texas is an exceptional place. As attorney general, I’ll fight to keep it that way.” As does the other attorney general candidate and most of the candidates running for other statewide offices, Branch majors on fighting Obamacare, protecting our borders, and other subjects to prove he is a “true conservative.” (Conservative isn’t conservative enough anymore in Texas.) What none of the political ads mention is that Texas won’t be such an exceptional place in the future if all we worry about is abortions, definition of marriage, Obamacare, border security and guns. Texas is headed for tough times, despite successfully dealing with all these diehard conservative issues. It’s all in the demographics. I’ve heard Steve Murdock, former state demographer and current Rice University professor, talk about demographics in Texas on several occasions over the last 10 years and what those demographics mean for the future Texas economy. He has written a book, Changing Texas: Implications of Addressing or Ignoring the Texas Challenge, explaining his concerns. In Texas Monthly’s BurkaBlog, Brian D. Sweany writes about Murdoch’s book and cites just a few alarming statistics: • The average age of a non-Hispanic white woman in Texas is 42. The average age of a Hispanic woman in our state is 28. And that pretty much sums up the future of Texas. o In 2000, there were 120,382 more Anglo children than Hispanic children; in 2010, there were 995,116 more

Hispanic children than Anglo children. o Between the years 2000 and 2040, the increase in Anglo population is expected to be 3.9 percent. The increase in Hispanic population is expected to be 78.2 percent. • When Gov. Rick Perry took office, less than half of the state’s K-12 enrollment qualified for free or reduced lunches. Today, nearly 61 percent of our enrollment does, and that number increases each year. • If the current trend line continues, three out of 10 Texas workers will not have a high school diploma in the year 2040. • The average household income between the years 2000 and 2040 is expected to go down every decade, from $52,639 in 2010 to $47,883 in 2040. (Those numbers are not adjusted for inflation, so the actual dollar amount will be even worse.) That is the “Texas challenge.” Does it have to be this way? Murdoch’s premise is that Texas can do something about it, but we need to start now. We must better educate the Texas Hispanic population. If we do, the “Texas miracle” can continue. As Sweany says in his article, “The most important takeaway is that the changes in Texas’ population can either become a crippling problem or an unprecedented social and economic asset.” To do something about it means the politicians must look beyond the next election. It’s a worrisome thought at best, a prediction for decline at worst. POLITICAL EXPEDIENCY Election season is in full swing. Sometimes I think it brings out the worst in all of us. I have had two experiences in my life that seem relevant to all the campaign rhetoric that bombards us voters. The first happened when I was in college, working, selling sewing machines door-to-door to help support my wife and pay college expenses. To generate leads, we would advertise a used Singer sewing machine for a small price. It was a classic bait-andswitch ploy where the goal was to sell a much more expensive, new sewing machine to the unsuspecting customer. We almost always sold the new machine. In our training, we were told about every objection or question the potential customer might pose, and we were ready with a pat answer to all. I sold a lot of sewing machines. The second experience, years later, was to undergo media training. Media training is done to get you comfortable with all those terrible questions reporters might ask, to teach you to deal

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

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with embarrassing questions and most of all to teach you that you don’t have to answer the question posed by the reporter – you can just give your spiel, say what you want to say, regardless of the question. Politicians serve up numerous loss leaders; we call them campaign promises. They always have an answer to every potential question, and if they don’t, they just deliver their canned message instead of answering the question. It seems to me that Texas politicians have opened up a whole new political tactic, which complements all the others this election season. I call it, “Tell them what they want to hear.” Whether running for governor, land commissioner or state legislative office, all the candidates seem to be delivering the same message: President Barack Obama is ruining our life and I oppose him; I am more conservative than my opponent, even if the opponent looks like Attila the Hun; secure the borders; protect our right to bear arms; restore family values; embrace the right to life; and of course, create jobs! Video ad after video ad depicts candidates with their pickup truck, dog and gun, or alternatively with their family, dog and

anyone, but family values are not things that can be legislated; in fact, it’s an infringement on the voter’s liberty for legislators to try to tell them what their family values should be. (Sorry, now I’ve gone to meddlin’.) Politicians will respond to what voters demand. If voters want to hear more about the issues, ideas for improving our state, issues that might relate to the office being sought, they have to speak up! Voters must quit rewarding the politicians’ empty rhetoric and demand real information, real plans, real solutions. If a politician doesn’t have any ideas about how to solve problems facing the state, he/she won’t be any better than the one they replace. Politicians will tell us what we want to hear. It’s our job to make sure we tell them what it is we want to hear! STRAUS APPOINTS ROAD AND WATER COMMITTEES At least one politician realizes that roads and water are top priority issues for Texas. Fortunately, he is Speaker of the House. Speaker Joe Straus has appointed a Select Committee on Transportation Funding and four new water-related committees.

WHEN YOU WANT TO HELP PEOPLE, YOU TELL THEM THE TRUTH. WHEN YOU WANT TO HELP YOURSELF, YOU TELL THEM WHAT THEY WANT TO HEAR.” — Dr. Thomas Sowell Rose and Milton Friedman Senior Fellow The Hoover Institution Stanford University

gun, or maybe it’s their family, pickup truck and gun. Do these ads say anything about the issues relevant to the particular office being sought? Candidates must have a very low opinion of us voters. They seem to think all they have to do is spout some mantra that voters want to hear and they can win the election. The sad part is, maybe they’re right! As the campaigns continue to the general election, will the candidates have to say something meaningful? Will they have to actually offer some suggestions or solutions for all the issues facing Texans today? Not only are we not addressing the demographic realities, we don’t have enough water; we don’t have enough roads; our future electricity supply is in question; our property taxes are unreasonably high; too many Texans don’t have access to health care; some public school districts get much more money per pupil than others; university tuition has increased to the point where college debt may burden young Texans for the rest of their lives; and the list goes on and on. I’m not trying to minimize the issues like immigration, right to life, protecting our right to bear arms, family values and job creation, but are those the only big issues for Texans today? It seems to me that the other list, water, roads, etc., is equally pressing. Obama, guns and immigration are mostly national issues that most state politicians like to talk about, but practically speaking, can’t do much about. So why would we care if our land commissioner or state comptroller dislikes Obama, carries a gun or wants to secure the borders? And family values? I believe in family values as much as Today’sCPA

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Straus said: “Transportation is a top priority for the Texas House. This committee will take an extensive, objective look at the transportation solutions that best suit our people and our growing economy.” The new water committees are: • State Water Implementation Fund for Texas (SWIFT) Advisory Committee: The SWIFT advisory committee was established by the Legislature to oversee the Texas Water Development Board’s implementation of House Bill 4, which established the SWIFT account to pay for needed water supply and conservation projects across Texas. Texans voted last November to fund the account with $2 billion from the so-called rainy day fund. • Joint Interim Committee to Study Water Desalination: This committee is charged with examining the status of seawater and groundwater desalination in Texas, as well as determining ways that expanded use of desalinated water could help meet Texas’ needs. • Edwards Aquifer Legislative Oversight Committee: This committee oversees and reviews the activities of the Edwards Aquifer Authority. • Environmental Flows Advisory Group: The advisory group studies the policy implications of balancing demands on the state’s water supply with the need for adequate environmental flows for riparian lands, bays and estuaries. The Straus press release announcing the appointments said these committees will help the full House prepare to address road and water matters in the 2015 legislative session. It’s a start. ■ 21

Cover Article By DeLynn Deakins, Today’s CPA Managing Editor

TSCPA’S 2013-2014

Year in Review

As TSCPA closes out the fiscal year, we take a look at highlights of 2013-2014. TSCPA uses its strategic plan as the foundation for programs, initiatives and activities developed on behalf of members. The current plan began in the 2010-2011 year and covers a three-year period. The objectives are advocacy, professional competency, operational excellence, and recruitment and retention. The next few pages of Today’s CPA magazine will cover the work completed to help achieve the strategic plan objectives.

TSCPA’s 2013-2014 Chairman William Hornberger, CPA-Dallas

REGULATORY AND POLITICAL ADVOCACY EFFORTS TSCPA continued to be active in the political and regulatory process. Since the state Legislature was not in session in 2014, attention was focused on the 2014 elections. Texans will have a new governor, as well as a new state comptroller – two offices with direct relevance to TSCPA members. TSCPA’s CPA-Political Action Committee (CPA-PAC) is a vital part of TSCPA’s advocacy efforts, especially during election years. The CPA-PAC is a member-managed, member-driven and member-focused political action committee that helps ensure CPAs have a voice in Texas legislative and political affairs. The CPA-PAC is directed by the TSCPA PAC committee, whose volunteer members are appointed by the TSCPA chairman. The committee works closely with local chapters and their public affairs committees to determine which policymakers should receive contributions, and 75 percent of the contributions are allocated to local legislative candidates. To learn more about the CPA-PAC and make a donation, please visit TSCPA’s website at www.txcpapac.org. In the primary elections, the CPA-PAC supported a number of legislative candidates. In the state Senate races, the CPA-PAC supported seven candidates in contested races with five winners, one loss and one in a run-off. In the state House races, the CPAPAC supported 31 candidates in contested races; 22 candidates won, eight lost and one is in a run-off. The CPA-PAC will make local and statewide candidate support decisions in concert with local chapters for the general election after the run-off elections are complete. Today’sCPA

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TSCPA’s 2013-2014 Executive Board

It appears that all the CPA legislators will be returning to Austin for the 2015 legislative session, except for former Sen. Tommy Williams (R-The Woodlands) who resigned his Senate seat last December. Reps. John Otto (R-Dayton), Charles Perry (R-Lubbock) and Angie Chen Button (R-Garland) all defeated their primary opponents and have no Democratic opposition in the November general election. Rep. Scott Sanford (R-McKinney) had no primary opposition and has no general election opponent. Reps. Phil Stephenson (R-Wharton) and John Frullo (R-Lubbock) both face Democratic challengers in November, but are safe bets for reelection. All of these CPAs were supported by the CPA-PAC. With State Comptroller Susan Combs not running for re-election, CPAs in both public practice and private industry are interested in who will be her replacement. CPAs interact with the comptroller’s office on myriad state tax issues, and the comptroller’s opinions and rules affect all state taxpayers. TSCPA’s State Taxation Committee has been active in reviewing and commenting on proposed new rules from the state comptroller’s office throughout the year. Candidates running for state comptroller are Republican nominee Sen. Glenn Hegar and Democratic nominee Mike Collier, who is a CPA and TSCPA member. Hegar has a long history of serving in the House and Senate, and will still be a state senator if he loses the comptroller race. Collier is running for office for the first time after serving as a partner in an international accounting firm and as CFO of a private company serving the oil and gas industry. In September, TSCPA sent a letter to Texas Sen. John Cornyn to support mobile workforce legislation. In joining with other state CPA societies, TSCPA urged Cornyn, a member of the Senate Finance Committee, to cosponsor the Mobile Workforce State Income Tax Simplification Act, which was introduced by Senators Sherrod Brown of Ohio and John Thune of South Dakota. This bill would establish a uniform national standard governing the withholding of state income taxes for non-resident employees. Companion legislation in H.R. 1129, cosponsored by Texas Reps. Blake Farenthold (R-27) and Steve Stockman (R-36), is the same measure that passed the House last year, but stalled in the Senate. Also in September, TSCPA joined other state CPA societies with letters to lawmakers opposing a proposal in the House Ways and Means Committee’s small business tax reform discussion draft that limits the use of the cash method of accounting for non-natural Today’sCPA

