Today's CPA Nov/Dec 2014 by The Warren Group

Todayâ&#x20AC;&#x2122;sCPA NOV/DEC 2014

TE X AS SOCIETY OF

C E RT I F I E D P U B L I C AC C O U N TA N T S

Techniques to Gain and Retain More Clients

What You Need to Know About Captive Insurance Structures Reasons to Conduct an Intangible Asset Valuation Brushing Up on the New Audit Report and Relating it to the Financial Reporting Framework for Small to Medium-Sized Entities

Also: Grassroots Growth for the CPA-PAC

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CONTENTS

CHAIRMAN Mark Lee, CPA

VOLUME 42, NUMBER 3 NOVEMBER/DECEMBER 2014

EXECUTIVE DIRECTOR/CEO John Sharbaugh, CAE

EDITORIAL BOARD CHAIRMAN Winford Paschall, CPA

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

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

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

WEB EDITOR Wayne Hardin whardin@tscpa.net

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

DIRECTOR, MARKETING & COMMUNICATIONS Janet Overton 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 Crapps, CPA-Houston; James Danford, CPA-Fort Worth; Melissa Frazier, CPA-Houston; Greta Hicks, CPAHouston; 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; Barbara Scofield, CPA-Permian Basin; Brinn Serbanic, CPA-Central Texas.

Design/Production/Advertising The Warren Group thewarrengroup.com custompubs@thewarrengroup.com

cover story 24 Techniques to Gain and Retain More Clients society features 14 Spotlight on CPAs That’s Entertainment! 22 Capitol Interest From Candidates to Elected Officials technical articles 23 The Global Management Accounting Principles: Helping Businesses Make Better Decisions 30 What You Need to Know About Captive Insurance Structures 34 Reasons to Conduct an Intangible Asset Valuation 38 CPE: Brushing Up on the New Audit Report and Relating It to the Financial Reporting Framework for Small to Medium-Sized Entities columns 4 Chairman’s and Executive Director’s Message Introducing the New Strategic Plan, Part 2 6 Tax Topics The Inner Play of Passive Losses and Net Investment Income 8 Business Perspectives Cash is King 9 Accounting & Auditing Cash to Accrual: How Will You Be Affected? 10 Tech Issues Three Steps to Improving Client Retention With Social Media 101 12 Chapters Grassroots Growth for the CPA-PAC departments 16 Take Note 46 Classifieds

© 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.

Today’sCPA November/December 2014

CHAIRMAN’S AND EXECUTIVE DIRECTOR’S MESSAGE

Introducing the

New Strategic Plan, Part 2

By Mark Lee | 2014-2015 TSCPA Chairman and John Sharbaugh, CAE | TSCPA Executive Director/CEO

n the last issue of Today’s CPA magazine, we began introducing you to TSCPA’s new strategic plan. We discussed the planning process used, the TSCPA Mission Statement and the first two objectives of the plan. In this issue, we’ll cover the remaining three objectives. To recap, the objectives of the new plan are: • Professional Competency – Deliver knowledge and resources for best-in-class professional development. • Career Success – Provide tools and resources to help members compete and thrive. • Advocacy – Advocate for Texas CPAs by influencing decision-makers who affect our profession. • Culture and Community – Inspire CPAs to advance the profession and serve their communities. • Organizational Excellence – Maintain a world-class accounting association. TSCPA will use these objectives to set priorities, focus resources, strengthen operational excellence and assess the direction of the organization. Advocacy. With this objective, TSCPA works to serve the professional interests of members by being the advocate for Texas CPAs to public policy makers, regulators and standards-setters. Through the Key Person Program, TSCPA will continue to establish and maintain essential relationships with state legislators and regulators. Further, TSCPA will provide fundraising programs for the CPA-Political Action Committee (CPA-PAC) and encourage the chapters to participate. TSCPA will also develop appropriate responses to regulators and various standards-setting bodies, including the IRS and state comptroller’s office. Input will be provided on TSBPA-proposed rule changes and other actions as necessary. The Society will promote the profession to the public at large. To facilitate effective dissemination of information to the public, Mark Lee 4

can be contacted at Mark.Lee@aglife.com.

as well as serve as a resource to the news media, TSCPA develops and maintains effective relationships with news reporters at the national, state and chapter level. Culture and Community. Promoting the benefits of membership is an important recruiting and retention activity. Also important is promoting the Society and the CPA profession to relevant student audiences, with the goal of encouraging interest in being a member. To contact potential student members, relationships will continue to be built with Texas educational institutions. TSCPA will publicize the role that CPAs play in serving their communities. Since the work of CPA volunteers is the key to the Society’s success, TSCPA will encourage and develop new volunteer leaders, with a special focus on younger members. The chapters will be encouraged to sponsor activities that engage new members by holding events to promote volunteerism. With the goal of life-long involvement, TSCPA will enable members to serve in a variety of roles as their jobs and careers change. Organizational Excellence. To maintain TSCPA’s prominence and influence in the accounting field, as well as continue to provide excellent service to members, the Society will ensure adequate financial, technological and human resources. Adequate IT technological capabilities include a robust, easy-to-use website with relevant content and continuing to explore mobile applications. Recognizing the significant constituent connections at the local level, appropriate member activities will be coordinated with the chapters to best serve members. In addition, TSCPA will utilize market research and other appropriate methods to keep current on member needs.

Setting a Course for the Next Three Years The new strategic plan will guide the organization from 2014 until 2017. The objectives identified in the plan will assist TSCPA in achieving its mission to support its members in their professional endeavors and to promote the value and high standards of Texas CPAs. TSCPA’s strategic planning process enables the organization to define its direction and set a course for the future. The plan is posted on the TSCPA website. Go to tscpa.org, select About TSCPA, then Governance, and click on Strategic Plan. n John Sharbaugh

can be contacted at jsharbaugh@tscpa.net. Today’sCPA

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TAX TOPICS

The Inner Play of Passive Losses and Net Investment Income

By Greta Hicks, CPA | Column Editor uestion: Is gain from the sale of building and land subject to §1411, Net Investment Income Tax

(NIIT)? Facts: • T owns 100 percent of S corporation. • S corporation is a trade or business in which T materially participates. • T rents the building and land to S corporation to be used in its trade or business. S corporation sells its property for a gain, as well as the land and building owned by T and used by S corporation. First, is the sale of the S corporation assets subject to NIIT? Some portion may be subject to NIIT. Regs §1.1411-7, which states in part: “The term Section 1411 property means property owned by or held through the Passthrough Entity that, if disposed of by the entity, would result in net gain or loss allocable to the transferor of a type that is includable in determining net investment income of the transferor under §1.1411-4(a)(1)(iii).” “…Net gain includes, but is not limited to, gain or loss attributable to the disposition of property from the investment of working capital (as defined in §1.1411-6),” which would be taxable NII. Second, is the sale of the building and land subject to NIIT? Maybe not. Under §1411, “to the extent that gross rental income described in §1411(a)(1)(i) and §1411(e)(3)(vii) is treated as not derived from a passive activity by reason of §1.4692(f )(6) or as a consequence of a taxpayer grouping a rental activity with a trade or business activity under §1.469-4(d)(1), such gross rental income is deemed to be derived in the ordinary course of a trade or Greta Hicks, CPA 6

business within the meaning of §1411(b).” To determine the answer to the building/land sale being subject to NIIT, §1411 refers us to §469, Passive Activities and self-rental rule of 1.469-2(f )(6), which states, in part: “An amount of the taxpayer’s gross rental activity income for the taxable year from an item of property equal to the net rental activity income for the year from that item of property is treated as not from a passive activity if the property is rented for use in a trade or business activity in which the taxpayer materially participates (within the meaning of §1.469-5T) for the taxable year.” Following the train of thought in IT Regs. §1.469-1T(e)(3)(ii)(F), “The provision of the property for use in an activity conducted by a partnership, S corporation, or joint venture in which the taxpayer owns an interest is not a rental activity under paragraph 1.469-1T(e)(3) (vii),” which states in part, “If the taxpayer owns an interest in a partnership, S corporation, or joint venture conducting an activity other than a rental activity, and the taxpayer provides property for use in the activity in the taxpayer’s capacity as an owner of an interest in such partnership, S corporation, or joint venture, the provision of such property is not a rental activity.” The taxpayer must make the property available to the S corporation in his/her capacity as an owner of an interest in the S corporation. “The determination of whether property used in a (trade or business) activity is provided by the taxpayer in the taxpayer’s capacity as an owner of an interest in a partnership, S corporation or joint venture shall be made on the basis of all of the facts and circumstances.”

It appears that “the taxpayer’s capacity as an owner” is met when the property is being rented below fair market value. There is nothing stated in the regulations to this effect, but several authors and cases arrive at the conclusion that below fair market value rental indicates that the property is being provided in his/her capacity as an owner. The above materials include general rules, but are intended to be used as a beginning point in your research for specific transactions of your individual clients. Also see: • 1.1411-4 Definition of net investment income • 1.1411-4 Property held in a trade or business other than a passive activity • 1.1411-4 Gains and losses excluded from net investment income • 1.1411-6 Income on investment of working capital subject to tax • 1.1411-7 Treatment of certain nonpassive rental activities • 1.1411-7 Exception for dispositions of interests in partnerships and S corporations • 1.469-1 Property made available for use in a nonrental activity by a partnership, S corporation or joint venture in which the taxpayer owns an interest • 1.469-1 In his/her capacity as an owner of a partnership or S corporation • 1.469-2 Self-rental Rule – recharacterized as non-passive • 1.469-2 Dispositions of partnership interest and S corporation stock • 1.469-4 Definition of activity • 1.469-5 Material participation These key words and sections of the regulations will assist you in continuing your research. n

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

Cash is King

By Mano Mahadeva, CPA, MBA | Column Editor

company pays invoices to vendors before receiving payments from its customers. The company pays invoices late and gets saddled with late fees. There is excess inventory stashed in the warehouse, some of which is obsolete. Operating cash deficits become larger, so the company continues to borrow funds from a cheap credit market to fill in these deficits. Stacks of invoices sit on desks waiting to be processed. The sales team, at random, generously grants extended payment terms to customers to keep them happy. Observations such as these make it clear that this company is not managing its balance sheet. Managing cash is an integral part of a company’s overall operations. Cash is required to sustain the operating cycle, and the finance and treasury departments ensure timely provision of the cash resources needed to sustain these activities. Minimizing a company’s working capital helps maximize its cash flow. It will allow your company’s financial performance to improve even without any increase in sales or a reduction of costs. As a result, the company has greater flexibility of actions. In accounting terms, working capital is the organization’s current assets, such as cash, inventory and its receivables, less its current liabilities or what it owes in the short term. Operationally, the company buys raw materials from a vendor, creating a payable; the raw materials purchased get converted to inventory as work-inprocess products or as finished goods. Some of the finished goods are sold on credit, which creates an account receivable. To free up cash, companies need to optimize working capital by efficiently and effectively managing payables, inventory and accounts receivable. The concept of effective working capital management is simple, but difficult to execute. On a basic level, it means reducing the days of sales outstanding, increasing the days in which payables are outstanding and asking someone else to carry your inventory! A concerted and sound effort needs a strategy that requires time and patience. We need to think differently and be open to exploring fresh alternatives. What amount of working capital should a company target? Well, every company needs sufficient cash and inventory to do its job, but the size of the organization, the diversity of its products, the stage of its life and future growth have an effect on the amount of working capital. The goal is to aim for the lowest amount of days in cash conversion cycle time, which helps generate a better free cash flow profile for the company. Instead of the daily scrutiny it needs, quick fixes to working capital may include the liberal use of discounts and rebates, handing out extended payment terms to customers, holding back payments on vendors and stopping production on some items, to name a few. These are not appropriate tactics for the long term. What may happen if the company gets caught in a downturn and has to ask this same vendor for better terms? Measuring optimum days and levels Mano Mahadeva, CPA 8

of inventory presents several challenges. Accounting techniques and assumptions allow a company to value inventory in different ways, so working capital values will depend on the chosen method. Remember EOQ from college days?! This is an area of constant struggle between sales and operations, where each has an opinion of the amount to be carried. Too much inventory may require write downs, and too little on shelves means dissatisfied customers. Diversity of products, each product’s volume of sales and the velocity (or turns) of each product make valuations of inventory more difficult. Days sales outstanding (DSO) reflects the “average” number of days a company needs to fully collect on a sale. Because “average” days are used, it is important to look at the underlying calculations and assumptions used. Assess the quality – is the aging of receivables in line with company history or within the industry, as the use of an “average” masks receivable aging issues? Look at the state of the economy – is a downturn impacting collections? Is there a concentration of accounts that presents a higher risk? Or are the days too low due to a policy that is too rigorous on terms? Accounts payables seem easy – you are the customer; you pay when you want to or when you get to it, right? Hopefully not, as there should be a broader focus on timely delivery, dependability of the supply chain, quality, innovation capability and a longer-term symbiotic relationship. Is manual entry in vogue or are A/P processes automated? Are there lengthy approval processes or missing and duplicate invoices? And are we taking advantage of timely discounts to improve our margins? Working capital management has to be a key priority for any business. It should be championed by the C-suite and monitored daily. A sound, cohesive policy that is appropriate should be crafted and adhered to. Timely communication and teamwork between billing efforts, inventory management and the procurement process help build strong cash positions, which help lenders lend. Seizing the opportunity to improve working capital will generate profits, enhancing shareholder value. n

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

ACCOUNTING & AUDITING

Cash to Accrual: How Will You Be Affected?