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taxpayers. The proposal would effectively eliminate exceptions that currently exist for some partnerships and S corporations that are personal service companies (i.e., CPA firms, engineering firms) and farming businesses. It would require them to change to the accrual method of accounting if their average gross receipts exceed $10 million. AICPA issued a comprehensive letter in August to Ways and Means’ Chairman Dave Camp and Ranking Member Sander Levin. TSCPA members continue to serve on the Texas State Board of Public Accountancy (TSBPA). During the year, Governor Perry appointed TSCPA member Thomas G. Prothro, CPA-East Texas, as the presiding officer. Prothro has been a member of the board since 2009 and his current term expires in 2015. He followed another TSCPA member, Carlos Barrera, CPA-Rio Grande Valley. Barrera completed a two-year term as presiding officer and six years of service on the board. Other TSCPA members currently serving terms on the board include: J. Coalter Baker, CPA-Austin; John Broaddus, CPA-El Paso; Rocky Duckworth, CPA-Houston; Everett (Ray) Ferguson, CPA-Abilene; James C. Flagg, Ph.D. and CPA-Brazos Valley; Donna Hugly, CPA-Dallas; Robert M. McAdams, CPA-San Antonio; Maribess L. Miller, CPA-Dallas; and Steve D. Pena, CPA-Austin. TSCPA is active in recommending and supporting CPAs and TSCPA members for appointment to TSBPA by the governor. There are also 25 other TSCPA members who serve as volunteers on various board committees. TSCPA works cooperatively with TSBPA to ensure public protection and effective administration of the Public Accountancy Act. TSCPA’s Federal Tax Policy Committee (FTP) continued its work to serve as a voice to represent Texas CPAs to the U.S. Congress, Department of the Treasury and the Internal Revenue Service (IRS) on U.S. tax matters. The committee responds to actual and proposed federal tax legislation, regulations and administrative pronouncements. During the year, the committee sent comment letters on several issues to the IRS and members of Congress. For updates on their advocacy efforts, please see your weekly electronic Viewpoint newsletter and visit the Federal Tax Policy Blog on the TSCPA website. The objective of the Professional Standards Committee (PSC) continued on next page

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is to respond to exposure drafts issued by any accounting and auditing standard-setting body that has an impact on the practice of accountancy in Texas. During the year, the PSC submitted letters to the Financial Accounting Standards Board, the Private Company Council and the Public Company Accounting Oversight Board. The PSC also sent a letter jointly with the FTP committee to the AICPA Professional Ethics Executive Committee. To read the exposure drafts and letters of comment, please go to TSCPA’s website at tscpa.org. Under the Resource Center tab, scroll down to Member Communities, and select Professional Standards Committee. CONTINUING PROFESSIONAL EDUCATION In the area of continuing professional education, the TSCPA CPE Foundation, Inc. remained committed to offering a variety of course topics and formats, including live conferences and seminars, webcasts, webinars, on demand and more. There are hundreds of webcasts and webinars available, making it easier to stay up to date on accounting issues and current events affecting the profession. TSCPA’s conferences and clusters are held in locations around the state, and they bring state and national speakers to Texas who examine the latest issues, applications and trends. Two all-new conferences were added this year. The Business Valuation, Forensic and Litigation Services Conference was held in Houston. It offered two tracks and nine hours of CPE credit. Also new this year was the Accounting and Auditing Conference, held in Addison, which covered new accounting standards, an update on assurance services, compilation of financial statements, and other relevant topics. TSCPA added a new location for the Texas CPA Technology Conference. In addition to Dallas, members in the Houston area had the opportunity to participate in a series of conference sessions designed to equip them for success in today’s rapidly evolving technology and business landscapes. For the third year, the Texas School Districts Accounting and Auditing Conference was held live, as well as via webcast. More than 140 people took advantage of the online option and attended the conference through the webcast. The professional issues webcasts continued this year. Members can earn two CPE credit hours with these free, two-hour webcasts. Speakers included TSCPA Chairman William H. Hornberger, CPADallas; TSCPA Executive Director/CEO John Sharbaugh, CAE; and AICPA VP of External Relations and Management Accounting Ash Noah, CPA, CGMA. They discussed the top issues facing finance professionals, the Chartered Global Management Accountant (CGMA) designation, private company accounting standards, the activities of the Private Company Council, the AICPA Financial Reporting Framework for Small and Medium-Sized Enterprises, and details on other matters affecting CPAs. The next professional issues webcast is scheduled for the end of May. When you are making plans for your continuing education, you can count on TSCPA to provide CPE programs that are convenient for you and relevant to your area of practice. The extensive CPE catalog, available on the website at tscpa.org, delivers a wide range of topic offerings, scheduling flexibility and price levels that can 24

To recognize future leaders, the Rising Stars Program was continued.

accommodate your budget. To learn more and register online, visit the website or call the TSCPA staff for assistance at 800-428-0272 (972-687-8500 in Dallas). A FOCUS ON CURRENT AND FUTURE MEMBERS In the area of recruitment and retention, TSCPA developed a new campaign – the Responsibility of Individuals (ROI). The campaign debuted at the Annual Meeting of Members. The ROI campaign promotes members as being responsible for their profession and its values, and it was created to remind Texas CPAs of the significance of belonging to their professional community. People, businesses and legislators listen more to the collective voice of 27,000 than to your individual voice, and TSCPA is the most effective advocate for the CPA profession in Texas. As of April 1, 2014, 954 members had joined during the ROI campaign. The chapters participated by implementing recruitment and retention programs locally in their areas. To recognize future leaders of TSCPA and the accounting profession, the Rising Stars Program was continued. This program spotlights CPA members 40 years old and younger who have demonstrated exemplary leadership skills and active involvement in TSCPA, the profession and/or their communities. Nominations for the recognition were received from across Texas, and a task force of TSCPA Executive Board members served as the selection committee. After receiving over 40 nominations in 2012-2013, the task force selected 18 up and comers. They were honored at the 2013 Annual Meeting of Members and featured in the September/ October 2013 issue of Today’s CPA. Members in business and industry remained a focal point for TSCPA. The month of April was once again designated as business and industry month. A brochure was created and sent to all business and industry members promoting member value, resources and upcoming education. Other efforts included working with AICPA to host CPE programs about the value of the CGMA designation. The Society also hosted behind-the-scenes events for business and industry members. These events include presentations from financial professionals at the visited organizations. As of press time, behind-the-scenes tours were held in, or planned for, the following chapters: Houston, Austin, San Antonio and Southeast Texas. In the area of student membership, TSCPA has 1,869 student/ candidate members as of April 1, 2014. The Campus and Faculty Rep Programs remained active. Through these programs, TSCPA works with Texas students and educators to serve as a connection on campuses across the state. More information on the Campus and Faculty Rep Programs is available on TSCPA’s website at tscpa.org. The Accounting Career Education (ACE) program was also continued. Through this program, members are encouraged to share their knowledge about accounting careers with students. Today’sCPA

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Tools used include career guides, videos and lesson plans for educators. If you are interested in serving as an ACE program volunteer, please contact your chapter. The Society hosted a panel presentation for community college students in Houston. More than 140 students heard from Houston Chapter members about the value of becoming a CPA. ACTIVE IN SOCIAL MEDIA TSCPA is active in various social media outlets. On Facebook, the information is updated several times a week with helpful and informative notes. TSCPA’s community page can be found on the Society’s group page or by doing a search for Texas Society of CPAs at the top of your Facebook homepage. In addition to these efforts, several TSCPA chapters have their own Facebook pages. To reach CPAs in a more corporate/business setting, TSCPA created LinkedIn groups and subgroups for members to join. The groups are reviewed and updated to keep members informed of the latest news and upcoming activities. The Society’s Twitter page is reviewed daily for followers to receive updates on the latest industry news, stats, helpful tips and professional briefs. The Twitter handles are @TXCPAs, which is general news about all things TSCPA and accounting related, and @TXCPA2B, which provides TSCPA student info, exam information, and accounting news and updates. Members can also stay current on Society and accounting profession news through TSCPA’s blogs. The blogs include: • Executive Director/CEO John Sharbaugh at www.thesharblog.com; • Governmental Affairs at tscpa.typepad.com/my_weblog; • Federal Tax Policy Committee at tscpafederal.typepad.com/ blog; • Business and Industry blog at industryissues.wordpress. com; • TSCPA’s student minded blog written by accounting students at www.txcpa2b.com. For upcoming CPE conferences, TSCPA adds LinkedIn group pages and Twitter hashtags. Members who join the LinkedIn groups can learn additional details about the conferences and connect with other conference attendees. Members can also tweet using the official hashtags to be involved in the conference discussion on Twitter. 360 DEGREES OF FINANCIAL LITERACY PROGRAM The 360 Degrees of Financial Literacy program continued again this year. This program was created to educate consumers on personal finance issues. TSCPA’s consumer website, ValueYourMoney.org, offers free personal finance resources. The following activities supported the program: • Updated content for all life stages on ValueYourMoney.org; • Continued the workplace financial education initiative to inform Texas employees about the program and other workplace financial literacy resources; • Updated ValueYourMoney.org with workplace financial education materials, such as flyers, table tents, paycheck inserts and money management documents; • Created Tax Talk section on the site with resources and tools to assist taxpayers; Today’sCPA

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• Developed materials and promoted 2014 Financial Literacy month (April) and Social Media Outreach Day; and • Provided “12 Days of Christmas” financial tips, created a series of holiday-themed infographics, and distributed the TakeOff! monthly e-newsletter for consumers. Encourage your colleagues, family and friends to check out all the resources available on the site at ValueYourMoney.org. TSCPA ADDS MEMBER BENEFITS Private Health Insurance Exchange – The Society partnered with Pearl Insurance to offer the new TSCPA Private Health Care Exchange. It was rolled out on Nov. 1, 2013 and remained open until March 31, 2014. The open enrollment period under the Affordable Care Act for 2015 coverage will run from Nov. 15, 2014 - Feb. 15, 2015. Digital Marketing Solution: Radiate360 – TSCPA partnered with Radiate360 to offer an easy-to-use digital marketing solution to connect with clients online. It enables you to create and manage a mobile-optimized website, connect and maintain your social media presence, promote your services and much more. Radiate360 also offers analytics tools to measure your website traffic, social media reach and campaign success. For more information on your TSCPA member benefits, please visit the Member Benefits Marketplace under the Resource Center tab on the website at tscpa.org. NEXT YEAR BRINGS A NEW STRATEGIC PLAN Every three years, TSCPA develops a new strategic plan. The current plan ends on May 31, 2014, so TSCPA created a new plan for 2014-2017. TSCPA’s strategic planning process involved gathering input from leaders, volunteers, staff, and members at large. One of the first steps was to look at the changing demographics and other conditions that impact the accounting profession both nationally and statewide. According to the U.S. Census Bureau and Texas Demographer’s Office, Texas is growing, becoming more urban and more diverse. TSCPA also evaluated professional issues to assist in determining and planning for future trends. AICPA’s CPA Horizons 2025 report was reviewed. AICPA conducted extensive research to create the report, and it identified the top 10 issues that will impact the profession. TSCPA assessed the impact of these demographic changes and professional issues. Input was also received from TSCPA leadership and volunteers, as well as from a comprehensive survey that was sent to a random, representative sample of members across Texas. After the information from these various groups was received, the Strategic Planning Committee and Executive Board met for a two-day strategic planning retreat in December. The new plan was then developed and prepared for TSCPA’s Executive Board members for review and approval at their April meeting. The plan will be presented at the 2014 Annual Meeting of Members and Board of Directors Meeting. This meeting will be held June 27-28 in New Mexico at the Hilton Santa Fe Buffalo Thunder. Look for your upcoming July/August 2014 issue of Today’s CPA magazine for an introduction of TSCPA’s incoming Chairman Mark Lee, CPA-Houston. He’ll cover the goals and plans for the new year. ■ 25

Feature By Today’s CPA Technical Editor C. William (Bill) Thomas, and Today’s CPA Managing Editor DeLynn Deakins

An Update on Today’s CPA In each year’s May/June issue of Today’s CPA magazine, we include a brief report on the activities of TSCPA’s Editorial Board, and the work being done to keep the magazine as timely and relevant as possible. In 2013, the economy continued toward economic recovery, with the job market in recovery. Financial and real estate markets have posted all-time highs, which has been a bright sign for investors, as well as a reminder from history that markets can go both ways. In Washington, D.C., Democrats control the executive branch and the Senate, while Republicans have retained a majority in the House of Representatives. While tax increases and a strengthening economy are providing some relief, federal budget deficits continue to soar amidst talk of tax reform and debate on how the federal deficit could be balanced with a mixture of more spending cuts and tax increases. The role of government in the economy has continued to be a source of both hope and concern for businesspeople in general, and CPAs in particular. Increased regulation is the order of the day in Washington, D.C. The Texas economy continues to be better off than most other states, thanks to low taxes and new life for the energy sector. Health care reform is now in full swing, impacting the lives of most Americans. Certain provisions of the Affordable Care Act began in the fall and issues related to health care reform pose substantial challenges for regulators, as well as taxpayers and the CPAs who advise them. Doubt remains about U.S. transition to International Financial Reporting Standards (IFRS), with convergence more likely than outright adoption. Meanwhile, the Private Company Council (PCC) has implemented a new financial reporting framework for small and medium-sized entities. The Public Company Accounting Oversight Board (PCAOB) has developed several new auditing standards for public companies, and auditing standards for non-public entities have been completely recodified and simplified. All of these events have helped shape the content of articles in Today’s CPA. OVERVIEW Today’s CPA is a bi-monthly, peer-reviewed magazine. The articles submitted for consideration are reviewed by members of TSCPA’s Editorial Board. The Editorial Board represents a cross-section of the overall membership of TSCPA. Their names are listed in the magazine’s masthead each issue. We attempt to balance the magazine’s content to cover the various interest areas of TSCPA’s membership. Articles may include a technical analysis and/or informed commentary on the topic, and each issue includes an article that provides continuing professional education (CPE) credit. This article is peer reviewed, and the quiz is pre-tested by reviewers prior to publication. 26

In Figure 1, you’ll find a comparative summary of our activities for the past three calendar years. It shows that the rate of submissions to Today’s CPA has been declining, while our acceptance rate has gone up. The key to maintaining high-quality material in our journal is increasing the number of submissions. We are continuing our efforts to solicit more submissions from both practitioners and academics. In spite of the decline in submissions, we still have about a 12-month backlog of articles and a publication calendar extending into 2015. If you or someone in your organization would like to write an article for Today’s CPA or have an idea you feel can be developed into an article, we encourage you to contact us. It is only by receiving a large number of relevant submissions from a broad cross-section of our readership that we can continue to deliver high-quality content for TSCPA members. If you would like to receive our editorial guidelines, please contact DeLynn Deakins at ddeakins@tscpa.net. Figure 1. Summary of 2011-13 Activity Articles

2013

2012

2011

Received

Accepted

21 (66%)

15 (42%)

19 (39%)

Rejected

5 (16%)

10 (28%)

16 (33%)

In Review

Invited Short Articles

5 Accepted

3 Accepted

7 Accepted

ACKNOWLEDGEMENTS We would like to thank the members of the Editorial Board for volunteering their time and considerable efforts to review articles for publication, pre-test CPE quizzes, and participate in meetings and on conference calls. We also recognize and thank our copy editor and contributing writer, Anne Davis, and the column editors and contributors: TSCPA Chairman William Hornberger, CPA-Dallas; Greta Hicks, CPA-Houston; TSCPA Chapter Relations Representative Rhonda Ledbetter; Mano Mahadeva, CPA-Dallas; Bob Owen, CPA-Dallas; James Reeves, CPAFort Worth; and TSCPA Executive Director/CEO John Sharbaugh. We also thank the accounting and financial professionals who author articles for Today’s CPA. Authors from all practice areas are invited to submit articles for consideration in the magazine. ■ Today’sCPA

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Feature By Mary Recor, CPA

Pension Sharing and QDROs Divorce is an end. It is an end to a partnership, a lifestyle, and to sharing in financial assets and financial income as well. The purpose of this article is, in part, to analyze and examine whether or not the sharing ever ends. The specific area of concern is income streams that take place post divorce. participant and the name and mailing address of each alternate payee covered by the order, (B) the amount or percentage of the participant’s benefits to be paid by the plan to each such alternate payee, or the manner in which such amount or percentage is to be determined, (C) the number of payments or period to which such order applies, and (D) each plan to which such order applies.

It should also be noted that the IRC provides certain procedures the plan administrators must follow.6 In the case of any domestic relations order received by a plan:

Before proceeding any further, it may be helpful to clarify and distinguish between two very important terms: Qualified Domestic Relationship Orders (QDROs) and Domestic Relationship Orders (DROs), and to realize that it is the Internal Revenue Code (IRC) that governs taxation and the Employee Retirement Income Security Act of 1974 (ERISA) that, in turn, governs the administration of pension plans. A DRO is any judgment, decree or order (including approval of a property settlement agreement) that relates to the provision of child support, alimony payments or marital property rights to a spouse, former spouse, child or other dependent, or a participant, and that is made pursuant to a state domestic relations law (including a community property law).1 A QDRO creates or recognizes the existence of an alternate payee’s right to, or assigns to an alternate payee the right to, receive all or a portion of the benefits payable with respect to a participant under a plan.2 A QDRO entitles a former spouse to share in a post-divorce income stream. Even though a marriage may have been dissolved years ago, an individual may be entitled to share in a former spouse’s pension income during retirement years. For this to happen, a DRO must be qualified. It is the administrator of the pension plan who has the responsibility to make this determination. The IRC states that each plan shall establish reasonable procedures to determine the qualified status of domestic relations orders and to administer distributions under such qualified orders.3 It is an ERISA requirement that the plan contain written procedures that must be followed in making this determination.4 The plan administrator has a fiduciary responsibility to the plan’s participants and must exercise extreme care in the handling of this matter. While there may be some variations among different plans, all plans must contain certain specifics according to the IRC:5 (A) the name and the last known mailing address (if any) of the

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(i) the plan administrator shall promptly notify the participant and each alternate payee of the receipt of such order and the plan’s procedures for determining the qualified status of domestic relations orders, and (ii) within a reasonable period after receipt of such order, the plan administrator shall determine whether such order is a qualified domestic relations order and notify the participant and each alternate payee of such determination.

The code also states certain things a QDRO cannot do.7 The order may not alter the amount, form, etc., of benefits. A domestic relations order meets the requirements of this paragraph only if such order: (A) does not require a plan to provide any type or form of benefit, or any option, not otherwise provided under the plan; (B) does not require the plan to provide increased benefits (determined on the basis of actuarial value); and (C) does not require the payment of benefits to an alternate payee that are required to be paid to another alternate payee under another order previously determined to be a qualified domestic relations order.

A look at some litigation will illustrate technical issues that may arise. The Fernandez8 case provides a very interesting example of the appropriate tax treatment of post-divorce income sharing. This case does not question whether the spouses should share – but rather questions whether both parties should be taxed in the same manner. The Fernandez case involves a former spouse’s treatment of funds received under a QDRO. Under this agreement, the former spouse was entitled to receive a portion of her former husband’s pension, which was classified as a disability pension. IRC Section 104 states that gross income does not include amounts received as compensation for personal injuries or sickness, that is, disability payments. Mr. Fernandez was, in fact, receiving a disability continued on next page

Pension Sharing and QDROs Continued from page 27

pension. He had worked for the Los Angeles County Sheriff ’s Department for almost 20 years when he became disabled and retired. Since Mr. Fernandez did not satisfy the service requirement of his plan, he was not eligible for normal retirement; therefore, he opted for a “service-connected disability” retirement. Mr. Fernandez began receiving this pension in March 1993, and he and his wife legally separated in March 1995. Mrs. Fernandez had been awarded a portion of Mr. Fenandez’s pension, which she was to receive until his death. The tax year in question is 2007, by which time the divorce had become final. Mrs. Fernandez had received a 1099-R, and it indicated that she received taxable benefits in the amount of $11,691, yet she did not include any of this amount in her 2007 tax return. Mrs. Fernandez’s position was that these funds were not taxable to her. The argument she presented was that since the payments were not taxable to her former husband, they should not be taxable to her as she was an alternate payee pursuant to IRC Section 414(p) that discusses special rules involving QDROs. It is true that Mrs. Fernandez was entitled to receive a portion of her former spouse’s pension in accordance with IRC 414(p). However, the question remains: does that put her in the same tax position as her former husband? Since Mr. Fernandez’s pension income was not taxable to him, does that automatically mean the pension income received by Mrs. Fernadez was not taxable to her? The court felt this was not the case: Mrs. Fernandez was not considered to be in the same position as her husband. He had been injured; she had not been. Mrs. Fernandez next looked to IRC Section 402(e)(1). This section states that an alternate payee who is the spouse or former spouse of the participant shall be treated as the distributee of any distribution or payment made to the alternate payee under a QDRO (as defined in Section 414 (p)). Section 402 was specifically added to the code to permit the assignment of benefits with respect to a QDRO as, generally speaking, the assignment of a participant’s benefits are not permissible. A QDRO provides an exception. The view of the court was that while Section 402 does protect the rights of a former spouse, it was not intended to prevent the taxation 28

of benefits assigned to a former spouse as Mrs. Fernandez believes. In short, the court did not believe that the purpose of Section 402 was to prevent the taxation of benefits assigned from a former spouse. The IRC specifically states that income received “as compensation for personal injury” is not taxable.9 It was Mr. Fernandez who suffered personal injury and not Mrs. Fernandez. As such, Mrs. Fernandez did not find favor with the court and the $11,691 was deemed to be taxable to her. It is noteworthy to recognize that this case involved post-divorce income that former spouses are sharing long after the divorce is complete and yet the manner in which each spouse is taxed is not the same. The amount of sharing was never in question; yet what was completely tax free to one was fully taxable to the other. Further litigation review illustrates that not following the letter of the law can prove to be extremely costly when dealing with QDROs that spell out the post-divorce sharing with respect to pensions. It is extremely important to note that retirement plans are neither permitted nor required to follow the terms of a DRO purporting to assign retirement benefits unless it is a QDRO. Recall who determines whether an order is a QDRO: under federal law, the administrator of the retirement plan that provides the benefits affected by an order is the individual (or entity) initially responsible for determining whether a domestic relations order is a QDRO. The importance of distinguishing between whether one is dealing with a DRO or a QDRO can be demonstrated by briefly looking at the Hartley case.10 The tax year in question was 2009 and the amount of income involved was $52,684. Once again, divorce is an end, but the financial ramifications can linger on. Mr. Hartley was ordered to withdraw funds from his qualified retirement by a family court judge. The reason for doing this was so that the funds could be given to his wife as alimony. Mr. Hartley had included these funds on his 2009 tax return. What he did not include was the 10 percent penalty for such distributions. This penalty11 as well as any exceptions12 to the penalty for taking early distributions can be found in the IRC. Mr. Hartley believed that he satisfied

the criteria for one of the exceptions to the penalty, which states: Payments to alternate payees pursuant to qualified domestic relations orders… Any distribution to an alternate payee pursuant to a qualified domestic relations order (within the meaning of Section 414(p)(1).13 While the payments made by Mr. Hartley were made in connection with divorce and under a court order, they were not made in connection with a QDRO. To qualify for the above-referenced exception, a distribution must be made by the plan administrator to an alternate payee in response to a QDRO. The distribution had been made directly to Mr. Hartley rather than directly to Mrs. Hartley as an alternate payee. It is unfortunate that a QDRO was not in place that would have directly assigned Mr. Hartley’s benefits to his former spouse as an alternative payee. This would have permitted an exception to the 10 percent penalty with respect to the court ordered alimony under IRC Section 72(t)(2)(C), which was the matter at issue. More importantly, the distribution itself would have been taxed to Mrs. Hartley instead of Mr. Hartley. Unfortunately for Mr. Hartley, he shared his pension benefits, but he did not share his tax liability. CURRENT BENEFICIARY ELECTION Unfortunately, it is not at all uncommon for individuals to neglect to update beneficiary information even when experiencing life changing events such as the birth of a child, a divorce or entering into a second marriage. This is something we just do not think about – it is on the back burner. The Kennedy case14 is an intriguing illustration of how things may not turn out as one had intended. Mr. Kennedy worked for E. I. DuPont de Nemours & Co. and was a participant in its savings and investment plan. This plan required “all authorizations, designations and requests concerning the plan to be made by employees in the manner prescribed by the plan.” Mr. Kennedy’s plan also stated that if at the time the participant dies “no surviving spouse exists and no beneficiary designation is in effect, distribution shall be made to, or in accordance with the directions of, the executor or administrator of the decedent’s estate.” Mr. Kennedy got married in 1971 and designated his wife as his pension plan beneficiary in 1974. At that time, he did Today’sCPA

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not designate a contingent beneficiary. They divorced in 1994. According to the divorce, Mrs. Kennedy “is ... divested of all right, title, interest and claim in and to ... [a]ny and all sums ... the proceeds [from], and any other rights related to any ... retirement plan, pension plan or like benefit program existing by reason of [Mr. Kennedy’s] past or present or future employment.” Basically, she would not be entitled to any of Mr. Kennedy’s pension benefits. Mr. Kennedy died in 2001; his daughter, Kari Kennedy, was the executrix. She had asked the plan to distribute the funds to the estate. The plan did not do so. Instead, they paid the benefits of approximately $400,000 to Mrs. Kennedy, Mr. Kennedy’s former wife. As a result of this action, the estate sued Mr. Kennedy’s former employer and the plan administrator. The question in this case is whether the terms of the limitation on the assignment or alienation invalidated the act of a divorced spouse. The divorced spouse had been the designated beneficiary under her ex-husband’s ERISA pension plan. Mr. Kennedy did not, however, execute any documents removing Mrs. Kennedy as his beneficiary. It was the estate’s position that the divorce decree amounted to a waiver by Mrs. Kennedy of her right to any pension benefits. Since the decree was not a QDRO, the plan administrator disregarded this waiver of benefits. Remember, the administrator must be extremely careful in exercising his/her duties in this area. The District Court entered a summary judgment for the estate. It was their opinion that the waiver was acceptable, because a beneficiary can waive his/ her rights to proceeds of an ERISA plan. However, on appeal, the Fifth Circuit reversed this decision. They were of the opinion that Mrs. Kennedy’s waiver constituted an assignment or alienation of her interest in the plan benefits to the estate, which is not permissible and therefore could not be honored. Accordingly, they were of the opinion that the plan administrator had acted properly in disregarding the waiver as it was in conflict with the designation made by her husband. This designation had been made in accordance with the plan documents. If Mr. Kennedy wished to change his beneficiary to someone other than his former spouse, he had the power to do so. However, he had to make this change in the manner prescribed by the pension plan.