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

ection 3301 of the Tax Reform Act of 2014 is generating significant concern for small businesses across America. The proposal issued last year by the Joint Committee on Taxation ( JCT) of Congress broadens the tax base while lowering and flattening rates. Section 3301 redefines the types of entities that are required to use the accrual method for computing taxable income. If implemented, this provision alone would increase tax revenues by an estimated $23.6 billion over 10 years. Many small business owners are now asking the question, “How will this proposal affect me?”

Cash vs. Accrual Accounting The cash method of accounting is a straightforward way of revenue and expense recognition for a small business. A company recognizes income (and generates ability to pay tax) when cash is collected, and recognizes expenses when cash is disbursed. One of the main benefits of using the cash method is simplicity. The main complaint against using the cash method is timing differences between periods in which transactions occur and periods when collections are received. Under the accrual method, revenues and expenses are recorded when the transactions actually occur, regardless of when cash is received or disbursed. The benefit of using accrual is the accurate representation it provides of the company’s true financial standing. When transactions occur at a significantly different time than when cash payments are received or disbursed, accrual accounting allows businesses to see when revenues and expenses are actually being generated. Despite its accuracy, it is a more complex method than what is traditionally considered necessary for small businesses. The Proposed Change Current law allows individuals, certain pass-through entities, partnerships, personal service companies, and farmers and ranchers to choose between the cash and accrual method, regardless of their size and income (unless they have inventory). It also allows C corporations with less than $5 million in gross receipts to elect to use the cash method. The proposal would change two things for non-farm businesses: 1. All businesses with gross receipts of $10 million or less may use the cash method of accounting. Those with gross receipts of $10 million or more must use the accrual method. C. William Thomas

2. All entities other than sole proprietorships (certain pass-through entities, partnerships, and personal service companies) would be required to use the accrual method of accounting if gross receipts exceed the $10 million threshold. Many feel that allowing more small corporations to use the cash method is a step forward in encouraging small business growth. This one benefit, however, is overshadowed by the adverse effects it would have on the newly included types of business entities across a myriad of different industries, from professional services such as accounting, architectural, engineering, law firms and medical practices. While the change for C corporations has found some support, this provision has found many opponents, including the American Institute of CPAs (AICPA). One of the main arguments against the inclusion of these entities is the significant financial burden that taxing the “accrued” income would place on cash flows of affected companies. Many of these businesses may receive payments on accrued income only after significant time has passed or perhaps not at all. In the meantime, employees and other operating expenses must be paid. Some companies may be forced to borrow in order to pay taxes. As a recent letter to the Senate against the proposal explained: “The basic tenet of taxation is ‘ability to pay.’ Forcing businesses to recognize income before they receive payment violates this basic tenet.” Another argument against the change is that many of these entities have used the cash method of accounting as the basis for their business model for decades. Requiring such entities to change their accounting policies would require restructuring and create substantial compliance costs. The $10 million threshold could also create a significant growth barrier to small companies. If a company is required to change its accounting from cash to accrual when it grows past the $10 million threshold, it may simply choose to remain at its current size and stop pursuing further growth, or sell out to a larger entity. At the moment, it appears that this measure is sufficiently unpopular among powerful lobbying groups as to have little chance of becoming law, even if Congress can agree on a final bill, which is in itself doubtful. However, it is a sign of things to come with regard to Congressional willingness to use tax accounting information in new ways to raise revenue. So, while some may dodge this bullet for the present, in the end most of us will likely pay more. n

is the J.E. Bush Professor of Accounting in the Hankamer School of Business at Baylor University in Waco. Thomas can be reached at Bill_Thomas@baylor.edu.

Today’sCPA November/December 2014

TECH ISSUES This Tech Issues section replaces Emerging Issues

Three Steps to Improving Client Retention With Social Media 101

By Brett Owens, Guest Columnist

hile there is nothing better than one-toone, personal contact to let clients know they are valued, I believe social media can help your firm improve client retention. Clients are more loyal to people they like and with people they feel closely connected to, as well. Social media can help strengthen the bonds you have with your clients. Rather than meeting just once or twice a year, social media can help you stay connected and on the top of your clients’ minds on a regular basis. The big knock on social media is that it’s a time drain. From Twitter to blogging to everything in between, who has the time? You do – if you’re smart and strategic about how you use, promote and evaluate social media. When it comes to using social media, there are, undoubtedly, many ways to waste time, and you can invest a lot of time for little or no return if you’re not careful. What you want is maximum return from a minimal time investment. 1. Connect with Clients on LinkedIn and Facebook. If you don’t yet have a profile established on LinkedIn and Facebook, you should set one up on each platform. Traditionally, LinkedIn is used for business purposes; Facebook for personal connections. However, these traditional roles are blending by the day – as our personal and work lives blend in parallel. So, I’d recommend setting up a personal profile on each. Once you have a profile set up, the next thing you need to do is “connect” with your clients on these platforms. This is pretty easy to do – these networks were both built on the viral process inherent in inviting people you know to “connect.” You can even use your existing email address book to search for initial connections. When you land a new client, the first thing you should do is connect with them 10

on Facebook and LinkedIn. Also include the links to your LinkedIn and Facebook profiles in your email signature so that others can find you. If you’re not connecting with your clients on these mediums, you’re behind the curve. You may be wondering about Twitter. I think the noise level is still too high to be used for this purpose. If you’re very savvy with social media, though, feel free to integrate Twitter into your efforts. I think you’ll be fine either way. 2. Set up a Blog and Write Informative Articles. You have a lot of expertise floating around in your head, so much that you might not realize it. Your clients tap this vast pool of knowledge when they meet with you and engage your services – it’s the value they receive from doing business with you. If you could share this knowledge with them on a regular basis, in small but consistent quantities, it would further strengthen the regard they have for you. It may also help drive new business from

existing clients, because one of your posts may trigger them to take action, which would, of course, involve your assistance and expertise. The best way I know to share knowledge and allow others to tap your expertise in a scalable manner is by blogging. Blogs are very easy to create. Writing as little as one article a week can reap huge rewards for you. Plus, you’re going to generate valuable content for your email newsletter. More on that later. To set up your blog, choose a blog platform. Once you have a blog platform established, you’ll want to make a habit of frequently writing a post. At first, this might be challenging – especially if you’re not in the habit of writing. Like any skill, the more you do it, the more comfortable you’ll become. What should you write about? Really anything you want … anything you think might be of interest to your clients and even prospects. The important thing is to write about topics that you are informed Today’sCPA

and passionate about. Writing shouldn’t be a chore – it should be an enjoyable experience. If you need some ideas, think about the questions that come in from clients. If you took the time to answer a client’s question, why not write a general blog entry about the topic? It very well may be of interest to other clients, and remember: blogs are searchable on Google, Bing and other engines, so you may very well recruit a new client in the process. When in doubt, ask your clients what they want to hear about! There is a reason they are paying for your expertise – they think highly of it. 3. Send a Monthly Email Newsletter. You might be thinking that this is getting to be a lot of work. Don’t worry, I have a major shortcut on this step that will save you a lot of time, and allow you to leverage and

Brett Owens

repurpose the great content you generated in step 2. To send a monthly newsletter, you need an email list and you need content. Let’s start with the email list. You’ll want to get set up with an email marketing provider. Once you’ve signed up for an account with an email marketing provider, you’ll then want to import the email addresses of your clients. Some email providers will allow you to do this directly, while others may require another step of requesting the permission of your client to be added. Each newsletter needs to contain instructions about unsubscribing. Now for the content part – and my big shortcut. You can use the recent content of your blog to automatically generate this email for you. This means that after the

initial setup, there’s little work required of you each month. What you want to do is set up an “RSS Driven Campaign” that delivers an email monthly to your list. Essentially what you do is set up an email template and format it as you’d like with Subject Line, Title and so on. Then, plug in the RSS address of your blog and voila! The email will automatically be generated based on the blog articles you wrote over the last month. Social media channels can have potentially significant beneficial effects for your firm’s client retention efforts. While the steps outlined here require a bit of up front time and energy, the ongoing time requirement is not that much. I think the return you’ll see from your efforts will far exceed the modest time and energy input. n

is CEO and co-founder of Chrometa, a Sacramento, Calif.-based provider of time management software that accurately records and reports back how you spend your time. Previously marketed to only the legal community, Chrometa is branching out to accounting prospects. Gains include the ability to discover previously undocumented billable time, saving time on billing reconciliation and improving personal productivity. Owens is also a blogger and founder at ContraryInvesting.com, as well as a regular contributor to two leading financial media sites, SeekingAlpha.com and Minyanville.

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Today’sCPA November/December 2014

CHAPTERS

Grassroots Growth for the CPA-PAC

By Rhonda Ledbetter | TSCPA Chapter Relations Representative

s they say, “All politics is local.” That is especially true for TSCPA chapters. The success of the Society’s legislative advocacy for its 27,000 members comes down to the work being done locally, around the state. Following are some of the projects and events this year, in chapter alphabetical order.

Austin The Austin Chapter hosted its first-ever CPA-PAC fundraising golf tournament in May. Thanks to organization and execution by Jesse Dominguez, CPA, a member experienced in conducting such events, the chapter volunteers were able to “divide and conquer” and get it all done without any one person feeling overwhelmed. Member involvement was the key to success. The financial support of sponsors – and the participation of their representatives – helped make the tournament happen. There were three levels: Title, Closest to the Pin, and Hole sponsors. One of the hole-in-one prizes was a new car or $25,000 cash. The car dealer had a representative on site and a car at hole No. 5. A winner at holes No. 7 or No. 9 could get a name-brand flat panel TV, two roundtrip airline tickets or a set of golf irons. When the tournament ended, there was an all-American lunch of hamburgers and hot dogs, and an awards ceremony that included a drawing among those who donated to the cause by purchasing mulligans. (A member actively involved in TSCPA’s legislative work generously matched dollar-for-dollar the mulligans bought.) The event netted approximately $3,000, and the chapter was so pleased with its success that another will be planned in the future. Corpus Christi The 2013-14 Chapter President Paul Damerow, CPA, was motivated to meet the fundraising goal set by the CPA-PAC Committee for the year. He and the chapter Public Affairs Chairman Susie Sullivan, CPA, were discouraged at first because the goal seemed out of reach. It was higher than in the prior year, when the chapter was recognized for achieving that year’s goal. But they dug deep and sprinted toward the finish. In May, the president sent hand-signed letters to sole practitioners and managing partners in local firms who had not yet contributed for the 2013-14 year. His letter pointed out how close the chapter was to meeting the goal and encouraged them to make firm and individual contributions. He also sent letters of appreciation to those who had made contributions with their membership renewals in April and May. Thanks to the effort, the chapter exceeded the target and was recognized 12

in its size category again for achieving the highest percentage of goal.