Since the Kennedys’ divorce decree was not a QDRO, the Fifth Circuit reasoned that it could not give effect to Mrs. Kennedy’s waiver in it, given that “ERISA provides a specific mechanism – the QDRO – for addressing the elimination of a spouse’s interest in plan benefits, but that mechanism was not invoked.” This case was granted certiorari and moved on to the Supreme Court. While the Supreme Court upheld the decision of the Fifth Circuit, their decision was based on a different rationale. It was the opinion of the Supreme Court that while such a waiver is not rendered invalid, it was not relevant in this case. The plan administrator properly disregarded the waiver owing to its conflict with the designation made by the former husband in accordance with plan documents. It cannot be stressed enough that overlooking what may seem to be a small detail can prove to be extremely costly and in opposition of the participant’s desired wishes. POST-DIVORCE SHARING We have seen that while there may be post-divorce sharing, the treatment or taxation of what is shared can be different. The importance of knowing whether a QDRO is actually in place, and the significance of following plan documents, is especially crucial when it comes to beneficiaries. It is important to note that plan administrators are required to furnish notice to participants and alternate payees of the receipt of a DRO. They are also required to notify the participant and each alternate payee of the administrator’s determination as to whether the order constitutes a QDRO. This notice should be in writing and furnished promptly following a determination. In the case of a determination that an order is not qualified, the notice should include the reasons for the rejection. Drafters of a QDRO must be certain the order contains all of the required major elements necessary for proper classification and must also address the specific requirements of the plan for which it is being written. For example, if an order is prepared and requests that the alternate payee receive a lump sum payment while the plan itself does not permit lump sum payments, the order will fail and not be classified as a QDRO. Attention to detail cannot be emphasized enough.

The drafter of the order may want to consider contacting the plan to request a copy of the plan’s summary plan description, as well as the plan’s QDRO procedures. One purpose of the plan’s guidelines is to provide assistance in the proper preparation of the QDRO so that it will pass the first time and minimize the legal cost of its preparation. In addition, the guidelines facilitate the plan’s effectiveness and time frame in reviewing the document. It also prevents or minimizes the chance of litigation against the plan. Many plans provide model documents; however, these model documents should be used with caution. The model will contain all of the required elements necessary to have the order meet the conditions for QDRO classification, as well as the specific criteria that is applicable to this particular plan. Unfortunately, the model may not be designed in the best interest of a particular participant and/or a particular alternate payee. Each situation is different and requires specific attention. The drafter of a QDRO may also make use of an Internal Revenue Bulletin15 that provides sample language the drafter may want to use or incorporate into the order. The marriage is over; the sharing continues. The sharing of a pension is a lifelong arrangement. The handling of today’s QDRO will have a long-lasting effect. Plan carefully today so that tomorrow will have the desired outcome. Utmost care is a necessity. ■ 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13. 14.

15.

IRC Section 414(p)(1)(B) and ERISA 206 (d)(3)(B)(ii) IRC Section 414(p)(1)(A) and ERISA 206 (d)(3)(B)(i) IRC Section 414(p)(6)(B) ERISA Section 206(d)(3)(G)(ii) IRC Section 414(p)(2) IRC Section 414(p)(6)(A) IRC Section 414(p)(3) Shannon L. Fernandez v. Comm of Internal Revenue, 138 T.C. No. 20 – United States Tax Court IRC Section 104 Charles L. Hartley v. Comm of Internal Revenue, T.C. Memo 2012-311 – United States Tax Court IRC Section 72(t)(1) IRC Section 72(t)(2) IRC Section 72(t)(2)(C) Kari E. Kennedy, executrix of the Estate of Kennedy, Deceased, Petitioner, v. Plan Administrator for DuPont Savings and Investment Plan et al. – 129 S. Ct 865 (2009) Internal Revenue Bulletin 1997-2 at p. 49 (Jan. 13, 1997).

Mary Recor, CPA, is an assistant professor of Accounting and Taxation for the City University of New York – College of Staten Island. She can be reached at mary.recor@csi.cuny.edu.

Today’sCPA

| MAY/JUNE 2014

Feature By Frank Badua, Ph.D., MBA

Going Green is Doing Well … Does Research Show it Pays to Tell? Environmental issues have been in the business news for some time now and in recent years, the coverage on matters green has reached a crescendo. Whether it’s the 2010 Deepwater Horizon Oil Spill in the Gulf of Mexico involving British Petroleum, Halliburton and Transocean Ltd., or the seesaw legal battle between Chevron and the government of Ecuador that has been making headlines for the last decade, the relationship between corporate operations and their effect on the environment has garnered ever-growing attention from all stakeholders. Therefore, it should come as no surprise that there has been a concurrent chorus of calls to release more information about such issues.

In Bloomberg Businessweek’s November 28/December 4, 2011, issue, the article titled “Who’s the Greenest of Them All?” documents “investors’ and the public’s (demand) for increasingly detailed information on non-financial metrics that define sustainability.” Consulting firms such as the Global Reporting Initiative (GRI) and SustainAbility have consequently responded, such that while there were only 21 sustainability raters in 2000, by 2010, “that number had swelled to 108, (all) seeking to sell research to investors.” More recently, the European Union announced in April 2013 that it would require all firms employing more than 500 people to disclose “information on their social and environmental impact,” a requirement that would affect almost 20,000 companies, according to the April 16, 2013, issue of The Wall Street Journal. Nevertheless, according to the GRI, only 10 percent of corporations and multinational firms report on sustainability practices. Furthermore, whereas almost 40 percent of firms outside the United States obtain third-party assurance over their environmental performance, the proportion of U.S. firms that do so is only 10 percent. 30

One of the major obstacles to widespread adoption of environmental disclosure is the lack of credible, consistent and comprehensive criteria for reporting. Fortunately, the issue of what users of the information that corporations disclose find useful to their investment and lending decisions (that is, what they consider “value relevant”) has been studied in the accounting academic and institutional literature for at least three decades. Hence, this research is helpful in answering such questions as: What environmental information do investors and lenders deem to be relevant? Does what a company discloses about its efforts to go green make a dollar-and-cents difference? Does the medium by which environmental information is revealed matter? What is the role that accounting professionals should play? Several academic accounting journal papers published over the last three decades were identified as studying the relationship between environmental disclosures and company financial characteristics. Accounting research is useful in answering these questions because over the last several decades, it has evolved a research agenda that focuses on the way company value (which is reflected in stock price and borrowing costs) is affected by different types of manager disclosure, including both financial statement assertions and other relevant information. Environmental disclosure varies according to its source, format and emphasis. The quantitative metrics used to measure environmental performance also vary. In some of the papers in this study, the information takes the form of press coverage of environmentally relevant events affecting the company, such as the passage of the Clean Air Act or the Exxon Valdez oil spill. Another form is by a third party rater, such as the Council on Economic Priorities (CEP) or Environmental Protection Agency (EPA). However, several papers feature self disclosure (voluntary or otherwise) in content included in the annual reports. Based on this content, the authors constructed measures of the extent and quality. These measures may take the form of simple counts of words or lines of text in the annual report devoted to environmental topics, although, as discussed later, more Today’sCPA

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Table 1. Papers and Environmental Disclosures Used in Study Disclosure Format

Title

Author(s)

Journal and Year

Press Coverage

“An Investigation of Shareholder Wealth Effects of Environmental Regulation”

Shane

Journal of Accounting, Auditing, and Finance, 1995

Press Coverage

“Regulatory Cost Effects in a Patten and Nance Good News Environment”

Journal of Accounting and Public Policy, 1998

Third Party Ratings

“Market Response to Environmental Information Produced Outside the Firm”

The Accounting Review, 1983

Third Party Ratings

“Site Uncertainty, Allocation Campbell et al. Uncertainty, and Superfund Liability Valuation”

Journal of Accounting and Public Policy, 1998

Third Party Ratings

“The Value Relevance of Nonfinancial Measures of Air Pollution in the Electric Utility Industry”

Hughes

The Accounting Review, 2000

Third Party Ratings

“Environmental Liability Information and Bond Ratings”

Graham et al.

Journal of Accounting, Auditing, and Finance, 2001

Self-Disclosure

“The Liability Equivalence of Unfunded Nuclear Decommissioning Costs”

Khurana et al.

Journal of Accounting and Public Policy, 2001

Self-Disclosure

“An Investigation of Regulatory and Voluntary Environmental Capital Expenditures”

Johnston

Journal of Accounting and Public Policy, 2005

Self-Disclosure

“Do Financial Markets Care About Social and Environmental Disclosure”

Murray

Accounting, Auditing, and Accountability Journal, 2006

sophisticated measures that take into account specificity, format and areas of emphasis are also used. Table 1 lists the various papers used in this study and the type of environmental disclosure they utilized. Just as the measures differed between studies, the measures of how users of the information responded to it also varied. Measures based directly on financial statement assertions are not frequently used in academic accounting research because, first, these may be subject to bias and manipulation, and second, because the capital markets are deemed to be sufficiently efficient to make reasonably good judgments about company value, even in the presence of flawed financials. Table 2 summarizes these measures, how they are typically computed, and their meaning. Establishing how a company’s environmental disclosure affects its financial performance is determined by statistically correlating these two sets of data with one another. In virtually all of the studies mentioned, this was done through some form of statistical regression, where the various measures of financial performance were the dependent variables, and the various methods of disclosure were the independent variables. A significant correlation between the dependent and independent variables indicates a very low probability that the observed relationship occurred by chance. Table 3 summarizes the research findings. A glance at the findings reveals that investors and lenders do Today’sCPA

| MAY/JUNE 2014

Shane and Spicer

respond to environmental performance information. This is true whether the information was disclosed in the press, by third parties or by the company itself. For example, in situations where the information points to increased future costs, whether arising from Superfund site liabilities (liabilities related to sites deemed to be polluted according to the Comprehensive Environmental Response, Compensation and Liability Act), or from anticipated costs of compliance with new environmental standards, stock prices of affected companies drop and costs of capital increase. On the other hand, information that portends decreased compliance costs was significantly and positively associated with stock returns. The level of disclosure regarding environmental practices and performance also has an effect on financial performance, which is generally positive. In the aftermath of the 1989 Exxon Valdez oil spill, oil companies (besides Exxon) that had a history of reporting environmentally relevant information about their operations actually experienced positive stock returns that were significantly greater than those that had less disclosure. The average level of disclosure by a company over several years is also positively associated with stock returns. Thus, company reporting on environmental performance is value relevant. It provides information to which the investing and continued on next page

Going Green Continued from page 31

Table 2. Summary of the Measures, How Typically Computed, and Their Meaning Financial Performance Measure

Elements and Calculation

Significance and Implications

Stock Returns

Change in the stock price plus any dividends over the period divided by original price

A short-term measure of financial performance

Abnormal Returns

Difference between actual stock return and expected stock return

Used in event studies that look at the transitory effect of unforeseen events on firm value

Bond Rating

Focuses on the firm’s liabilities, their extent, maturities, and likelihood of redemption

A longer-term measure of firm financial health than stock returns or abnormal returns, as they are related to long-term debt

Market Value of Equity

The product of the number of a firm’s outstanding shares and the current stock price per share

A measure of the firm’s value to its owners, representing the value of current and future operations, which are all impounded into share price by investors based on historical financial statement data and forecasts based on these

lending sectors react significantly, and is therefore important for these external users of financial information to know. Because of this property, it is important for policymakers to encourage this type of disclosure, just as other types of value relevant financial information is mandated for reporting. Initiatives must be established for companies that are performing poorly economically or environmentally, for these are the types that tend to shy away from it when left on their own. These initiatives may take the form of mandatory environmental compliance reporting for those seeking public equity capital or even for those issuing debt. So where do accountants and auditors fit in all of this? Here is where research by accounting’s governing institutions sheds some light. Along with the growing realization of the importance of environmental information, and the call for the development of standards for environmental disclosure, there has been a trend towards the application of the auditor’s assurance skills to nonfinancial statement matters. This last phenomenon has come to manifest itself in calls for an audit to provide assurance over a company’s environmental performance. As early as the mid-1990s, the American Institute of CPAs’ (AICPA’s) Special Committee on Assurance Services, chaired by former KPMG partner Robert Elliott, had called for the widening of the scope of auditor’s assurance services beyond the traditional financial statement audit. The committee pointed to an inevitable saturation of the market for financial statement audits since it would be difficult to differentiate the service provided by one audit firm from another because of the regulated and standardized nature of the assurance product. Instead, the Elliott Committee recommended that auditors use their skills and training in evaluating evidence, and determining the fairness and veracity of assertions to provide assurance on other matters. Hundreds of new assurance services 32

were proposed. Recent developments have shown that the Elliott Committee’s recommendations have partially come to fruition. A majority of providers of third-party assurance over environmental and sustainability assertions are traditional accounting firms, as opposed to engineering and other professional services firms, according to the GRI. There have even been environmental audit standards promulgated by international regulatory agencies. The International Organization of Supreme Audit Institutions (INTOSAI) is a worldwide affiliation of governmental entities charged with tasks analogous to the U.S. General Accounting Office (GAO), which is among its members. Since the meeting of INTOSAI’s Working Group on Environmental Auditing in Cape Town, South Africa, in April 2000, the organization has developed over 20 documents providing guidance on various issues related to environmental reporting and auditing, available at www. environmental-auditing.org. Among the topics discussed in these drafts are reporting and assurance on water issues, land use, sustainable energy, wildlife and fisheries. One document, Environmental Audit and Regularity Audit, describes the role of the auditor in the process of reporting and assurance about environmental matters. Because of the dearth of mandatory rules for reporting over environmental issues, the document admits the current difficulty in conducting such an audit. However, the document also states that the auditor would still be able to consider environmentally relevant matters that have a financial statement impact, such as the costs of monetary penalties for non-compliance with environmental law, the expenses, impairments and losses related to environmental catastrophes and natural disasters, and the measurement of efficiency and economy in the use of human and natural resources. Today’sCPA

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Table 3. Summary of the Research Findings Author(s)

Journal and Year

Environmental Information Finding

Shane and Spicer

The Accounting Review, 1983

CEP pollution compliance ratings

Significantly negative abnormal returns for firms rated as poor compliers

Shane

Journal of Accounting, Auditing, and Finance, 1995

Proposal and passage of the Clean Air Act of 1970

Significantly positive abnormal returns for firms likely to have decreased compliance costs and significantly negative returns for firms likely to have increased compliance costs

Patten and Nance

Journal of Accounting and Public Policy, 1998

Occurence and aftermath of Exxon Valdez oil spill and its effect on oil companies other than Exxon

Generally significant positive abnormal returns, but less positive returns for firms with less extensive environmental disclosures

Campbell et al.

Journal of Accounting and Public Policy, 1998

Hughes

The Accounting Review, 2000

Graham et al.

Journal of Accounting, Auditing, and Finance, 2001

Khurana et al.

Journal of Accounting and Public Policy, 2001

Use of nuclear power generation and nuclear decommissioning costs

Negative effects on MVE

Johnston

Journal of Accounting and Public Policy, 2005

Disclosures about regulatory environmental capital expenditures

Significantly negative association with stock prices

Murray

Accounting, Auditing, and Accountability Journal, 2006

Social and environmental disclosures by firms

Positive long-term association between firm environmental disclosure and stock returns

The document also describes how the auditor may have to rely on an “environmental expert” for formulating opinions. “The auditor is not expected to know more than management or environmental experts,” but could use his/her “training, experience and understanding of the entity and industry to recognize non-compliance and seek expert advice.” An interesting development is the document’s definition of an “environmental asset” whose benefit is “non-economic,” but pertains to “aesthetic or health values” and “habitat, flood and climate control.” The idea stems from the perspective that a company is not only accountable to shareholders for stewardship of pecuniary assets, but also to society at large for stewardship of these environmental assets. Pursuant to this expanded objective is the call to auditors “to encourage their clients to adopt regimes that may be considered good practice, but are not currently mandatory.”

Superfund site classification Negative effects on MVE or and associated costs bond rating

So, what does academic and institutional research tell us about environmental disclosure and the role accountants and auditors should play in it? First, it appears from academic research that investors and creditors care about a company’s environmental operations and performance. Second, this research reveals that capital markets respond to this environmental information whether it appears in the press, in ratings by third parties, or by the company itself. Furthermore, investors reward those that are more forthcoming in revealing their environmental information. Finally, institutional research points to an expanding role for accounting professionals in facilitating greater environmental disclosure. This role is consistent with both the traditional corporate focus on stewardship of investor wealth and with a more recently developed realization of the importance of stewardship of our natural resources. ■

Frank Badua, Ph.D., MBA, is an associate professor in the Lamar University College of Business. He can be reached at

frank.badua@lamar.edu.

Today’sCPA

| MAY/JUNE 2014

Feature By Peter A. Nolan and Marcus J. Brooks

Winstead, PC v. Combs Strikes Down Comptroller Rule Disallowing Deductions of Employee Benefits

If you prepare Texas franchise tax returns for clients who utilize the compensation deduction, you probably know that Comptroller’s Rule 3.589(e)(2)(D) provides that for purposes of deducting compensation and benefits, “[t]he term ‘benefits’ does not include … working condition amounts provided so employees can perform their jobs.” The rule further provides that “[e]xamples of working condition benefits include an employee’s use of a company car for business, job-related education provided to an employee, and travel reimbursement.” 34 Tex. Admin. Code §3.589(e)(2)(D). You may not know that Rule 3.589(e)(2)(D) was recently struck down by the 201st Judicial District Court of Travis County, Texas. The court held that Rule 3.589(e)(2)(D) “is invalid to the extent it prevents the taxpayer, for purposes of calculating franchise tax liability, from deducting as compensation the cost of any benefits the taxpayer provides to 34

its officers, directors, owners, partners and employees that are deductible for federal income tax purposes.”1 However, as of the date this article was being finalized (approximately one year after the District Court’s judgment), the online version of the Texas Administrative Code2, found through the Secretary of State’s website, still shows Rule 3.589(e) Today’sCPA

| MAY/JUNE 2014

(2)(D) as if it were alive and well. The potential deductions that are purportedly disallowed by Rule 3.589(e)(2)(D) may be of significant value to your clients. An awareness of the invalidity of the rule, and its ramifications, is necessary to avoid having your clients pay more Texas franchise tax than is now properly due under the law on a going-forward basis. Additionally, you should consider filing refund claims for clients that would benefit from increasing their compensation deduction in prior tax years. THE TAX CODE AND RULE 3.589(E)(2)(D) Where a taxpayer elects to deduct compensation for purposes of calculating its franchise tax base, Texas Tax Code Section 171.1013(b)(2) provides that the taxpayer may include in the compensation deduction “the cost of all benefits, to the extent deductible for federal income tax purposes,3 the taxable entity provides to its officers, directors, owners, partners and employees, including workers’ compensation benefits, health care, employer contributions made to employees’ health savings accounts, and retirement.” The Tax Code thus, on its face, permits a taxpayer that elects to subtract compensation for the purpose of computing its franchise tax base to subtract the cost of all benefits it provides to its officers, directors, owners, partners and employees that are deductible for federal income tax purposes. Title 34, Section 3.589(e)(2)(D) of the Texas Administrative Code, however, disallowed the deduction of some employee benefits that are

deductible for federal income tax purposes. The impetus and policy behind the comptroller’s rule are unclear, but the conflict between the statute and the rule seems apparent. WINSTEAD’S TAX REPORTING, IRS “NO CHANGE LETTER” AND A COMPTROLLER AUDIT Winstead, PC is a large business law firm with several locations in Texas. In calculating its own compensation deduction for its Texas franchise tax return, Winstead included parking expenses, attorney occupation taxes and continuing education expenses that it paid on behalf of its employees (the “employee benefits”). The employee benefits totaled over $1 million for each of the 2008 and 2009 reporting years. Winstead also deducted the employee benefits on its federal income tax returns for report years 2008 and 2009. Interestingly, Winstead’s federal tax return for tax year 2009 was audited by the Internal Revenue Service (IRS). At the end of the audit, Winstead received a letter from the IRS indicating its review of Winstead’s tax return resulted in “no changes” to Winstead’s reported tax for the 2009 tax year, thus supporting, inter alia, Winstead’s deduction of the employee benefits for federal income tax purposes. The comptroller also conducted an audit of Winstead’s franchise tax for report years 2008 and 2009. At the conclusion of the audit, the comptroller issued a Texas Notification continued on next page

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Winstead, PC v. Combs Continued from page 35

of Audit Results for each report year, dated May 23, 2011 (the “assessments”), excluding Winstead’s deduction of the employee benefits, based upon Rule 3.589(e)(2)(D), which states that the compensation deduction does not include “working condition amounts provided so employees can perform their jobs.” WINSTEAD’S PROTEST PAYMENT SUIT After the comptroller issued the assessments, Winstead paid the amounts at issue under protest and filed a refund suit in Travis County District Court, pursuant to the Texas Tax Code. As a creation of the Legislature, an administrative agency such as the comptroller has only the powers that are delegated to it by the Legislature. State v. Jackson, 376 S.W.2d 341, 344 (Tex. 1964); Tex. Parks & Wildlife Dept v. Callaway, 971 S.W.2d 145, 148 (Tex. App. – Austin 1998, no pet.). The Legislature has delegated to the comptroller the authority to “adopt rules that do not conflict with the laws of this state.” Tex. Tax Code §11.002(a) (emphasis added). Any rule of an administrative agency is void if it conflicts with the state’s statutes. Liberty Mut. Ins. Co. v. Griesing, 150 S.W.3d 640, 648 (Tex. App. – Austin 2004, pet. dism’d w.o.j.); Employees Ret. Sys. v. Jones, 58 S.W.3d 148, 154 (Tex. App. – Austin, 2001, no pet.). Winstead argued that Rule 3.589(e)(2)(D) directly contradicted Section 171.1013(b)(2) of the Tax Code and was therefore void. The comptroller first pointed out that Winstead must show that the comptroller’s interpretation of the tax statute is unreasonable and inconsistent with the statute. First American Title Ins. Co. v. Combs, 258 S,W.3d 627. 632 (Tex. 2008). The comptroller also repeated the common law principle that, since a deduction from tax is at issue, the court must construe the statutory language strictly and in favor of taxation. North Alamo Water Supply Corp. v. Willacy County Appraisal Dist, 804 S.W.2d at 899; Sharp v. Tyler Pipe Indus. Inc., 919 S.W.2d 157, 161 (Tex. App. – Austin 1996, writ denied).