Dallas Dallas Public Affairs Committee members and legislative Key Persons were busy delivering CPA-PAC checks to legislators throughout the chapter area and, in some cases, others where two chapters jointly support legislators. Whenever possible, the efforts were coordinated to involve more than one CPA in making the deliveries. The volunteers also worked to target an event and get the appropriate chapters’ names listed on brochures or announcements. This work continued from August through the month of October – an exciting time right before the November elections and the next session of the Texas Legislature. Headed up by chapter PAC Committee Chair John Eads, CPA, the chapter held a November Legislative Emphasis Week, which included an event featuring a legislator as a keynote speaker during a CPA-PAC fundraising luncheon. One of its purposes was to make individual CPAs and their employers aware of TSCPA’s legislative efforts on their behalf and to get them on board regarding current issues. It was a big event, with formal invitations to partners and owners of CPA firms, monthly newsletter and email blasts to CPAs, and invitations to all legislators in the chapter area. There were sponsors to help absorb event costs. Current PAC contributors had a ribbon of recognition on their nametags and their names published in the chapter newsletter. El Paso A chapter meeting was turned into a mutual education and networking opportunity. Five legislators and candidates actively participated in a luncheon attended by 41 members and guests. The groundwork was laid with contacts made by a chapter past president who made personal connections during Today’sCPA

Austin Chapter members Stefanie Cavanaugh, CPA, and Jesse Dominguez, CPA

El Paso Chapter CPA members Roxie Samaniego (second from left), René Peña (fifth from left) and Tony Benitez (sixth from left). Others pictured are candidates for state representative Cesar Blanco (left), Joe Moody (third from left), Marisa Marquez (fourth from left), and Jose Alexandro Lozano (far right).

other networking events in the community. Each of the five was given approximately 10 minutes at the meeting to provide updated legislative or candidate information and hold an open question-and-answer session. Rene Peña, CPA, the chapter’s Public Affairs chair gave a brief presentation about the CPAPAC, explaining its importance to CPAs and the public. To encourage CPA-PAC donations, they sent letters to members in May and July outlining the benefits that contributions create for CPAs’ employers, clients and the profession. As a follow-up to the initial ask, the chapter committee will send an email requesting donations and will implement a telephone call drive to each member’s firm and to sole proprietors.

Fort Worth The chapter produced a tour of Fort Worth’s new downtown public square, Sundance Plaza, and its two new bookend buildings. The members in charge were CPA-PAC Committee Cochairs J.D. Danford, CPA, and Trish Fritsche, CPA. An architect from the firm responsible for development was with the tour as a knowledgeable guide, walking participants through the plaza to highlight form, function and aesthetics. The group began at the building on the west side of the square. Group members were informed about the references to Fort Worth’s architectural history in this recently opened structure, named after the historic Westbrook Hotel and featuring references to the “Cowtown Moderne” style on the facade and interior. The group continued into the square and learned that many structures have been created to bring the public into the heart of downtown – with aesthetic and functional features, including a permanent stage, outdoor cafes, innovative “umbrella” sun shades, and new multiuse office and retail buildings. A cocktail reception at law offices in the 420 Commerce Building on the east side of the square capped the tour. The firm hosted a wine reception after the architect’s closing remarks about the plaza, its design, uses and future. Today’sCPA November/December 2014

The event was open to all who made a minimum contribution to the PAC. Approximately $4,000 was raised.

Houston A reception was held by the Houston Chapter in May. A nonpartisan event, it featured presentations on current issues in the Texas Legislature given by a Republican and a Democrat serving as state senators. TSCPA’s managing director of regulation and legislation, Bob Owen, CPA, also shared insights on legislative topics. The chapter’s PAC Steering Committee, chaired by Jeff Harris, CPA, planned the event. Invitations were sent to PAC contributors, followed up by personal phone calls. There were 40 members who participated in the reception, which was held in a tasting room at a local wine cafe. Southeast Texas Chapter The first chapter meeting of the 2014-15 fiscal year was focused on educating members about issues at the Texas Legislature affecting the accounting profession and those it serves. At a luncheon attended by chapter members and their staff, State Rep. John Otto, CPA, shared a wealth of knowledge about topics that have been dealt with during recent years and those likely to be on the minds of legislators during the upcoming session. At the luncheon, Chapter Regulatory and Legislative Committee Chair Brad Brown, CPA, provided information about the work of the CPA-PAC and its advocacy for the accounting profession in Texas, and an appeal for donations. Posters were displayed recognizing participants (and their contribution levels) during the most recent two fiscal years. Back the PAC Be part of the strength in numbers by getting involved in the CPA-PAC. Donations are needed year-round and work to keep your voice in Austin heard. Go to the Governmental Affairs area at tscpa.org, click on “CPA-PAC” and then “Donate Now.” n 13

SPOTLIGHT ON CPAS

That’s Entertainment! Austin CPA’s Adventure Includes Unique Client Base

By Anne McDonald Davis

hen was the last time you were visiting a client and someone yelled, “Fire in the hole!” and nearby a car blew up? Then you went right on with the appointment because that was perfectly normal? “Welcome to entertainment tax for film and TV,” laughs Kristy Holmes, CPAAustin, with Maxwell Locke & Ritter LLP in Austin. “Part of our practice is geared toward actors, directors, production companies, independent filmmakers and musicians.” Clients have hailed from projects ranging from indie films such as “The Last Rites of Ransom Pride,” to a Lifetime movie, “The Preacher’s Daughter,” to the hardboiled “Sin City: A Dame to Kill For.” Holmes explains the firm’s recent growth in this specialty: “In the last few years, there was a really good deduction for filmmakers, and we became known for how to qualify our clients. The deduction didn’t pass for 2014, but it brought us a lot of work in the meantime ... and there’s still the possibility it may get renewed and even be retroactive.” Speaking of deductions, as one might imagine, there are some interesting ones. The car that blew up? A deduction, you bet. Movie based on a book? Buying the rights is deductible along with the posters for the movie, all the camera equipment, whether bought or leased, and so forth. Perhaps it’s a bit grisly, but Holmes admits that she was particularly intrigued by deducting faux body parts – a costly fake leg, to be specific.

Small Town Roots Holmes began life in a small west Texas town, Iraan, about 80 miles from Midland/ Odessa. She spent her entire childhood in the town named for Ira and Ann Yates, who made their family fortune in the neighboring oil fields. When she was a junior in high school, an observant teacher encouraged her to take an accounting class. Holmes liked it so 14

Kristy Holmes and actor Danny Trejo at the premier of movie shorts attended in Austin.

much that she joined with three others in the school who signed up so that an accounting 2 class could be offered. She even participated in UIL competition before enrolling at San Angelo State to major in the field. “It just clicked with me,” she recalls. “In fact, I was advised against taking college-level accounting 1 too soon, but after my work in high school, it was actually kind of a breeze!” Holmes began her career in tax work for a regional west Texas firm, primarily serving oil field companies. Several years later, she moved to Austin for a position with Maxwell, Locke & Ritter just before they merged and the new partner brought in entertainment clients. “I was the newest,” she explains, “so I got brought in on that.”

In the Real World Holmes says she likes to fill her non-fiction life with “nice people,” many of whom she says she’s met through the Texas Society of CPAs. She enthuses: “I joined as soon as I got my license. I’d done a lot of stuff with the Permian Basin Chapter and really liked it. When I moved to Austin, my coworker got me started going to events and participating in the leadership program. That’s when I really got involved.”

These days, Holmes volunteers as manager of community involvement for the Austin Chapter and on TSCPA’s External Relations Committee. “I enjoy serving – it’s the other people, other CPAs to socialize with. Yes, you make connections, but it’s not so much about that as being around nice people,” she says. Her clients will be glad to hear that Holmes loves to patronize the movies, although presently many of those fall into the category of “Frozen” (a recent favorite), since her 3-year-old daughter takes up most of her free time. Holmes has been married for five years. Her husband is a revit technician, basically 3D drafting, for structural engineering companies. She grins, “We’re redoing our daughter’s bedroom and he wants to draw it all out in 3D.” Her community involvement includes being a member of the Austin Film Society, a volunteer for Junior Achievement and serving as a past treasurer at the Mobile Film School. All of this adds up to a very full life, particularly when you add in work experiences such as strolling across the set of the movie “Predators” while it was still smoking. “That was cool,” she admits. n Today’sCPA

GR WTH It’s what CGMA stands for. Officially, of course, it’s Chartered Global Management Accountant. A new designation representing accomplished professionals that drive and deliver business success, worldwide.

Find out more at cgma.org

TAKE NOTE CGMA Designation: Exam Information Exam Requirement Begins January 2015

Forensic & Valuation Services 2014

Conference

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Unique Perspectives. Shared Focus. Save NextGen FVS Professionals Attend Program –23.5 $ 75 On-Site or TSCPA Member Selected Inaugural NextGen Online Ambassador Up to

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PatriciaFVSHavard, CPA-Fort Worth, CFF, Holders was selected as one Section Members and ABV™/CFF Credential Save an Additional $100 of only two inaugural NextGen Ambassadors for AICPA’s 2014 Forensic & Valuation Services (FVS) Conference held in New Orleans on Nov. 9-11, 2014. As ambassador, Havard was a speaker during the NextGen FVS Professionals Program and served as conference mentor. ®

Havard is the principal at Patricia Havard PC in Lancaster (South Dallas County). Her firm began its 21st year in business this past September and is a full-service accounting firm serving many industries. Besides being a CPA for 20+ years, Havard acquired the Certified in Financial Forensics (CFF) credential from AICPA in January 2013. This certification is exclusive to AICPA, and CPAs can only receive it after extensive training and testing. AICPA’s NextGen FVS Professionals Program is a hands-on exploration of core competencies for professionals with fewer than five years of forensic or business valuation experience. This inaugural program is built on case studies within each discipline that offer the less experienced practitioner the opportunity to learn and apply concepts, methodologies and resources in actual practice. The AICPA Forensic & Valuation Services (FVS) Conference is an educational forum that brings together influential forensic and business valuation experts – in one location – for insightful perspectives from the two disciplines. Sessions available are from both interrelated areas.

AICPA and the Chartered Institute of Management Accountants (CIMA) created the Chartered Global Management Accountant (CGMA) designation. It is a global designation that recognizes U.S. CPAs and CIMA members who work in management accounting roles. The CGMA is available to qualifying AICPA members, and members of TSCPA who are also AICPA members receive CGMA_FullPage_ADS.indd 4 a discount. Starting in January 2015, candidates will be required to pass an examination to become CGMA designation holders. The first exam sitting will be in May 2015. The CGMA exam is a comprehensive strategic case study that will assess the competencies required in today’s business environment. Candidates will be required to apply theoretical and practical knowledge to a real-world scenario to demonstrate their ability to guide business decisions. A practice exam is available to illustrate the key features of the case study exam, demonstrate the format of the questions and allow candidates to gain familiarity with the exam’s functionality. The practice test is free to use as many times as a candidate wishes. To find out more about the CGMA designation and exam, visit CGMA.org. On the site, click on Become a CGMA, then scroll down and select CGMA Exam for AICPA Members. n

TSCPA Member Recruitment Campaign TSCPA is reaching out to Texas CPAs who have not yet joined to encourage them to connect with their professional association that is responsible for connecting, protecting and advancing CPAs in Texas. Share with your nonmember colleagues the value of TSCPA membership and encourage them to join your professional community. To learn more about how TSCPA serves CPAs, please visit www.tscparoi.org. n

For more information and eligibility requirements for the NextGen FVS Professionals Program, contact conferencesteam@aicpa.org. n 16

Today’sCPA

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TAKE NOTE

New Revenue Recognition Standard: Build Your Implementation Plan Now

By Kim Kushmerick

he Financial Accounting Standards Board’s new revenue recognition standard presents the most significant accounting change many veteran CPAs have seen. The standard touches every entity (public and private, including not-for-profit entities) that reports under U.S. GAAP and will require CPAs to reexamine the underlying economics of large numbers of established business practices. The new standard applies to most transactions and contracts with customers except for leases, insurance contracts, most financial instruments and guarantees (other than product or service warranties). At first glance, the implementation period for Accounting Standards Update (ASU) No. 2014-09, Revenue from Contracts with Customers, might seem adequate if not generous. Public companies, for whom early adoption is not permitted, are required to adopt the standard in 2017 (for reporting periods beginning after December 15, 2016). Private companies get an additional year – starting with 2018 for their annual reports – and two more years, beginning in 2019, to start applying the standard to interim reports. Private companies may choose to adopt the standard on the public company schedule. After further study, however, many organizations may find the implementation period to be extremely aggressive and the task daunting. There are many components to be analyzed and many questions to be answered: • How will the standard affect operational and performance metrics? • What IT changes will be needed? • How will you retrospectively adopt the standard? If a public company chooses full retrospective adoption, revenue and the direct effects of change in accounting principle to all contracts must be restated for 2015 and 2016 to show comparative financial statements with a cumulative adjustment as of January 1, 2015. CPAs are encouraged to advise clients and employers to begin developing an implementation plan as soon as possible. AICPA has organized a major effort, including industry work groups, training, and organizational tools to assist CPAs with this monumental implementation. You can use the following key tasks based on AICPA’s New Revenue Recognition Accounting Standard-Learning and Implementation Plan as a high-level road map to begin organizing your organization’s implementation.