Ultimately, the comptroller argued that the word “benefits” was not defined by the statute and that the language “to the extent deductible for federal income tax purposes” was a limitation, not a definition. Given the purported absence of a definition of benefits in Chapter 171, the comptroller, as the agency charged with implementing and interpreting the Tax Code, argued that it was entitled to define the meaning of benefits in Rule 3.589(e)(2)(D). Winstead pointed out, in response, that the comptroller’s argument overlooked the word “all.” Section 171.1013(b)(2) allows a taxpayer to deduct “all” benefits, to the extent deductible under federal income tax law. The adjective all, together with the descriptive phrase, “to the extent deductible for federal income tax purposes,” assigns a precise meaning to the term benefits. Rule 3.589(e) restricts the deduction to only some benefits, to the extent deductible under federal income tax law. The rule, thereby, improperly excludes certain benefits that are included by the statute. Further, because the statute was not ambiguous, the agency’s regulation should not be entitled to deference. Fiess v. State Farm Lloyds, 202 S.W.3d 744, 747 (Tex. 2006). Additionally, because Section 171.1013(b)(2) is a provision of the franchise tax chapter of the Tax Code, Rule 3.589(e) must be in harmony with the general objectives of the chapter as a whole. Evidenced by the numerous references to federal income tax in the franchise tax chapter, one of the general objectives is to conform with established federal income tax law, where appropriate.4 This conformance with federal income tax law promotes consistency and efficiency in the reporting and administration of the Texas franchise tax. On March 18, 2013, the District Court entered a judgment granting Winstead’s refund and declaring Rule 3.589(e)(2)(D) “invalid to the extent it prevents the taxpayer, for purposes of calculating franchise tax liability, from deducting as compensation the cost of any benefits the taxpayer provides to its officers, directors, owners, partners and employees that are deductible for federal income tax purposes.”

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RAMIFICATIONS OF THE INVALIDATION OF RULE 3.589(E)(2)(D) Because Rule 3.589(e)(2)(D) has been invalidated to the extent that it prevents the taxpayer from deducting benefits that are deductible for federal income tax purposes, the rule should no longer be enforced by the comptroller for this purpose. Given the rule’s continued existence in the readily available version of the Texas Administrative Code, it is likely that many professionals are unaware of its invalidity, and thus are in danger of having their clients send in larger franchise tax payments than are actually due under currently prevailing law. Further, if you have clients that claimed the compensation deduction last year, but limited that deduction based on the overly restrictive definition of benefits contained in Rule 3.589(e)(2)(D), you should strongly consider filing refund claims on behalf of those clients. Similarly, it is important to remember that, while the rules promulgated by the comptroller are no doubt a form of law, they cannot be applied to the extent they are inconsistent with the Tax Code itself. The failure to carefully scrutinize these rules and consider whether their application to your client

is consistent with the statutory scheme itself can cost your client unnecessary, excessive tax dollars. Consultation with counsel knowledgeable with respect to these issues could be of significant value to your clients and others who are similarly situated. ■ 1. Final Judgment in Winstead v. Combs, Cause No. D-1-GN-12-000141, 201st Judicial District Court of Travis County. 2. http://info.sos.state.tx.us/pls/pub/readtac$ext.viewtac 3. For federal income tax purposes, a taxpayer may deduct all the ordinary and necessary expenses paid or incurred during a taxable year in carrying on any trade or business, including “a reasonable allowance for salaries or other compensation for personal services actually rendered.” I.R.C. §162(a) (1) (2011) (emphasis added). Payments must be reasonable and have a compensatory purpose. O.S.C. & Assoc. v. Comm’r, 187 F.d3 1116, 1120 (9th Cir. 1999), cert. denied, 529 U.S. 1097 (2000). 4. See, e.g., Tex. Tax Code §§171.063(a) (exempting from the franchise tax corporations that are exempt from the federal income tax), 171.1011 (referencing line numbers on a taxpayer’s federal income tax return to determine the taxpayer’s total revenue), and 171.1012(h) (requiring taxpayers to determine their cost of goods sold “in accordance with the methods used on the federal income tax return” except as otherwise provided).

Peter A. Nolan is a shareholder with Winstead, PC, whose practice focuses on government enforcement and regulatory actions, as well as complex commercial litigation. Marcus J. Brooks is also a shareholder with Winstead, PC; his practice focuses on tax controversies and litigation, and tax planning at both the state and federal levels. Brooks also serves as an adjunct professor at Baylor Law School and in the Baylor University Master’s of Taxation Program.

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CPE Article By Steve Grice, Ph.D., CPA, and Loraine Magrath, Ph.D., CPA

SIMPLIFYING THE ANNUAL IMPAIRMENT

TESTS:

GOODWILL AND INDEFINITE-LIVED INTANGIBLE ASSETS

Curriculum: Accounting and Auditing Level: Basic Designed For: Public Practice and Business & Industry Objectives: The objective of this article is to provide an understanding of the major provisions of ASU 2011-08 and 2012-02, and to highlight the impact of those provisions on an entity’s impairment tests related to goodwill and indefinite-lived intangible assets. Key Topics: The key topics are the annual impairment tests for both goodwill and indefinite-lived intangible assets. Specifically, this article discusses the use of the new more likely than not qualitative assessment in the impairment evaluation. Prerequisites: None Advanced Preparation: None 38

The Financial Accounting Standards Board (FASB) issued two Accounting Standards Updates (ASUs) that amend the impairment test guidance in Accounting Standards CodificationTM (ASC) Topic 30, Intangibles – Goodwill and other. Initially, ASU 2011-08 was issued to simplify how goodwill is tested for impairment by allowing, but not requiring, a more likely than not (MLTN) qualitative assessment to be a part of the goodwill impairment evaluation. Subsequently, ASU 2012-02 was issued to improve consistency in the impairment test guidance by allowing the MLTN qualitative assessment to also be used in the impairment tests for indefinite-lived intangible assets. Today’sCPA

| MAY/JUNE 2014

These amendments to the ASC may reduce the cost and complexity of the annual impairment tests for both goodwill and indefinite-lived intangible assets for some entities. For example, entities that have indefinite-lived intangible assets or reporting units (for goodwill impairment tests) with fair values that significantly exceed the carrying amounts may decide to use the qualitative assessments to avoid performing costly fair value calculations. Importantly, this new guidance only affects how goodwill and indefinite-lived intangible assets are tested for impairment and does not change the recognition and measurement of goodwill and intangible assets or the related impairment losses. The purpose of this article is to provide a summary of the major provisions of ASU 2011-08 and 2012-02, and to highlight the impact of those provisions on an entity’s impairment tests related to goodwill and indefinite-lived intangible assets. GOODWILL IMPAIRMENT TEST Prior to the issuance of ASU 2011-08, the annual goodwill impairment evaluation was primarily quantitative. The evaluation required a two-step impairment test as described below. Step 1: Compare the fair value of a reporting unit with its carrying amount, including goodwill. The fair value of a reporting unit is determined in accordance with guidance in ASC 350-20-35-22 through 35-24. • If the fair value of the reporting unit exceeds its carrying amount, goodwill is not impaired and step 2 of the goodwill impairment test is not necessary. • If the fair value of the reporting unit is less than carrying amount, step 2 is performed to determine the amount of the impairment loss. When the reporting unit has a zero or negative carrying amount, the entity is required to perform Step 2 if it is determined that it is MLTN that there exists a goodwill impairment. Step 2: Compare the implied fair value of a reporting unit’s goodwill with the carrying amount of that goodwill. The implied fair value of goodwill is determined in three steps: 1. Assign a fair value to a reporting unit in the same manner as if the reporting unit had been acquired in a business combination or acquisition. The fair value of a reporting unit may be determined by using a multiple of earnings or revenue approach. 2. Assign the fair value to a reporting unit’s assets and liabilities (including unrecognized intangible assets that meet the separability or contractual-legal criterion) determined in accordance with ASC Topic 805, Business Combinations. 3. Calculate implied goodwill as the excess of the fair value of the reporting unit over the amounts assigned to its assets and liabilities. The implied goodwill is compared with the carrying amount of the reporting unit’s goodwill to determine the goodwill impairment loss, if any. If the carrying amount of the reporting unit’s goodwill exceeds the implied goodwill, an impairment loss is recognized in an amount equal to that excess (limited to the Today’sCPA

| MAY/JUNE 2014

carrying amount of the goodwill). The adjusted carrying amount of the goodwill is its new accounting basis, and subsequent reversal of the impairment is not allowed. ASU 2011-08 Optional Qualitative Assessment. ASU 2011-08 does not affect how Steps 1 and 2 of the goodwill impairment test are performed. However, the amendments add a qualitative assessment that allows entities to assess qualitative characteristics to determine whether or not the two-step impairment test is required. As described above, Step 1 requires entities to calculate the fair value for a reporting unit and compare fair value with the carrying amount, including goodwill, of the reporting unit. Step 2 is performed if the calculated fair value of the reporting unit tested is less than its carrying amount, including goodwill. ASU 2011-08 addresses concerns preparers had in applying the two-step quantitative test for goodwill impairment, specifically, concerns related to the calculation of fair value for reporting units with goodwill. The amended guidance allows entities to forgo the calculation of fair value and apply a qualitative assessment of events and circumstances to determine whether it is MLTN that the fair value of the reporting unit is less than its carrying amount. If the entity’s assessment determines that it is not MLTN that the fair value of the reporting unit is less than its carrying amount, then no further impairment testing is required. Conversely, if the assessment indicates that it is MLTN that the fair value of the reporting unit is less than its carrying amount, the entity must proceed with the two-step impairment test that requires the entity to calculate fair value of the reporting unit. In sum, entities now have the option to qualitatively assess whether it is MLTN that the fair value of a reporting unit is less than its carrying amount, with MLTN defined as having a likelihood of more than 50 percent (ASC 350-20-35-3a through 3g). Entities are not required to calculate the fair value of a reporting unit when it is not MLTN that the reporting unit’s fair value is less than its carrying value. It should be noted that an entity may choose to omit the qualitative assessment and proceed directly to performing Step 1 of the goodwill impairment test. The decision to bypass the qualitative assessment in one period does not affect the entity’s ability to apply the qualitative assessment in future periods (ASC 350-20-35-3a through 3b). INDEFINITE-LIVED INTANGIBLE ASSET IMPAIRMENT TEST Prior to the issuance of ASU 2012-02, the annual impairment test for long-lived intangible assets was also a quantitative approach. Specifically, ASC 350-30 indicates that the impairment test for long-lived intangible assets consist of (1) determining the fair value of the long-lived intangible asset and (2) comparing the fair value of the long-lived intangible asset to its carrying amount. If the carrying amount exceeds the fair value, then an impairment loss is recognized in an amount equal to any excess of the carrying amount over the fair value. If the carrying amount is less than fair value, no impairment loss is recognized. ASU 2012-02 Optional Qualitative Assessment. ASU 2012-02 does not affect how to perform the quantitative impairment test for long-lived intangible assets. However, the amendments add a qualitative assessment that allows entities to assess qualitative characteristics to determine whether the quantitative impairment continued on next page

CPE Article continued from page 39

Exhibit 1 Impairment Tests for Goodwill and Indefinite-lived Intangible Assets

Guidance Transition to ASU

Goodwill

Indefinite-Lived Intangible Assets

ASU 2011-08 (see ASC 350-20)

ASU 2012-02 (see ASC 350-30)

Effective for fiscal year ends beginning after December 15, 2011

Effective for fiscal years beginning after September 15, 2012

Use of qualitative assessment

Optional

Qualitative assessment allowed in subsequent periods even if not used in prior periods

Allowed

Threshold for the effect of quality assessment on impairment

More than 50% (MLTN)

If qualitative assessment indicates a MLTN impairment does not exist

No further testing

If qualitative assessment indicates a MLTN impairment exists

Perform two-step impairment test (ASC 350-20-35-4 through 35-13)

Subsequent reversal of recognized loss

test is required. As described above, an entity was previously required to annually calculate the fair value of the long-lived intangible asset and compare the fair value to the carrying value. Similar to ASU 2011-08, ASU 2012-02 addresses concerns financial statement preparers had about the cost and complexity of performing the quantitative impairment test when there appears to be a very low likelihood that the asset being tested was impaired. The amended guidance allows entities to forego the calculation of fair value and apply a qualitative assessment of events and circumstances to determine whether it is MLTN that the indefinite-lived intangible asset is impaired. If the entity’s assessment determines that it is not MLTN that the indefinitelived intangible asset is impaired, then no further impairment testing is required. Conversely, if the assessment indicates that it is MLTN that the indefinite-lived intangible asset is impaired, the entity must proceed with the quantitative assessment that requires the entity to calculate fair value of the indefinite-lived intangible asset. In sum, entities now have the option to qualitatively assess whether it is MLTN that the fair value of an indefinite-lived intangible asset is less than its carrying amount, with MLTN 40

Perform impairment test (ASC 350-30-35-18e through 35-19) Prohibited

defined as having a likelihood of more than 50 percent (ASC 350-30-35-18a). Entities are not required to calculate the fair value of an indefinite-lived intangible asset when it is not MLTN that the asset is impaired. It should be noted that an entity may choose to omit the qualitative assessment and proceed directly to performing the indefinite-lived intangible asset impairment test. The decision to bypass the qualitative assessment in one period does not affect the entity’s ability to apply the qualitative assessment in future periods (ASC 350-30-35-18a). Exhibit 1 contains a summary of the major provisions for testing goodwill and indefinite-lived intangible assets for impairment after the issuance of ASUs 2011-08 and 2012-02. EVENTS AND CIRCUMSTANCES TO CONSIDER IN THE QUALITATIVE ASSESSMENT The qualitative assessment related to both the goodwill and indefinite-lived intangible asset impairment tests include the evaluation of events and circumstances that the entity believes may be relevant to the determination of fair value. Though not all-inclusive, the ASUs suggest several examples of the types of events and circumstances that should be considered in the Today’sCPA

| MAY/JUNE 2014

Exhibit 2 Events and Circumstances Affecting Impairment Assessment (ASC 350-20-3c and ASC 350-30-35-18b) Description

Goodwill

Indefinite-lived Intangibles

Macroeconomic Conditions Deterioration in general economic conditions

✔

Limitations on accessing capital

✔

Fluctuations in foreign exchange rates

✔

Developments in equity or credit markets

✔

Industry and Market Considerations

Goodwill

Indefinite-lived Intangibles

Negative or declining cash flows

✔

Decline in actual or planned revenue

✔

Decline in actual or planned earnings

✔

Changes in management or other key personnel

✔

Change in strategy

✔

Overall Financial Performance

Relevant Entity-Specific Events

Deterioration of the operating environment

✔

Change in customers

✔

Increased competitive environment

✔

Contemplation of bankruptcy

✔

Decline in market-dependent multiples or metrics

✔

Litigation

✔

A change in the market for products/ services

✔

A regulatory or political development

✔

A change in the market for specific products/services due to obsolescence, demand, competition, industry stability, technological advances, legislative action resulting in a changing business environment, and expected changes in distribution channels

✔

Increases in raw materials or labor costs

✔

Increases in other costs having a negative effect on earnings or cash flow

✔

qualitative assessment. For goodwill impairment tests, ASU 2011-08 includes entity or industry events and circumstances that might affect a reporting unit. For indefinite-lived intangible assets, ASU 2012-02 lists similar qualitative events and circumstances, as well as other events and circumstances more appropriate for testing indefinite-lived intangible assets. These examples are summarized in Exhibit 2, with indications as to which impairment test (goodwill or indefinite-lived intangible assets) the individual events and circumstances are applicable. The qualitative assessment should consider the identified events and circumstances in totality, considering both negative and positive events. The ASUs indicate that events that most affect net assets (e.g., cost factors) should be given more weight. Recent fair value calculations for reporting units or indefinitelived intangible assets can be considered in reaching the MLTN conclusion. In the end, the entity’s qualitative assessment of events or circumstances in totality will indicate either:

(1) It is MLTN that the fair value of a reporting unit or indefinitelived intangible asset is less than its carrying amount, or (2) It is MLTN that the fair value of a reporting unit or indefinitelived intangible asset is more than its carrying amount. | MAY/JUNE 2014

Change in the composition or carrying amount of net assets

✔

A MLTN expectation of disposition of all or a portion of the reporting unit

✔

Testing for recoverability of an asset group within a reporting unit

✔

Recognition of goodwill impairment loss of a subsidiary

✔

Other

Cost Factors

Today’sCPA

Events Affecting a Reporting Unit

Decrease in price share in absolute terms or relative to peers Legal, regulatory, contractual, political, business, or other factors, including asset-specific factors

✔

If situation (1) exists, the entity must calculate the fair value to perform the goodwill or indefinite-lived intangible asset impairment test. If situation (2) exists, the entity need not perform any further tests (ASC 350-20-35-3d through 3e; ASC 350-30-35-18e). OTHER KEY PROVISIONS Other points of interest related to the goodwill and indefinitelived intangible assets impairment tests discussed in ASU 201108 and 2012-02 are summarized below. Frequency of test. Goodwill and indefinite-lived intangible assets should be tested for impairment at least on an annual basis. For goodwill, the annual test can be performed at any time, but must be performed at the same time every year. Goodwill and indefinite-lived intangible assets should be tested between annual tests if an event occurs or a circumstance changes that would MLTN reduce the fair value of the reporting unit or the indefinite-lived intangible asset below the carrying amount. Subsequent recovery of loss. Entities are not allowed to continued on next page

CPE Article continued from page 41

Exhibit 3 Illustrative Factor Table Current Direction of Impact on Asset Value Macroeconomic conditions

Negative

Neutral

Positive

Intensity of Impact on Asset Value Impact

Factor 1

General economic conditions

Low

Factor 2

Changes in money markets

✔

Med

Factor 3

Foreign exchange rates

✔

High

✔

Industry and market considerations Factor 4

New competitors

✔

High

Factor 5

Change in demand

✔

Med

Factor 6

A regulatory or political development

✔

Low

Cost factors Factor 7

Increases in raw materials

✔

Med

Factor 8

Increases in labor costs

✔

High

Overall financial performance Factor 9

Negative or declining cash flows

Factor 10

Changes in planned revenue

✔

High High

Factor 11

Changes in planned earnings

✔

Low

✔

Entity and Reporting Unit Events Factor 12

Changes in management

Factor 13

Growth in customer base

✔

High

Factor 14

New product offerings

✔

High

Factor 15

Research and development

Factor 16

Patent infringement litigation

✔ ✔

subsequently reverse an impairment loss once the loss has been recognized. Further, the adjusted amount of goodwill or indefinite-lived intangible asset becomes the new accounting basis after recognition of the impairment loss. International comparison. The amendments in ASU 201108 and 2012-02 do not conform or converge with International Financial Reporting Standards (IFRS). For goodwill, IFRS requires a one-step quantitative test performed at the cashgeneration level in which entities record the excess of the carrying amount of the reporting unit over the recoverable amount of the reporting unit as an impairment loss. The international guidance for small and medium-sized entities allows the amortization of goodwill over its estimated useful life. For indefinite-lived intangible assets, IFRS requires a one-step approach in which the carrying amount of the asset is compared with the recoverable amount. The recoverable amount is the higher of (1) the asset’s fair value less costs to sell or (2) the asset’s value in use. Value in use represents discounted cash flows, using asset-specific risk factors and a market-determined rate. IFRS also requires an annual test for impairment of indefinitelived intangible assets even when there is no indication that an impairment exists and more often if there is an indication of impairment. 42

Med

✔

Med Med

ILLUSTRATION 1: USE THE QUALITATIVE ASSESSMENT In assessing the events and circumstances described in Exhibit 2, practitioners will need to assess the impact of each factor on the carrying value or fair value of the asset. The three-step process can be described as: Step 1: Identify factors associated with the event and/or circumstance (e.g., deteriorating economy is a macroeconomic condition). Step 2: Determine whether the impact of the factor is negative, positive or neutral. Step 3: Determine how the factor affects the fair value and/or carrying value of the asset. A qualitative scale based on relative weights might be used (e.g., scaled as low/medium/high indicating low impact/medium impact/high impact). In the following example, Hypothetical Inc. developed a factor table based on the events and circumstances discussed in Exhibit 2. For each factor, Hypothetical Inc. indicates whether the impact on fair value and/or carrying value will be negative, neutral or positive. Then Hypothetical Inc. indicates whether the factors will have a low, medium or high negative impact on the fair and/ or carrying value of the asset. A review of Exhibit 3 indicates that Hypothetical expects Today’sCPA

| MAY/JUNE 2014

positive and fairly significant impact due to market considerations and overall financial performance. It expects a medium to high significance of the impact on macroeconomic conditions and cost factors. Overall, it appears that a judgment will need to be made regarding whether the positive/high significance impacts outweigh the negative/high significance impacts. Another table column styled “Comments” or a separate report explaining each line item might be useful in making the judgment. Of course, additional factors specific to Hypothetical’s operations or industry could be identified. The overall point of the qualitative assessment is to make a judgment about whether an impairment test is necessary. At some point in the analysis, management may decide that identifying and analyzing additional factors may be more costly than performing impairment tests. For example, the decision to opt out of the qualitative assessment could be made much earlier in the annual impairment test process. The following example illustrates a condition in which Hypothetical might decide to bypass the qualitative analysis to avoid the cost of identifying and analyzing additional factors. ILLUSTRATION 2: BYPASS THE QUALITATIVE ASSESSMENT In this scenario, assume that Hypothetical Inc. begins the annual impairment test by reviewing the prior year quantitative analysis. The review is performed before any factors such as those in Exhibit 3 are identified. Hypothetical is a calendar-year entity that performs its annual impairment test on Oct. 1. Hypothetical has two long-lived intangibles: (1) a customer list acquired 10 years ago from a competitor going out of business and (2) a trademark acquired five years ago. The results of the prior quantitative analysis are: Given the relatively small difference between the fair values Intangible Asset

Asset Age

Carrying Amount

Fair Value Oct 1, 20x0

Excess Fair Value $

Customer List

200,000

202,000

2,000

Trademark

50,000

51,000

1,000

and carrying amounts of its indefinite-lived intangibles, Hypothetical might decide to bypass the qualitative assessment to avoid the additional cost of identifying and analyzing the factors necessary to perform the qualitative assessment. The option to bypass the qualitative assessment in year 20x1 would not affect Hypothetical’s decision in future years. Another example of when an entity might decide to bypass the qualitative assessment would be when there appears to be little or no possibility that an impairment exists. For example, if Hypothetical’s prior quantitative analysis was as follows: In this case, it appears that an impairment is extremely

Intangible Asset

Asset Age

Carrying Amount

Fair Value Oct 1, 20x0

Excess Fair Value $

Customer List

200,000

350,000

150,000

75%

Trademark

50,000

100,000

50,000

100%

unlikely. Given this situation, Hypothetical might decide that the cost of identifying and analyzing factors such as those shown in Exhibit 3 would be greater than the cost of determining fair value at Oct. 1, 20x1, and would opt out of the optional qualitative assessment. Again, the decision to opt out of the qualitative assessment in 20x1 would not affect future qualitative assessment decisions. These examples show that the decision to use the qualitative assessment provisions of ASU 2012-02 will depend on an entity’s judgment with respect to the relative cost of performing a qualitative assessment or calculating fair value. NEW GUIDANCE HOPES TO ADDRESS CONCERNS Although some large accounting firms raised concerns about implementation and auditing issues associated with the qualitative approach to impairment testing of goodwill and indefinite-lived intangibles, FASB issued ASU 2011-08. Though workshops to assist in allaying the concerns were conducted, some participants noted that in the absence of illustrative examples or prescriptive guidance, there may be variations in practice. Subsequently, ASU 2012-02 was issued to provide a consistent approach to testing intangible assets. With the issuance of this ASU, all intangible long-lived assets can also be tested for impairment using the qualitative assessment. FASB indicated that the reason for this new guidance is to satisfy users and preparers who were concerned about the cost and complexity of performing quantitative impairment tests for each reporting period. Whether an entity takes advantage of the qualitative assessment option will be a matter of judgment. As previously noted, entities that have indefinite-lived intangible assets or reporting units with fair values that significantly exceed the carrying amounts may decide to use the qualitative assessments to avoid performing costly fair value calculations. Conversely, FASB noted that it may be more cost effective to bypass the qualitative assessment when entities believe that there is a high likelihood that the fair values of indefinite-lived intangible assets or reporting units are less than the carrying amounts. The contents of this article will assist practitioners in understanding and applying the new provisions related to qualitative assessments in impairment tests. ■

Steve Grice, Ph.D., CPA, is a professor of Accounting at Troy University. He may be reached at 334-670-3149. Loraine Magrath, Ph.D., CPA, is an associate professor of Accounting at Troy University. She may be reached at 334-670-3155.