Task 1: Form a Task Force (2014-2015) Don’t wait to get all of the major players involved. The standard replaces most transaction- and industry-specific guidance with a 18

principle-based approach, making it difficult – if not impossible – for CPAs to estimate the implementation effort required in a specific organization without first conducting a detailed assessment to use in developing a work plan. In all but the very smallest private companies, this assessment will require substantial collaboration with most major business functions, including sales and marketing, IT, legal and human resources.

Task 2: Evaluate the Impact (2014-2016) Evaluate the changes from current GAAP to the new revenue recognition standard and evaluate the impact on how your company accounts for existing revenue streams and the results to your company’s financial statements. In addition, evaluate how the standard will affect operational and performance metrics, company contracts, compensation plans, accounting policies, internal controls and tax matters. Work with your auditor to ensure that your approach to implementing the new revenue recognition standard and any changes in accounting for revenue recognition are documented completely and accurately. Task 3: Choose How to Retrospectively Adopt (2014) The standard should be applied using one of the following two methods: 1. Retrospectively to each prior reporting period presented and the entity may elect any of the following practical expedients: a. For completed contracts, an entity need not restate contracts that begin and end within the same annual reporting period. b. For completed contracts that have variable consideration, an entity may use the transaction price at the date the contract was completed rather than estimating variable consideration amounts in the comparative reporting periods. c. For reporting periods presented before the date of initial application, an entity need not disclose the amount of the transaction price allocated to remaining performance obligations and an explanation of when the entity expects to recognize that amount as revenue. 2. Retrospectively with the cumulative effect of initially applying the standard recognized at the date of initial application. If an entity elects this transition method, it should also provide the additional disclosures in reporting periods that include the date of initial application of the following items: a. The amount by which each financial statement line item is affected in the current reporting period by the application of Today’sCPA

the standard as compared to the guidance that was in effect before the change. b. An explanation of the reasons for significant change. In September, the Securities and Exchange Commission determined that companies electing full retrospective adoption will only be required to apply the new standard for three years rather than the expected five years.

Task 4: Determine IT Changes Needed (2014) Based on the determinations made in Tasks 2 and 3, the new standard may require modifications to IT systems to capture the appropriate level of information related to data used to make estimates on revenue recognition and new disclosures. Determine whether any changes will need to be made to IT systems or software applications to capture information needed for the new revenue recognition standard, including the following retrospective adoption and the additional qualitative and quantitative disclosures required. Task 5: Determine Interim Disclosures Needed for Public Companies (2014-2016) Public companies should consider the guidance in SEC Staff Accounting Bulletin (SAB) No. 74 (Topic 11:M), Disclosure of the Impact that Recently Issued Accounting Standards Will Have on the Financial Statements of the Registrant When Adopted in a Future Period, to determine the appropriate interim disclosures to be made prior to the adoption of the new standard. Task 6: Develop Project Plan (2014–2016) Develop an evolving project plan for implementation of the revenue recognition standard considering all of the tasks above and facilitate training for your staff. Task 7: Educate Key Stakeholders (2015-2016) Based on the determinations made in Tasks 2 and 3, the new revenue recognition standard may result in changes in timing of revenue recognized, as well as new qualitative and quantitative disclosures that will need to be explained to stakeholders. Educate key stakeholders, such as your audit committee, board of directors, investors and lenders, on the new revenue recognition standard and what changes they should expect in your company’s financial statements. For additional information and resources on the new revenue recognition standard, visit AICPA’s website at aicpa.org. n Today’sCPA November/December 2014

2014 Outstanding Educator Award Recipients Recognized TSCPA presented four top Texas accounting professors with the organization’s 2014 Outstanding Accounting Educator Award. The awards recognize accounting educators in Texas who have demonstrated teaching excellence and have distinguished themselves through active service to the profession. At a ceremony held during the TSCPA Accounting Education Conference, the winners each received a plaque for their office provided by the TSCPA Accounting Education Foundation. Congratulations to the recipients: • Narita Holmes, Ph.D., CPA – University of Texas of the Permian Basin (small four-year college/university) • Kelly Noe, Ph.D., CPA – Stephen F. Austin State University (medium fouryear college/university) • Brian Lendecky, CPA – University of Texas at Austin (large four-year college/university) • Cathy Scott, CPA – Navarro College (community college) For more information about the Outstanding Accounting Educator Award, please go to TSCPA’s website at tscpa.org. Click on Students, then Educators and scroll down and select Outstanding Accounting Educator Award. n

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. n 19

TAKE NOTE

Leadership Nominations Results for 2015-16 Positions Terms Commence June 1, 2015 TSCPA’s Nominating Committee recently chose the candidates for 2015-16 leadership positions, directors-at-large and Nominating Committee members. In accordance with TSCPA Bylaws Article IX, the candidates’ election will be conducted through a secure electronic ballot on a TSCPA website area approved by the Executive Board. The electronic ballot will be open to all eligible members to vote. The voting is planned to take place in mid-November through December 2014. TSCPA will send communications to members regarding the electronic voting and will post information about it on the website at tscpa.org. The following persons were nominated for terms beginning in fiscal year 2015-16 and have consented to serve if elected by the members. Chairman-elect: Kathy Kapka (East Texas), Chairman in 2016-17 Treasurer-elect: Jesse Dominguez (Austin), Treasurer in 2016-17 Secretary: Mitch Perry (Dallas), Beginning June 2015 and expiring May 2016 Executive Board Members

(Three-year term beginning June 2015 and expiring May 2018)

Edie Cogdell (San Antonio) Ryan Bartholomee (Permian Basin) Director at Large (Three-year term beginning June 2015 and expiring May 2018)

Belen Briones (El Paso) Michael L. Brown (Central Texas) Rusty Chimeno (Southeast Texas) Amanda Johnson (Fort Worth) Jan Keeling (Austin) Lyn Kuciemba (Brazos Valley)

James Lucas (Houston) Lisa Ong (Dallas) Rodney Overman (East Texas) Keith Reeger (South Plains) Jeannette Smith (Rio Grande Valley) Donna Tadlock (Central Texas)

Nominating Committee (Beginning June 2015 and expiring May 2016)

Connie Clark (Austin) Carol Collinsworth (Rio Grande Valley) Phil Davis (Permian Basin) Mark Goldman (San Antonio) Kelly Hein (Fort Worth)

Gail Neely (Houston) Royce Read (East Texas) Keith Reeger (South Plains) Teri Reinert (El Paso) Ken Sibley (Dallas)

As immediate past chairman of TSCPA in 2015, Mark Lee (Houston) will automatically serve as the Nominating Committee Chair, and Keith Reeger (South Plains) was appointed as vice-chair. AICPA Council (Three-year term beginning October 2015 and expiring October 2018)

The following names will be submitted to the AICPA Nominating Committee as recommendations from Texas to serve on the AICPA Council: Mark Lee (Houston) Jim Oliver (San Antonio)

Bill Reeb (Austin)

AICPA Council – One-Year Designee (Beginning October 2015 and expiring October 2016)

Allyson Baumeister (Fort Worth) 20

Today’sCPA

Students Win Tuition/Book Reimbursements In a random drawing of 2014-15 student members majoring in accounting, four student members recently won $250 tuition/book reimbursements provided by the Accounting Education Foundation of TSCPA, Inc. TSCPA congratulates these four students: • Tracy Ann Sole, Austin Chapter, Austin Community College • Jennifer Taylor, Brazos Valley Chapter, Texas A&M University • Paula R. Toy, Central Texas Chapter, Life Partners Inc. • Maria Christina Wolpert, Houston Chapter, Houston Community College

TSCPA Seeking Awards Nominations As you’re participating in your professional events and activities during the 2014-15 year, be sure to consider those members you might want to nominate for TSCPA awards. Do you know a member who is doing great work promoting the accounting profession or is making considerable contributions as an outstanding committee chairman? Is there someone making a difference in your chapter or local community? TSCPA’s Awards Committee is seeking nominations for Meritorious Service to the Profession, Distinguished Public Service, Outstanding Chairman, Honorary Fellow, Honorary Member, and Young CPA of the Year. Nominations are due April 30, 2015. All criteria details are available online. For more information, go to TSCPA’s website at https://www.tscpa.org/eweb/DynamicPage.aspx?webcode=ABTawards or contact Melinda Bentley at mbentley@tscpa.net; phone 800-428-0272, ext. 279 or 972-687-8579 in Dallas. n

Notice of Midyear Board of Directors Meeting Includes Legislative Briefing January 27-28, 2015 Sheraton Austin Hotel, Austin, TX After undergoing a multi-million dollar overhaul, the Sheraton Austin Hotel at the Capitol offers newly designed guest rooms with HDTVs, an updated lobby and meeting spaces, and an inviting spot in which to reconnect with old friends or meet new ones at Link@ Sheraton experienced with Microsoft. This landmark hotel features distinctively modern architecture and majestic views of downtown Austin. It is situated in the cultural heart of Austin, next door to the Capitol. It is also just steps from the University of Texas, the allure of the Sixth Street/Warehouse District, and Austin’s burgeoning business district. Sheraton Austin Hotel at the Capitol 701 East 11th Street; Austin, TX 78701 512-478-1111 $205 single or double (plus hotel tax) Cutoff date is Friday, January 2, 2015, or when the block is filled, whichever occurs first. n Today’sCPA November/December 2014

Submit an Article to Today’s CPA The editors of Today’s CPA magazine are seeking article submissions. Today’s CPA is a peer-reviewed publication with an editorial board consisting of highly respected CPA practitioners. If you would like to see your name in print, submit an article for consideration in the magazine. For more information, please contact managing editor DeLynn Deakins at ddeakins@tscpa.net or technical editor Bill Thomas at Bill_Thomas@baylor.edu. n

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 – • Pamela K. Eaves, CPA, Lake Jackson; • Joseph F. Hicks, CPA, Bedford; • Marshall K. Loftin, CPA, Crosby. n

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. • Calvin O. Cox, Dumas; • Joe A. Roberson, Vernon. n 21

CAPITOL INTEREST

From Candidates to Elected Officials

By Bob Owen, CPA, TSCPA’s Managing Director of Regulation and Legislation

he election is over, and now you know who will be your elected leaders for the next two to four years. While I’m writing this before the election, it’s pretty safe to say we have elected predominately, if not completely, Republican statewide office holders and a state legislative body with a substantial Republican majority. So what else is new – this is Texas. In the unlikely event that Democrats took any of the top statewide spots, all bets are off and you can picture me with jaw dropped and a look of disbelief on my uneasy countenance. It’s not just that the Republicans are still in charge, but this group of elected officials is likely the most conservative set of politicos elected in many years – more years than I can remember. The winners’ jobs have changed from being candidates to being elected officials, with sworn responsibility to “faithfully execute the duties” of their office and “to the best of [their] ability preserve, protect and defend the Constitution and laws of the United States and of this state.” These newly elected leaders will take office in an almost unprecedented time of high and increasing state revenues. Surplus estimates for the current biennium ending Aug. 31, 2015, range from $5 to $8 billion. If these conservative legislators stay true to form and hold the line on state spending for the next biennium, and if the economy holds, state government will stay awash in cash. I’m no economist and certainly no predictor of the future economy, but those who are see the Texas economy continuing to do well because the oil boom is expected to continue indefinitely. (Where have I heard that before?) While it might be an overstatement to give the oil boom complete credit for the Texas economy and growing state revenues, it’s not much of a stretch. Look at the chart furnished by the Texas Taxpayers and Research Association (TTARA) showing Texas oil Texas Taxpayers and Research Association (TTARA)