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SIMPLIFYING THE ANNUAL IMPAIRMENT TESTS: GOODWILL AND INDEFINITE-LIVED INTANGIBLE ASSETS BY STEVE GRICE, PH.D., CPA, AND LORAINE MAGRATH, PH.D., CPA

B. Proceed with the quantitative assessment that requires the entity to calculate fair value of the indefinite-lived intangible asset. C. Retrospectively apply the qualitative assessment to prior periods and treat the change as a correction Prohibiting the use of the MLTN qualitative of an error. assessment in the impairment tests for indefiniteD. Immediately begin amortizing the indefinite-lived lived intangible assets. intangible asset over a three-year period. Requiring a reasonable amortization period for all indefinite-lived intangible assets. 6 Pursuant to ASU 2011-8, entities now Eliminating qualitative assessments from the have the option to qualitatively assess impairment tests for indefinite-lived intangible assets. whether it is MLTN that the fair value of Allowing the MLTN qualitative assessment to be a reporting unit is less than its carrying used in the impairment tests for indefinite-lived amount, with MLTN defined as: intangible assets. A. Having a likelihood of more than 25 percent.

ASU 2012-02 was issued to improve consistency in the impairment test guidance by: A. B. C. D.

2 According to ASU 2011-08, when an entity’s qualitative assessment determines that it is not MLTN that the fair value of the reporting unit is less than its carrying amount: A. Step 1 of the goodwill impairment test must be performed. B. Goodwill should be amortized over 40 years. C. No further goodwill impairment testing is required. D. None of the above.

3 Which of the following is a true statement related to an entity’s decision to bypass the qualitative assessment in the impairment test for indefinite-lived intangible assets?

B. Having a likelihood of more than 50 percent. C. Having a likelihood of more than 75 percent. D. Probable.

7 Which of the following are listed as events and circumstances that should be considered in the qualitative assessments described in ASU 2011-8 and ASU 2012-2: A. B. C. D.

Deterioration in general economic conditions. Increased competitive environment. Negative or declining cash flows. All of the above.

8 Which of the following is a true statement regarding the frequency of impairment tests?

A. Goodwill and indefinite-lived intangible assets should not be tested for impairment more than A. This decision to bypass the qualitative assessment two times over a five-year period. in one period does not affect the entity’s ability to B. The current guidance is silent on the frequency of apply the qualitative assessment in future periods. impairment tests for both goodwill and indefiniteB. If an entity bypasses the qualitative assessment lived intangible assets. in one period, the entity must use a quantitative C. Goodwill and indefinite-lived intangible assets assessment in all future periods. should be tested for impairment at least on an C. An entity is not allowed to bypass the qualitative annual basis. assessment in the impairment test for indefinite- D. Goodwill and indefinite-lived intangible assets lived intangible assets. should be tested for impairment on a quarterly basis for both public and private entities.

4 ASU 2011-08 was issued to simplify how goodwill is tested for impairment by: A. Allowing, but not requiring, a MLTN qualitative assessment to be a part of the goodwill impairment evaluation. B. Requiring a MLTN qualitative assessment to be a part of the goodwill impairment evaluation. C. Eliminating quantitative assessments from the goodwill impairment test. D. Requiring that goodwill only be evaluated for impairment every four years.

9 The amendments in ASU 2011-08 and 2012-02: A. Do not conform or converge with International Financial Reporting Standards (IFRS). B. Converge the impairment test guidance in the ASC with that promulgated by IFRS. C. Were specifically written to eliminate all differences in impairment test guidance that existed among all known financial reporting frameworks. D. Do not apply to public entities.

5 According to ASU 2012-2, if the 10 The amendments of ASU 2012-2 are qualitative assessment indicates that it is effective for: MLTN that the indefinite-lived intangible A. Fiscal years beginning after Dec. 15, 2012. asset is impaired, then the entity must: B. Fiscal years beginning after Sept. 15, 2012. A. Write-off the entire carrying amount of the indefinite-lived intangible asset.

Answers to last issue’s self-study exam: 1. b 2. d 3. a 4. c 5. d 6. c 7. d 8. b 9. c 10. b

C. Fiscal years beginning after June 15, 2012. D. Fiscal years beginning after March 15, 2013.

Classifieds Classifieds Positions Available In Dalhart Texas junior/senior accountant with 5 years minimum tax experience. Salary starting at $75k depending on experience plus benefits with partnership opportunity after proven success. Email resumes to chad@gaskillpharis.com, or mail to Gaskill, Pharis & Pharis, LLP. PO Box 1060, Dalhart, TX 79022. Local CPA firm in Corpus Christi, Texas is seeking an Accountant with 3-5 years of public accounting experience in audit and tax. CPA or CPA candidate required. Excellent partnership opportunity, as senior partner plans on retiring in the next 3-4 years and we are in need of the right individual to take over his client base. Salary starting at $50K for the 3-year experience level. Compensation package includes paid vacation time, employee health savings account and retirement plan match. If you meet these qualifications, please email your resume to dmorales@gowland-cpa.com.

Practices For Sale Accounting Broker Acquisition Group 800-419-1223 X21 Accountingbroker.com Maximize Value When You Sell Your Firm Retirement minded CPA seeks public CPA with billings of $40,000 or more for office cost sharing, part-time assistant and future buyout/merger. Excellent street visible location in central Austin where public has called on CPA for 25 years. Tax and write-up. Sole proprietorship. $120,000 gross. Reply to lapcpa@att.net. $300,000 gross. North Dallas/Addison area. 70% audit - 30% tax. Seller is retiring. Please reply to: Texas Society of CPAs, File Box #5206, Attn: Donna Fritz, 14651 Dallas Parkway, Suite 700, Dallas TX 75254 $135,000 gross. Bryan-College Station established practice. Seller is retiring and will assist in transition. 60% tax, 40% accounting. Please reply to File Box #5205, Texas Society of CPAs, 14651 Dallas Parkway, Suite 700, Dallas, TX 75087. 46

PLANNING TO SELL SOON? … BUYERS WAITING! Contact USA’s No. 1 accounting brokerage network for a FREE sales package with tips on getting your practice ready to sell. We provide financing so you can cash out at closing! Let our 30+ years of expert experience work for you! We only get paid for producing results! Confidential, prompt, professional. Contact Leon Faris, CPA, at … PROFESSIONAL ACCOUNTING SALES 972-292-7172 www.cpasales.com

AKINS PROFESSIONAL BROKERAGE: Successful transitions require experienced, confidential, professional services you can trust. This is what Akins Professional Brokerage provides. Specializing exclusively in the brokerage of CPA firms, we have no upfront fees. List your firm with a professional. Call David Akins, CPA, at 877-277-0272. Visit our website at www. ProfessionalCPAbroker.com. Texas Practices Currently Available Through Accounting Practice Sales: North America’s Leader in Practice Sales Toll Free 1-800-397-0249 See full listing details and inquire/register for free at www.AccountingPracticeSales.com $225,000 gross. Austin. Profitable, turnkey CPA practice. Revenue mix 79% tax, 11% acctng svcs, 5% audit/reviews and 5% other svcs. TXC1051 300,000 gross. Austin. Well-established CPA practice, comprised of 81% tax work, 15% accounting & 4% review. Turn-key opportunity. TXC1050 $67,000 gross. Manvel-Pearland area audit practice. Owner looking to sell audit portion of practice. Loyal client base. TXS1141 $860,000 gross. NW San Antonio Metro. Well-established, full-service CPA firm

with long-term staff and owner willing to assist in transition. TXC1047 $292,000 gross. Temple Metro area. Well-established CPA practice. Tax prep 60% and acctng svcs 40% for good year-round cash flow. TXC1048 $360,000 gross. Parker Co (with DFW clients) CPA practice. Highly profitable with loyal client base. Revenues nicely balanced 50/50 tax and acctng. TXN1347 $58,000 gross. East Fort Worth tax practice. Established business with loyal client base. Turn-key practice or nice addition to an existing firm. TXN1346 $93,000 gross. Abilene CPA practice. High-quality, loyal client base. Revenue mix 63% acctng and 27% tax to provide year-round income. TXN1348 $63,000 gross. Dallas (Love Field area) CPA practice. Revenues consist 80% tax work and 2/3rds are svcs for business clients. Strong fee structure. TXN1343 $576,000 gross. Fort Worth/Trinity Park area CPA practice. High-quality client base, strong fee structure and highly profitable. Turn-key opportunity. TXN1345 $167,000 gross. East Texas practice. Well-established, profitable practice with strong cash flow to owner 60%. Good fee structure. TXN1231 $120,000 gross. Bridgeport. Wellestablished tax and acctng practice with solid reputation. Turn-key with knowledgeable staff in place. TXN1317 $241,000 gross. Coleman Tax & Accounting. Turn-key business with revenues derived primarily from profitable tax preparation svcs. TXN1337 $464,000 gross. Tyler/Longview area. Well-established, rapidly growing CPA firm with loyal client base. Caters to govt. audit clients. TXN1305 Today’sCPA

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$131,000 gross. Decatur area. Tax and Accounting. Solid fee structure and strong cash flow to owner of more than 50% of gross. TXN1329 $130,000 gross. East TX/Palestine area. Well-established CPA practice with quality client base. Highly profitable with cash flow of 60%. TXN1328 $530,000 gross. East Texas. Wellestablished practice with great cash flow to owner. Turn-key opportunity with tenured staff in place. TXN1249 $552,000 gross. Wichita Falls. Highly profitable, well-established CPA practice with a quality client base and balanced service mixture. TXN1315 $180,000 gross. Northwest Houston. Acctng (40%), tax (29%), payroll (21%), and other svcs (10%). Consistent growth and year round revenue. TXS1132 $82,000 gross. West Houston. Franchise tax practice with approx. 500-650 individual tax returns. Staff in place and primed for new owner. TXS1137 $160,000 gross. West Houston tax practice comprised of about 500 individual returns. Staff in place to help in smooth transition. TXS1135 ACCOUNTING PRACTICE SALES For more information call Toll Free 1-800-397-0249 See full listing details and inquire/ register for free at www.AccountingPracticeSales.com

Practices Sought Accounting Broker Acquisition Group “Maximize Value When You Sell Your Firm”

A Local Texas Corporation You Sell Your Firm Only Once! Will You Leave Money on the Table? Free Report: “Discover the 12 Irreversible Fatal Errors You Must Avoid When You Sell Your Firm!” We sell small & large CPA firms … 100 percent of our acquisition brokers are “Ex-Big Four” CPAs! We are the only firm of our type in the nation that can make this claim! Call now for your Free Report! 800-419-1223 X101 or send a quick e-mail to maximizevalue@accountingbroker.com

Thinking of retirement? Naab Consulting has been assisting sellers of accounting and tax practices for over 17 years. We specialize in selling only accounting practices and understand the market. We offer noobligation, confidential on-site personal consultations to discuss your situation. We offer a large database full of qualified buyers, financing for your buyer and

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Software For Sale PROVEN OIL and GAS ACCOUNTING SYSTEM keeps getting better. Developed for CPAs by a CPA. Over 2,400 users. G/L, A/P, depletion, document imaging, payroll, joint interest billing, revenue distribution and production management. WolfePak Software; 2901 S. First St., Abilene, TX 79605. 325-677-1543 or 800299-1543. E-mail: sales@wolfepak.com.

TSCPA offers opportunities for members and non-members to advertise in the Classifieds section of Today’s CPA magazine. To request a classified ad, contact Donna Fritz at dfritz@tscpa.net or 800-428-0272, ext. 201 or in Dallas at 972-687-8501; fax 972-687-8601. Or write to:

TSCPA Today’s CPA Classified Ads 14651 Dallas Pkwy, Suite 700 Dallas, TX 75254-7408

All classified ads must be paid in advance. MasterCard, Visa, American Express, personal and business checks are accepted. Please contact Donna Fritz for rates and more information. Today’sCPA

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