September 2014

Texas Oil Production, 1982-2014 100

Millions of Barrels per month

90 80

70 60 50 40

30 20 10 0 1982 1986 1990 1994 1998 2002 2006 2010 2014 www.ttara.org

512-472-8838

production for the last 30 years. Add to that TTARA’s calculations showing 2014 oil and gas taxes up 30 percent and 26 percent, respectively, and the influence of the energy sector on our economy is clear. Even much of the 5.4 percent increase in sales tax revenues can be attributed to the energy industry. You get the picture – it’s good times for state revenues for the foreseeable future! As mentioned in previous articles, there are also some serious infrastructure needs for roads, water and education. I’m presuming all you frustrated commuters voted to pass the constitutional amendment to provide more funds for roads on Election Day. That constitutional amendment set aside half of the excess oil and gas revenue normally transferred to the Rainy Day Fund (estimated to total about $1.7 billion per year) to be used for non-toll roads. According to an article published on the WOAI 1200 News Radio website, “but even that amount isn’t enough to get the job done, according to Dave Ellis of the Texas Transportation Institute, who says anywhere between $4 and $7 billion a year is needed.” I have frequently heard and quoted the $4 billion number, but this is the first time I’ve read about a possible $7 billion annual need – WOW. That’s 75 percent more! Those numbers could do serious damage to the projected budget surpluses; or the surpluses may continue and the roads will just get worse. It seems there is always bad news to go along with the good news. Maybe that’s why Bill Hammond, president of the Texas Association of Business, is calling for a $50 hike in vehicle registration fees to fund more roads. Maybe that’s why Gov. Greg Abbott and others are calling for the end of gas tax revenue diversions from roads, and just maybe that’s why some brave souls are saying it’s time for the first gas tax hike in 20-plus years. I wouldn’t worry too much about a gas tax hike; it takes more than a few brave souls to pass a tax increase in Texas. Maybe that’s why Speaker Joe Straus directed the Legislative Budget Board to conduct a Strategic Fiscal Review (SFR) on selected state agencies. What is a strategic financial review? Think of it as zero-based budgeting on steroids. The selected state agencies represent about 21 percent of the total of the all-funds budget for the 2014-15 biennium. For those agencies selected, the SFR will be detailed, looking at historical operations of each major function within each agency. The study will review program effectiveness, return on investment and potential alternative methods of functional delivery. The process will include looking at options for alternative funding methods, increased transparency and analysis of the programs’ centrality to the function of the agency and legislative priorities. The SFR analysis is “designed to provide additional resources for the development of the appropriations bill during the next session and give legislators a more robust and detailed analysis to assist members in making more informed budget decisions.” Regardless of all the analyses, it’s up to these just-elected legislators to craft the budget for the next biennium. n Today’sCPA

FEATURE

Organisations large small, public andhas private to make better quality decisions. Globalisation process of and decision-making never been improving decision-making an increasingly inter-connected and and technological progress are making this more competeorinso difficult: To be confident of success, organisations need international market. The need to professionalise the complicated. Long-term competitive advantage is process • 47% of Asia’s CFOs saybeen decision-makin to make better quality decisions. Globalisation of decision-making has never so crucial being undermined as both the volume and velocity and technological progress are making this more or so difficult: hindered by information overload.1 complicated. flows Long-term competitive advantage is of information increase. • 47% of say decision-making is • Asia’s The CFOs International Data Corporation est being undermined as both the volume and velocity

hindered by information overload. that by 2020 business transactions on th of information flows increase. An effective management accounting function • The International Data Corporation estimates – business-to-business and business-to-c that by 2020 business transactions on the internet improves decision-making in organisations. An effective management accounting function This is will reach 450 a day. 2 – business-to-business andbillion business-to-consumer – because its people communicate decision-relevant improves decision-making in organisations. This is 2 will reach 450 billion a day. • Google’s Eric Schmidt claims that socie because its people communicate decision-relevant insight and analysis to every decision-maker in the• Google’s Eric Schmidt claims that society now creates as much new information every insight and analysis to every decision-maker in the organisation, while being alert to the organisation’s creates as much new information every two days, organisation, while being alert to the organisation’s as it did from the dawn of civilization to social and environmental duties. This is the as it did from the dawn of civilization to 2003. 3 social and environmental duties. This is the • Theconsumer average isconsumer is facedmore with ma • The average faced with making foundation of the four Principles which set out the foundation of the four Principles which set out the 4 70 a day. than 70 than decisions adecisions day. 4 fundamental values, qualities, qualities, norms andand features that that fundamental values, norms features represent management accounting. These are shown represent management accounting. These are shown in Figure 2 and are discussed in detail in Section 2. in Figure 2 and are discussed in detail in Section 2. 1

The Global Management Accounting Principles: Helping Businesses Make Better Decisions

fiGure 2: the Global management accounting principles

he business world is changing rapidly; the sheer fiGure 2: the Global management accounting principles volume and velocity of information coming at us is seemingly impossible to wrangle. As a result, INFORMATION COMMUNICATION quality decision making in business has never been IS RELEVANT PROVIDES more difficult to achieve. Unfortunately, the new INSIGHT INFORMATION COMMUNICATION THAT IS reality is that impulse often substitutes for insight. IS RELEVANT PROVIDES INFLUENTIAL In response to these issues, the Chartered Institute of INSIGHT GLOBAL Management Accountants (CIMA) and the American Institute THAT IS MANAGEMENT of CPAs (AICPA), two of the world’s largest accountancy bodies, INFLUENTIAL ACCOUNTING have produced four Global Management Accounting Principles. PRINCIPLES GLOBAL The principles were created to guide best practices, make sense of MANAGEMENT information overload, and bring consistency to decision making. ©

Information Overload and Decision Making Google’s Eric Schmidt says that every two days, the world creates as much information as it did from the dawn of civilization up until 2003. And everyone is feeling the pressure. For example, almost half of Asia’s CFOs say their decision making is hindered by information overload. Meanwhile, according to CGMA research, more than 90 percent of global senior executives are seeking better ways to gain insight from financial and nonfinancial data. This information deluge, coupled with the fierce competition today’s organizations face, have created a “perfect storm” of chaos for businesses. The four principles are a much needed – and exceedingly appropriate – response to these stresses. The Four Principles Provide the Right Solution at the Right Time: Now Developed in consultation with CEOs, CFOs, academics, government bodies, regulators, and professionals from 20 countries on five continents, the four principles ascertain that: • Communication provides insight that is influential; • Information is relevant; • Impact on value is analyzed; • Stewardship builds trust. Used together, they break down silos through influential communication, bring the most reliable and relevant information to the forefront for further examination, drive analysis that reveals organizational values, and make integrity and trust integral parts of a company’s long-term sustainability. The result is better business from the top down, while also instilling confidence in stakeholders, investors and the public that the right decisions are being made with the right information. Today’sCPA November/December 2014

STEWARDSHIP BUILDS TRUST

ACCOUNTING PRINCIPLES ©

IMPACT ON VALUE IS ANALYSED

The Principles Help Bring Structure to Complexity Ninety percent of senior executives believe a stronger partnership with finance in the decision-making process will help them better manage their organization. They perceive such a partnership as a necessary, ongoing opportunity, leading not only to improved decision making, but also helping mitigate risk. Management accounting is like GPS for the C-suite, guiding strategy through the provision of future-focused insight and analysis. While it sits alongside financial accounting, it has lacked the same level of guidance to ensure consistent practice worldwide. The principles help fill the gap by establishing the values, qualities and norms that represent management accounting’s best practices. Barry C. Melancon, CPA, CGMA, president and chief executive of AICPA, said: “The Global Management Accounting Principles empower evidence-based decision-making that prioritizes long-term success over short-term gains. With the principles in place, management, stakeholders, investors and the public can have more confidence in the actions that organizations take.” AICPA and CIMA encourage executives, CFOs and boards of directors worldwide to use the principles as the basis for benchmarking and improving their finance functions. Download the full Global Management Accounting Principles, watch a video and get more information at cgma.org/principles. n

COVER ARTICLE

Techniqu

to Gain and Retain More Clients 24

Todayâ&#x20AC;&#x2122;sCPA

ues

By Paul A. Ashcroft, Ph.D., CPA Public accounting has always been very competitive and demanded efficiency and quality client service to be successful. However, the pressure on CPA firms is greater now than ever before. Barry Melancon, American Institute of CPAs (AICPA) president and CEO, has stated that, “We live in a world of incredible complexity, hyper-speed expectations and challenges that are almost mind-numbing from the standpoint of business decision making.” Melancon added that to succeed, CPAs must be able to “manage complexity and understand the implications of complex situations in a business context.” AICPA’s Private Companies Practice Section (PCPS) surveyed CPA firms of all sizes in 2013 and 2011, asking them to rank their top 10 issues. The 2013 survey results indicate that gaining new clients and retaining clients are critically important issues faced by CPA firms of every size. Exhibit 1 presents the survey rankings.

Exhibit 1. PCPS Survey Results of the Top External CPA Firm Issues Firm Size: Number of Professionals 1

2-5

6-10

11-20

21+

Year

Gain New Clients

Retain Clients

2013

2011

2013

2011

2013

2011

2013

2011

2013

2011

The PCPS Top Issues Surveys and Melancon’s comments clearly indicate that to be productive today, CPA firms must effectively and efficiently handle a variety of pressures and challenges.

Methods for Improved Success in Gaining and Retaining Clients CPAs develop loyalty by providing high-quality services. However, rarely does high-quality service alone earn a CPA firm enough new clients or allow them to retain as many clients as they desire. The remainder of this article discusses specific practical methods that CPA firms of every size can use to achieve improvements in understanding client needs, gaining new clients, marketing the firm and retaining clients. Understanding Client Needs To gain new clients and retain current clients, it is vital that CPAs understand their needs and expectations. The 2010 CCH Accounting Firm Client Survey asked CPA firm clients, including individuals as well as large, medium and small businesses, questions about the types of services they needed and their satisfaction with their current CPA. The survey results stated that 36 percent of business clients said that they would probably switch CPAs within the next year. Clients’ number one reason for planning to switch was that their CPA did not regularly continued on next page Today’sCPA November/December 2014

COVER ARTICLE continued from previous page ask them about their changing needs. CCH President and CEO Mike Sabbatis stated that CPAs must have a continuous commitment to maintain strong client connections such that “there are no boundaries to their ability to understand and meet clients’ current and evolving needs.” The CCH Survey reported that 62 percent of business clients are generally satisfied and that only 17 percent of business clients are completely satisfied. Thus, 21 percent of business clients are unsatisfied. The survey also indicated that 55 percent of business clients and 29 percent of individual clients need an increased number of specialized services from their CPAs. Similarly, 70 percent of clients responding to the “Seven Keys to Successful Firm Management” survey said that poor client service and inattention is the main reason they would seek a new CPA. Sixty percent of clients stated that a CPA’s fee was the next most important factor in choosing a CPA. The surveyed CPAs incorrectly believed that the primary reason clients fire them is because clients consider their fees to be too high. Only 25 percent of CPAs thought that poor client service and inattention could cause them to lose a client, which CPAs perceived to be the third most important factor in keeping good clients. The results from these two surveys indicate that CPAs have an abundant opportunity to discuss with their clients which of their needs and expectations are not being met at all, as well as those that are only being partially met. In summary, CPAs are advised to communicate regularly, understand each client’s changing needs and strive to fully meet their expectations.

How to Gain New Clients How tough is it for CPAs to obtain new clients? How can CPAs effectively add new clients? The following discussion provides some answers. Tom Sant, Ph.D., says that the increased competitiveness for new clients caused by the recent recession is here to stay. Sant has provided strategic consulting to BKD, Moss Adams, PricewaterhouseCoopers and a dozen other accounting firms. He states that CPAs need to understand the mind of the client and to then deliver a compelling business proposal. Sant states that buyers of CPA firm services, especially audits, view their purchase as a commodity. To the buyer, commodities have little intrinsic value, have no strategic effect on the business, and are easily interchangeable with no noticeable differences; the lowest price determines the choice of service provider. To change the potential client’s perception, Sant advises CPAs to fully consider each request-forproposal (RFP) bid by doing the following, which are summarized in Exhibit 2: 1. Ask “Does anyone in our firm have any relationship with anyone in that entity?” When no relationship exists, Sant states that firms won only 10 percent of the bids. With one relationship, even a casual one, CPA firms won 40 percent of the bids. A survey of 472 U.S. and Canadian small businesses indicates that 58 percent chose their CPA from a referral by someone they know and 27 percent said their accountant is a friend or family member. 2. Emphasize value rather than compliance. Understand what “value” means to the buyer and then explain how the services provide value. PCPS Project Manager Lindsey Ferguson states that many CPAs need to understand that they can provide value by performing 26

services that go beyond the traditional compliance-based work. 3. Include specific facts and information in each client proposal that is relevant to that individual client. If the client is in “industry A,” then discuss each partner’s experience in serving industry A clients, examples of specific services actually provided to current clients in industry A, and the specific areas of expertise the CPA firm possesses that provides value to industry A. Providing facts about services related to an industry other than the client is a mistake. The CPA firm should also mention any specific areas in which they have a solid reputation; for example, information systems analysis or forensic accounting. The 2010 CCH Accounting Firm Survey results indicated that a CPA firm’s expertise is a major factor affecting a potential client’s choice of a CPA firm. Another method to gain clients is to seek buyers who need a trusted advisor, even if the potential clients do not realize that. The survey of 472 U.S. and Canadian small businesses indicated that while 31 percent of buyers think they will choose a CPA firm because of price, only 20 percent actually do. CPAs should inform each potential client that they will provide professional solutions to all questions the client may have about his/her business and personal financial situation. Since a potential client may think that CPAs offer only the standard financial accounting and tax services, it is critical to inform him/her otherwise. Only a minority of surveyed small businesses that use outside CPAs for accounting and/or tax services relied on them for the following services: financial planning (33 percent), business consulting (25 percent) and wealth management (15 percent). CPAs can gain their desired type of clients by improving their proposal strategies, and from becoming a trusted business advisor by providing valuable services beyond compliance. From the author’s experiences in public accounting, one of the best methods to gain new business is to develop relationships with people in “influential positions.” These “influential people” are in non-accounting professions who are in a position to recommend a CPA firm to another person they know. Influential people include bankers, business executives and owners, attorneys, relatives and friends. For example, a CPA who meets with a banker or business executive for lunch once a week would very likely gain many new clients. During such a meeting, the CPA should listen very intently and discuss primarily the influential person’s business, products and customers. When the influential person mentions an unmet financial/accounting need of some person they know, the CPA should respond with: “We can fully satisfy that need. We would like to meet with this person and discuss their situation and our services. Would you contact the person and schedule a time for us to meet with them?”

Marketing the CPA Firm CPA firms must develop effective marketing activities to gain and retain clients. All sizes of CPA firms can add new clients by marketing their specific areas of expertise. However, marketing is not a strength of many CPAs. Ned Steele, author of Awaken the Marketer in You, states that a CPA firm’s professional knowledge is its best marketing tool. The CPA begins by creating his/her own database of potential clients rather than Today’sCPA

Exhibit 2. Methods for Gaining Clients Method

Basic Description

Networking

Bid on potential work when a firm professional has some kind of relationship with an employee of that entity. Be involved with entities associated with prospective clients.

Focus on value beyond compliance Demonstrate competence Be a trusted business advisor Develop relationships with influential people

Understand how the buyer perceives value, and then explain how the CPA firm’s services will provide value to the potential client. Include specific facts in each client proposal relevant to that individual, such as specific knowledge and experience in serving the particular industry. Provide valuable services beyond compliance. Inform potential clients how the CPA firm will provide professional solutions to all of their questions about their business and personal financial situation. Develop relationships with non-accountants who are in a position to recommend a CPA firm to someone else. For example, meet a banker or business executive for lunch each week and primarily discuss the influential person’s business, products and customers. When the influential person mentions someone else’s unmet financial/accounting need, respond with: “We can fully satisfy that need. We would like to meet with this person and discuss their situation and our services. Would you contact the person and schedule a time for us to meet with them?”

purchase a list of names. A potential client is anyone a CPA has met, someone who has sent the firm business, or even just recommended the CPA or firm to someone else. Next, the CPA sends the potential clients two- to three-paragraph messages of valuable information. These could include general guidelines for a financial strategy or an analysis of a tax law change. Avoid using ads, promotions or self-lauding letters. The main purpose of the messages is to remind the potential clients that the CPA is thinking about them, not to try to provide information that all of them need right now. Finally, CPAs should present themselves as a knowledge resource to the media in return for free publicity. A CPA can ask reporters if they would like to do a story about a specific topic in one of the CPA’s recent messages to potential clients or that clients have asked about lately. The goal is to show reporters that the CPA will be the source of information for a story. The CPA helps the reporters, and gains media exposure that will increase the CPA’s credibility and market value among both potential and current clients. Should every CPA firm have a written marketing plan? Yes! Firms that do not should create a marketing plan as soon as possible to significantly improve their firm’s practice development. Research conducted by CPA Trendlines revealed that the most successful CPA firms in every size category were 14 times more likely than laggard firms to follow a written marketing plan. In addition, compared to lagging firms, leading CPA firms were five times more likely to use marketing strategies that achieve their goals and 11 times more likely to be satisfied with their achieved level of business development. CPA Trendlines reports that the firms that grew the most efficiently consistently display the following five traits: 1. Had most or all partners and professionals regularly creating new business leads. 2. Made business development a part of the regular performance evaluation process.

3. Rewarded each individual who brought in new business. 4. Involved all the professionals in new business development activities. 5. Had the partners meet on a regular basis to evaluate progress relative to the marketing plan. The marketing plan should appropriately correlate with the types of services that each firm desires to provide, the skills and interests of the partners and staff, and the types of clients desired. While it is important to have as many firm professionals as possible working to accomplish the plan’s goals, each firm should develop a marketing plan that focuses on its strengths and best opportunities. Since each firm is different, a specific plan designed to fit each individual firm is recommended.

How to Retain Clients All CPAs celebrate when a new client is gained and desire to keep their good ones. When working in public accounting, the author noticed that CPAs sometimes forget the effort needed to gain a client and often think that the good clients will stay with the firm for a long time. However, retaining good clients requires significant and ongoing effort and communication, as well as adapting to each client’s needs. Scott Cytron, a consultant to CPAs, suggests that CPAs not depend only on doing business on the golf course. CPAs who wait for clients to call them with new or continued business will not survive in the long run. The following techniques will improve client retention, and are adapted from Cytron’s article: • Contact clients at least twice a year. Frequent contact clearly displays that you care about their professional and personal lives. This distinguishes you from many who only contact clients before tax season. • Personally contact them by phone instead of impersonal email. continued on next page

Today’sCPA November/December 2014

COVER ARTICLE continued from previous page Exhibit 3. Retention Techniques Technique Frequently contact clients Personally contact them by phone

Basic Description Frequent contact displays that the CPA truly cares about the client. Phone calls provide a personal touch that will be welcomed and remembered.

Discover what is new

Ask clients what changes they have experienced and what changes they anticipate in the future.

Meet away from the office

Have breakfast or lunch to get to know them better and learn about any unmet needs they have.

Exchange referrals

After discussing all of their concerns, provide the client with referrals. Then, calmly ask for referrals.

Build your name

CPAs create a professional reputation by publishing articles, making speeches, posting testimonials, offering seminars, serving on a board of directors and being interviewed by the press.

Indicate how you have saved the client money Provide a package of services and use fixed fee pricing Actively listen to each client Learn marketing Include fun in CPA services

Inform each client how much the CPA’s services have reduced costs, increased revenues, prevented losses, saved time, etc. This will also likely result in more referrals. Bundling services gives confidence that the CPA provides a comprehensive service and is an expert. Fixed fee pricing is effective because clients like certainty rather than the unknown. CPAs should stay at the intersection of their skill set and the client’s needs to most effectively serve each one. A successful CPA must be both a knowledgeable technician and an effective marketer. CPAs include fun by having a contest to give away a prize or reward their best clients with a threeday vacation package to a local resort.

Many CPAs communicate with clients only by email because it is fast and easy. Phone calls provide a much more personal touch that clients will welcome and remember. • Discover what is new. When you call, tell the client you are “not watching the clock” and that you want to discuss what has changed since you last talked. Also ask what changes he/she expects in the next 12 to 36 months. • Have breakfast or lunch with the client. Select a relaxed environment away from the office. Ask them if they have additional needs they would like you to satisfy. Jean Caragher and Rick Telberg asked several thousand CPAs and their clients why a client would change CPAs. One-fourth of the clients said they would leave because their current CPA firm may not have the new or different services they needed. However, only 15 percent of the CPAs thought that clients might leave due to needed services the CPA was either not providing or could not provide. • First thoroughly discuss the client’s situation, and then exchange referrals. Exchanging referrals benefits both the CPA and the client, but CPAs overlook this opportunity. Approach the exchange of referrals very professionally by first discussing all of the client’s concerns about their situation. Next, provide him/her with referrals from your client base and others you know. Then, while avoiding any pressure or sales tactics, calmly ask for referrals. Also, provide a brochure outlining all of your services. That increases the likelihood of receiving referrals, since the client may know someone who needs a different service than the one you provide to them. 28

Additional ideas, adapted from an article by Sandi Smith, are: 1. CPAs build their brand, which is their name. CPAs build their name by creating a reputation for delivering results and for being a thought leader. CPAs can create a solid reputation by: publishing articles, making speeches, posting client testimonials and case studies on the firm’s website, offering web seminars or teleseminars, serving on a board of directors and being interviewed by the press. 2. Clearly indicate how the CPA’s services have saved the client’s money. A CPA will likely be retained when the benefits of the services are much higher than the CPA’s fees. Since clients often do not know their return on investment for the CPA’s services, CPAs should be diligent to inform them. At the same time the CPA delivers the finished work, the CPA can include a report stating how much each service has been beneficial in terms of reduced costs, increased revenues, avoided losses, time saved, etc. In addition to better retention, this will create great testimonials and more referrals. 3. CPAs should bundle services into a package and use fixed-fee pricing. Why? Clients like knowing the fee. A bundle of services gives confidence that the CPA is providing a comprehensive service and that the CPA is a qualified expert. Hourly pricing may cause clients to think the total fee will be higher than another firm that has a lower hourly rate. To persuade the client that a fee would be equal or lower, the CPA would have to know how fast his/her firm and the other firm would provide the same service, which may be difficult to know. Today’sCPA

4. Actively listen. CPAs will serve most effectively by staying at the intersection of their skill set and the client’s needs. That allows the CPA to be constantly providing new service and products. 5. Learn marketing. A CPA must be both a knowledgeable technician and an effective marketer. CPAs who are great technicians, but lousy marketers, lose clients because they are unaware of all the CPA’s services. Also, competitors who are better marketers, but are only average technicians, will gain business at the expense of the great technicians/lousy marketers. Client turnover will be even higher for a CPA who is a great marketer and a lousy technician. 6. CPAs should include some fun in their services. A CPA could have a contest and give away a prize. Or, CPAs could reward their best clients with a three-day vacation package to a local resort in the area.

Paul A. Ashcroft, Ph.D., CPA

Overall, effective retention involves providing services that are more valuable than the fees charged, and clearly showing clients that they and their challenges are important to CPAs. The retention techniques are summarized in Exhibit 3.

A Specific Plan CPA firm success today requires extreme dedication and determination. CPAs themselves currently indicate they are facing significant difficulties in gaining and retaining clients. This article presented several specific techniques and ideas on how to gain and retain clients, understand their needs and market effectively. The foundation of these methods is having a well-designed business development plan and communicating regularly and effectively with clients, influential people and potential clients. n

is an associate professor in the School of Accountancy at Missouri State University where he teaches auditing, advanced auditing and intermediate accounting. He has published articles in several journals including Today’s CPA, International Journal of Critical Accounting, Advances in Accounting, Incorporating Advances in International Accounting, Research in Accounting Regulation, The CPA Journal, the Oil, Gas, and Energy Quarterly and Internal Auditing. He currently serves on the editorial review board of The International Journal of Accounting, Auditing and Performance Evaluation. He is a member of the American Accounting Association, and the Institute of Internal Auditors. He can be reached at paulashcroft@missouristate.edu.

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Today’sCPA November/December 2014

FEATURE

What You Need to Know About Captive Insurance Structures – Utilizing Self-Insurance to Accumulate and Protect Cash Reserves with a Tax-Advantaged Twist

By David W. Clark, MPA, CPA, and Darlene Pulliam, Ph.D., CPA

n an environment of increasing taxes coupled with “fiscal cliffs” and “debt ceilings,” more companies are increasing their cash reserves to hedge the economic uncertainty of the foreseeable future. As business owners and CFOs look for efficient strategies to manage these increasing cash reserves, there has been a resurgence of captive insurance company offerings that, if structured correctly, should allow a company to accumulate and shelter reserves, while at the same time utilizing the additional funds to “self-insure” against previously uninsured risks. All of this works inside a tax-advantaged insurance strategy that has been around for decades. By utilizing captive insurance structures, companies are finding that self-insuring can be a very effective way to offset risks for the organization while building pre-tax cash reserves in a protected environment. 30

Captive Insurance Company Basics Captive insurance structures, also referred to as 831(b) captives, are basically private insurance companies that are established to provide an affiliated entity that can assume defined risks of a company, in exchange for appropriately priced insurance premiums. The unique twist in the captive structure comes when an election under IRC Section 831(b) is made whereby the captive insurance entity elects to be treated as a “small” captive, exempt from income tax on the written premiums received not exceeding $1.2 million. The insured company is still able to deduct the insurance premiums paid to the captive as an ordinary business deduction. In effect, cash reserves that would normally be accumulated on an after-tax basis and used to offset uninsured risks of a business Today’sCPA

can now be effectively accumulated on a before-tax basis in an affiliated entity that provides “self-insurance” for business risks, including some risk coverage that may not have been available in the commercial insurance market. Insurance coverage examples include product liability, coverage for natural disasters, traditional policy exclusions such as water damage or black mold, credit defaults, regulatory exposures, policy deductibles, building construction defects, and employment practices by the company. Businesses that have large property and casualty policies may even be able to use captives to reduce premium costs of these traditional coverages by using this self-insurance strategy. The lower cost premiums can be achieved by eliminating the marketing and administrative costs of a large insurance company and by the use of reinsurance to lower the costs and risks associated with operating the captive. The captive structure must operate with a legitimate business purpose and offer insurance products that are appropriately underwritten with premiums that match the associated risks that are being assumed by the captive. The insurance entity must be taxed as a C corporation, but it can be owned by almost every type of business form, including a limited liability company, limited partnership, individual, partnership and even a trust. The trust ownership structure has been effectively used in estate planning to segregate the reserves held in the captive and avoid their inclusion in a taxable estate. The wealth transfer capability offered by the captive structure is a significant tax-planning strategy for transferring

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continued on next page Today’sCPA November/December 2014

FEATURE continued from previous page retained earnings of closely held family businesses to the next generation. The captive structure also offers protection of the funds held inside the insurance entity because creditors of the insured have limited legal claim on the assets of the captive. This insulation from creditors is a very attractive benefit for businesses that normally have their cash reserves exposed inside their operating entities.

Location, Location, Location Captive insurance companies have traditionally been domiciled in offshore jurisdictions. The benefits of foreign tax treatment coupled with lower capital requirements to establish the insurance company often outweigh the security of a domestic locale. The current resurgence in captive offerings has, however, been to a large degree fueled by the increasing availability of domestic jurisdictions. The number of U.S. states that have passed favorable laws allowing for the creation of captives within their jurisdictions has dramatically increased over the last decade as those states have realized the economic benefits that can be gained. Captives pay regulatory fees to the jurisdiction, as well as the fees to incorporate and maintain the entity in the domiciled state. With more domestic offerings, companies that were adverse to the complexities of setting up and maintaining an offshore corporation are now considering the captive structure as a viable option. Business owners can realize tax-free benefits along with protection from creditors’ claims while having the added peace of mind that their cash reserves and investments are domiciled in the United States under laws and regulations that are accommodating to the domestic insurance entity. The Practitioner’s Tool Chest for Captives The research literature is filled with insightful court cases and Internal Revenue Service (IRS) rulings that offer detailed overviews of the captive structure. The following is a listing and brief overview of some of the most relevant cases and revenue rulings that have helped to shape the current environment for practitioners involved in captive insurance arrangements. • Helvering v. Le Gierse1 – This Supreme Court case has become the authoritative ruling that helps to define “insurance” with regard to the essential elements of risk shifting and risk distribution. These two elements of insurance are key factors that must be contained in any captive arrangement. • Revenue Ruling 2001-312 – This ruling established that the IRS would use a case-by-case, facts-and-circumstances approach to reviewing captive arrangements instead of invoking the “economic family” theory concerning wholly owned captive insurance subsidiaries. The “economic family” theory was created by the IRS in an attempt to deny parent-subsidiary and brother-sister insurance company relationships. Prior to this ruling, the IRS had asserted that the risk of insuring could not be effectively shifted unless it was outside of the “economic family” of related entities. • Revenue Ruling 2002-893 – This ruling is the first of a series of rulings that give specific guidance on deductible insurance arrangements between parent and subsidiary companies regarding risk shifting and risk distribution. This ruling 32

highlights that sufficient risk shifting and distribution occurs when the subsidiary insurance company pools the insurance premiums and risks of the parent company with those of unrelated insureds. The ruling implies that pooling with unrelated parties constitutes deductible insurance when less than 50 percent of the total risks borne by the subsidiary insurance company are from insurance contracts provided to the parent company. • Revenue Ruling 2002-904 – This ruling contains continuing facts and circumstance guidance related to deductible insurance arrangements between parent and subsidiary companies whereby standards of the self-insurance coverage are set forth in the ruling as the following: (1) the insurance premiums are determined in an arms-length manner; (2) the insurance contracts issued are appropriately regulated by the state of domicile; and (3) the subsidiary insurance companies “conduct themselves in all respects as would unrelated parties to a traditional insurance relationship.” • Revenue Ruling 2002-915 – This ruling affirms that a group of unrelated businesses can come together and form a captive insurance company to issue insurance contracts on an affordable basis for businesses operating in a similar industry. The ruling further affirms that appropriate risk distribution, required to constitute deductible premiums, is satisfied by the subsidiary company with the pooling of premiums of unrelated entities. • Revenue Ruling 2009-266 – This ruling clarifies that risk shifting and risk distribution can appropriately occur in a captive insurance arrangement that utilizes reinsurance contracts with third-party carriers to cover some of the risk assumed by the captive from the insured parent company. Reinsuring risks is a common practice in the commercial insurance industry and is also a valid economic transaction in a captive arrangement. Captives can participate in different risk pools with reinsurance companies to spread their risks with other non-related businesses.

Opportunities for CPAs and Financial Advisors With the complexities involved in the captive insurance company structure, CPAs and other financial advisors are well suited to guide their clients and employers through the process of evaluating the use of captives in their strategic plans, including utilizing captives to accumulate cash reserves. Practitioners dealing with mid-size business entities, particularly family owned companies, should be proactive in developing the resources to help their clients determine if the use of a captive could benefit their organization. In addition, CPAs should consider developing fee-based services such as uninsured risk assessments and premium analysis that could serve as a practice builder for new and existing clients. The use of captives in estate planning is another area that could lead to opportunities for practitioners in providing value-added services in addition to their traditional attestation and tax practices. One cautionary note: practitioners should do their due diligence in selecting the right actuarial and underwriting professionals who will be responsible for the premium Today’sCPA

calculations and underwriting the risks involved in the captive structure. These two critical functions are paramount in ensuring that the captive is structured appropriately and in compliance with the regulatory rules involved in the insurance industry. Fortunately, as the captive market has expanded, so have the firms specializing in the field. Several firms even offer comprehensive programs that take care of all of the regulatory and operational issues involved in a captive entity, including compliance with the laws of the company’s domicile and if needed, even arranging for financing of the insurance premiums.

can serve a dual purpose of providing insurance in the current operating period while, at the same time, accumulating a longerterm investment that can be used to hedge future operational needs of the organization. While the captive strategy is certainly not for every company, business owners should evaluate their uninsured operating risks and consider if the use of captives might fit their overall operating plan. Practitioners have a prime opportunity to step in and expand their service offerings in this increasing market space. n

A Compelling Strategy With the recent IRS activity helping to define the essential elements of captive structures, the increasing domestic resources available for establishing captives, and the increasing need for companies to manage their operational risks, the use of captive insurance arrangements in the current economic environment offers a compelling strategy for businesses to accumulate cash reserves in a tax-efficient manner. These reserves, in effect,

Footnotes 1. Helvering v. Le Gierse, 25 AFTR 1181 (61 S. Ct. 646), 03/03/1941 2. Rev. Rul. 2001-31, 2001-1 CB 1348, 6/05/2001 3. Rev. Rul. 2002-89, 2002-2 CB 984, 12/10/2002 4. Rev. Rul. 2002-90, 2002-2 CB 985, 12/10/2002 5. Rev. Rul. 2002-91, 2002-2 CB 991, 12/10/2002 6. Rev. Rul. 2009-26, 2009-38 IRB 366, 09/01/2009

David W. Clark, MPA, CPA

is an instructor of Accounting and Healthcare Management with West Texas A&M University.

Darlene Pulliam, Ph.D., CPA

is Regents Professor and McCray Professor of Business, Professor of Accounting, with West Texas A&M University.

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Today’sCPA November/December 2014

FEATURE

Reasons to Conduct an Intangible Asset Valuation

By Robert F. Reilly, CPA

here are numerous reasons why a CPA may be asked to conduct an intangible asset valuation. This discussion reviews the various types of intangible asset valuation analyses, summarizes the differences between a notational valuation and a transactional valuation, describes many of the individual reasons to conduct the valuation, and considers who should perform it. There are many parties who may ask the CPA to value an intangible asset. Commonly, such requests come from the intangible asset owner/operator. The CPA may also serve the informational needs of other parties who will transact with the owner/operator, such as a potential buyer, licensee, creditor, partner, joint venturer or contract counter party. In addition, the CPA may be retained by legal counsel representing various parties in a dispute involving the intangible asset.

Notational Analyses versus Transactional Analyses The CPA may perform the intangible asset valuation either for notational purposes or for transactional purposes. The purpose of the analysis may or may not affect (1) the valuation approaches and methods used and (2) the value conclusion reached. The purpose of 34

the analysis (as notational versus transactional) is typically a function of the reason to conduct the valuation. The CPA should understand the reason for performing the analysis, and whether that reason is satisfied by a notational analysis or a transactional analysis. In a transactional valuation, there is an actual intangible asset transfer pending. The transaction can be a sale (a transfer of all rights) or a license (a transfer of some rights). The transaction can also be a secured financing (which involves a transfer of some legal rights). In a transactional valuation, there is typically (1) a transfer of cash or some other valuable consideration, (2) a transfer of some or all of the intangible asset legal rights, and (3) a negotiation between two or more parties involved in the transaction. Fairness opinions, solvency opinions and adequate consideration opinions are examples of transactional valuation opinions. In a notational valuation, the intangible asset does not actually transfer. In a notational valuation, typically there is no (1) transfer of cash or other consideration, (2) transfer of some or all of the intangible asset legal rights and (3) negotiation between independent parties. Notational valuations are performed for financial accounting, taxation planning and compliance, strategic planning or regulatory Todayâ&#x20AC;&#x2122;sCPA

compliance purposes. These purposes are all important. However, in the notational valuation, either the intangible asset transaction is already completed or it is not yet contemplated. Usually, no cash changes hands. If cash does change hands (e.g., to pay taxes), it doesn’t involve the transfer of the intangible asset. Litigation valuations can be either transactional or notational. If the finder of fact’s decision results in a transfer of intangible asset ownership, the valuation may be transactional. If the finder of fact’s decision results in a monetary damages award, the valuation may be notational. While a judicial award results in monetary damages, the intangible asset ownership does not transfer.

Reasons to Value Intangible Assets The first category of valuation reasons relates to an intangible asset sale, license or other transfer. Intangible assets can be sold either (1) independently as individual assets; (2) separately from a going concern business, but as part of a portfolio of two or more assets; or (3) collectively as part of the assets of a going concern business. The CPA may be asked to estimate a defined standard of value for the tobe-transferred intangible asset. The CPA may be asked to opine on the fairness of the pending or completed sale transaction. That fairness opinion could encompass the price of the proposed transaction, the terms of the proposed transaction, or other transactional factors. Or, the CPA may be asked to opine on the solvency of the new owner after the intangible asset purchase, particularly if the purchase is financed. Intangible assets may transfer between for-profit entities and notfor-profit entities. To comply with regulatory requirements related to private inurement and excess benefits, the CPA may be asked to prepare a fair market value valuation with regard to such transfers. To give assurance to the transaction participants, the valuation will have to conclude that the not-for-profit buyer did not pay more than fair market value or the not-for-profit seller did not receive less than fair market value. Transactional fairness opinions and fair market value valuations apply to license transactions, as well as to sale transactions. One or more license participants may want the CPA’s assurance that the license terms are fair to the licensor, the licensee or some other specified party. Intangible assets are often transferred in the formation of a new business or in the asset distribution of a dissolving business. In the multi-investor formation of a new business, it is not uncommon for one investor to contribute cash, another investor to contribute tangible assets and another investor to contribute intangible assets. The valuation of contributed assets is needed for two reasons. First, the investors need to know their income tax basis in the equity interest (whether partnership units, member units, joint venture ownership percentage, etc.). Second, the investors need to know their relative equity ownership. That relative equity ownership is typically based on the asset contributions. Intangible assets are often distributed in the dissolution of the business. Such distributions happen in both voluntary and involuntary dissolutions. Such distributions may be planned (e.g., a joint venture that reaches its 10-year agreement term) or unplanned (e.g., the winding down of a financially troubled company). Today’sCPA November/December 2014

An owner/operator may transfer intangible assets between controlled entities (e.g., between wholly owned subsidiaries of a parent corporation). Depending on the structure of the transaction, there may or may not be taxation or accounting implications to the intercompany transfer. Certainly, the parent company needs to keep track of what controlled entity owns what corporate asset (whether it is tangible or intangible). The intercompany transfer becomes noteworthy when the intangible asset is transferred between a wholly owned subsidiary and a less than wholly owned subsidiary. In such an instance, the minority equity investor wants to ensure that the intangible asset transfer occurs at a fair, arm’s-length price (ALP). The second category of valuation reasons relates to financing transactions. Intangible assets are sometimes used as collateral for a debtor to obtain financing. This collateral pledge occurs when there is an active secondary market for the intangible asset. In such instances, the creditor is more comfortable about accepting the intangible asset as debt collateral. An example of such relatively liquid intangible assets are drug formula patents and FDA approvals in the pharmaceuticals industry. This collateral pledge also occurs when the debtor has no other assets to pledge as collateral. In the case where the entity has already pledged all of its tangible assets as prior loan collateral, the creditor may accept certain intangible assets as collateral, because there are no other unencumbered assets available. Intangible asset sale/license-back transactions are a form of structured financing. Such transactions are more common with intellectual property. In a sale/license agreement, the intangible asset title passes from the owner/operator to the licensor. The prior owner/ operator becomes a licensee. The licensee pays license fees or royalties to the licensor. At the end of the license term, the intangible asset title typically reverts back to the owner/operator. For such financing transactions, the CPA may be asked to estimate the intangible asset value both as of a current date and as of the terminus of the financing agreement. The third category of valuation reasons relates to taxation planning and compliance. There are numerous income tax reasons to value intangible assets. A common reason is a business acquisition purchase price allocation. A target business is purchased by an acquirer business. The total purchase price is allocated among all of the acquired assets. Common situations include (1) a cash for assets acquisition, where the transaction is accounted for under Section 1060, and (2) a cash for stock acquisition, where the transaction is accounted for by a Section 338(h)(10) election. In both instances, the acquired assets typically include Section 197 intangible assets. Another reason is the transfer of intangible assets between domestic and foreign subsidiaries of a multinational corporation. Such transfers are controlled by the Section 482 regulations. There are two types of intercompany transactions. First, such transactions may involve the transfer of the fee simple ownership between commonly controlled subsidiaries. The CPA estimates the fair market value of the transferred intangible asset as of the transfer date. The purpose for the valuation is to determine (1) continued on next page 35

FEATURE continued from previous page

the tax basis of the intangible asset to the transferee entity and (2) any gain or loss related to the asset transfer. Second, such transactions may involve the intercompany license of the intangible asset between commonly controlled subsidiaries. The CPA estimates a fair ALP for the intercompany use license. This ALP should be concluded in compliance with the transfer price methods allowed in the Section 482 regulations. A CPA may be asked to estimate the fair market value of an intangible asset charitable contribution. An owner/operator may need an intangible asset valuation to support a worthless stock deduction. An owner/ operator may also need an intangible asset valuation to support a conclusion that the taxpayer was insolvent (e.g., to offset the recognition of cancellation of indebtedness income). Another reason to value intangible assets is a taxpayer’s conversion from C corporation status to S corporation status. At the conversion date, the corporation needs to value all of its tangible and intangible assets to measure the built-in gain (BIG) related to each asset. The corporation avoids the BIG tax if the taxpayer owns the assets for 10 years after the conversion date. There are also state income reasons to value intangible assets. Many multistate corporations transfer intellectual property to a holding company subsidiary. That subsidiary has responsibility to hold, protect, develop and commercialize the intellectual property. The holding company licenses the intellectual property to the corporation’s units operating in other states. The operating units pay an intercompany license payment to the holding company subsidiary. That subsidiary is domiciled in a state where such license income is exempt from state income tax. The operating units claim a tax deduction for the license payment expense, and the holding company does not pay income tax on the license income. The parent corporation recognizes a decrease in its overall state income tax expense. Intangible assets may be valued for gift tax and estate tax purposes. Decedent-owned intangible assets (including professional licenses) are included in the taxable estate. The standard of value is fair market value. The decedent may own a closely held company or a professional practice. Intangible assets could be the principal component of the closely held business or professional practice value. The fourth category of valuation reasons relates to regulatory compliance and corporate governance. Intangible asset sale or license transactions between for-profit entities and not-for-profit entities were discussed above. In healthcare industry transactions, the parties

must comply with the anti-kickback statutes, the Stark statutes, and various Office of Inspector General and State Attorney General regulations. Intangible asset valuations document compliance with the appropriate statutory authority and administrative rulings. Corporate officers and directors sometimes face allegations of breach of fiduciary duty, misappropriation, gross negligence, dissipation of corporate assets and similar claims. Intangible asset valuations may help defend against such allegations. A valuation that demonstrates corporate investment, development, protection, commercialization, and appreciation of the company intangible assets may help defeat allegations against officers and directors. The fifth category of valuation reasons relates to bankruptcy and reorganization proceedings. Intangible asset valuation is often an important component of the debtor company’s solvency (or insolvency) conclusion. Such a conclusion is an important bankruptcy issue related to fraudulent conveyance claims and preference payment claims. Intangible assets often provide a source of debtor in possession (DIP) cash flow generation. The DIP can sell (and possibly license back) an intangible asset that has a greater value to the market than it does to the DIP. The DIP can license certain intangible assets (particularly intellectual property) to non-competitor licensees, generating license income in the process. The sixth category of valuation reasons relates to financial accounting. GAAP is codified in the Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC). Several of the ASC topics relate to the fair value of intangible assets. ASC 820 relates to fair value measurements and disclosures. ASC 820 provides the fair value definition, the fair value measurement hierarchy, and other measurement and disclosure guidance related to both tangible assets and intangible assets. ASC 805 governs the acquisition accounting related to business combinations. The ASC 805 guidance relates to the fair value of acquired assets (including identifiable intangible assets) and liabilities. ASC 350 relates to the tests for goodwill impairment. ASC 350 provides guidance for (1) the test for determining whether recorded goodwill should be impaired and (2) how the goodwill impairment (if required) should be measured. ASC 360 relates to the test for impairment related to other long-lived intangible assets. ASC 360 provides guidance related to (1) the test for determining whether a long-lived asset should be impaired and (2) how the long-lived asset impairment (if required) should be measured.

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There are numerous reasons to conduct an intangible asset valuation. Understanding the reason for the intangible asset analysis is an important prerequisite to conducting the valuation, both for the CPA and the owner/operator.

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Today’sCPA

ASC 852 relates to accounting for corporate reorganizations. This ASC topic addresses the accounting and financial statement disclosure for debtor companies that emerge from Chapter 11 bankruptcy protection. In certain circumstances, such reorganized entities adopt fresh-start accounting, including the fair value of the reorganized company’s intangible assets. The seventh category of valuation reasons relates to forensic analysis. Litigation involving intangible assets generally falls into two categories: (1) breach of contract and (2) torts. A breach of contract claim requires that there is a contractual relationship between the parties. In a tort claim, there is no contract between the parties. Rather, one party owes a duty to the other party. Examples of breach of contract claims include violations of an intangible asset purchase or other transfer agreement, use license agreement, development agreement, commercialization agreement or joint venture agreement. Examples of tort claims include breach of fiduciary responsibility, infringement, eminent domain and expropriation actions, interference with business opportunity, fraud and misrepresentation, slander, and libel. There are generally accepted methods and procedures for measuring the economic damages suffered by the aggrieved party. These economic damages methods and procedures fall into three categories: (1) measurement of lost profits related to wrongful acts; (2) measurement of a fair royalty rate to compensate the owner/operator for wrongful acts; and (3) measurement of a decrease in intangible asset value (or “the cost to cure”) due to wrongful acts. The eighth category of valuation reasons relates to strategic planning and management information. The first of these relates to the control of the owner/operator’s intangible asset. The owner/ operator uses the valuation to inventory and to centralize internal control procedures related to intangible assets. The second relates to the protection of the intangible asset. The owner/operator uses the valuation to assess the adequacy of the company’s insurance on its intangible assets, and to document ownership and value of intangible assets to prosecute infringement and other claims. Other reasons involve intangible asset commercialization opportunities. The owner/operator could investigate and enter into license agreements, technology-sharing agreements, joint development agreements, joint commercialization agreements, and joint venture agreements.

Who is the Appropriate Valuation Analyst? There are many professionals who perform intangible asset valuations. Each of these professionals has certain pros and cons related to who is best qualified. The various categories include: academics, economists, industry consultants, licensing executives, CPAs and appraisers. An important consideration for the owner/ operator is: What other advice or service is desired in addition to the quantitative value conclusion? Robert Reilly, CPA

In addition to reporting the value conclusion, the owner/operator may want the analyst to assist with: 1) Preparing an offering document or other sales memorandum to begin the process of selling the intangible asset; 2) Negotiating the terms of a license or other commercialization agreement; 3) Identifying licensor or licensee candidates for a potential agreement; 4) Advising related to the financial accounting for an intangible asset transaction; 5) Advising related to the tax aspects for an intangible asset transaction; 6) Advising the owner/operator on how to optimize the use of the intangible assets; 7) Preparing the intangible asset components of a bankruptcy reorganization plan; 8) Finding an interested financing source; 9) Appearing before a government regulatory authority; or 10) Providing an expert witness report and courtroom expert testimony. The CPA who holds the Accredited in Business Valuation (ABV) credential is often the appropriate professional to value the intangible asset. CPAs comply with rigorous and comprehensive professional standards. CPAs are highly regarded by taxation authorities, regulatory agencies, the banking profession and the judiciary. In addition, most CPAs are knowledgeable of the related issues that affect intangible asset valuation, including financial accounting and taxation issues. CPAs who have also earned the ABV credential have a demonstrated experience and expertise in intangible asset valuation. The ABV credential, which is granted by AICPA, is granted to CPAs who have achieved specific experience, examination, and continuing education requirements.

Understand the Reason There are numerous reasons to conduct an intangible asset valuation. Understanding the reason for the intangible asset analysis is an important prerequisite to conducting the valuation, both for the CPA and the owner/operator. A clear definition of the valuation reason allows the CPA to understand if (1) any specific analytical guidelines, procedures or regulations apply and (2) any specific reporting requirement applies. For example, intangible asset valuations prepared for fair value accounting purposes should meet ASC 820 fair value guidance. Intangible asset valuations performed for intercompany transfer price income tax purposes should comply with Section 482 regulations. The individual reasons for the valuation may influence the standard of value applied, the valuation date selected, the approaches and methods applied, the form and format of the report prepared, and even the type of professional employed to perform the analysis. n

is a managing director with Willamette Management Associates in Chicago. His practice includes valuation consulting, economic analysis and financial advisory services. He can be reached at rfreilly@willamette.com.

Today’sCPA November/December 2014

CPE ARTICLE

Brushing Up on the New Audit Report and Relating it to the Financial Reporting Framework for Small to Medium-Sized Entities

Todayâ&#x20AC;&#x2122;sCPA

Curriculum: Accounting and Auditing Level: Intermediate Designed For: Public Practice Objectives: Review of basic audit reports for financial statements prepared under GAAP, as well as the FRF for SMEs Key Topics: The unmodified report; reports with modified opinions; emphasis-of-matter and other matter paragraphs; financial statements prepared under the FRF for SMEs; key differences Prerequisites: None Advanced Preparation: None

By C. William (Bill) Thomas, CPA, Ph.D.

n October 2011, the Auditing Standards Board (ASB) of the American Institute of CPAs (AICPA) issued Statement on Auditing Standards (SAS) 122, Statements on Auditing Standards: Clarification and Reclassification. This SAS recodifies the generally accepted auditing standards (GAAS), aligning them to those of the International Auditing and Assurance Standards Board (IAASB). In many areas, the clarified standards merely reword and reorganize existing standards, with no substantive changes in either theory or application. However, the form and content of the audit report, as outlined in AU-C 700, has changed in some important ways. Adding complexity and potential confusion, several new financial reporting frameworks (FRFs) now exist that provide context within which to judge and report on fairness of presentation. Besides generally accepted accounting principles (GAAP), available FRFs now include the Financial Accounting Standards Board’s (FASB’s) GAAP decision-making framework for small and medium-sized entities (SMEs), International Financial Reporting Standards (IFRS), and a group of socalled special-purpose FRFs that small practitioners often manage. These include the cash basis, the tax basis, regulatory or contractual bases, and a recent addition, the financial reporting framework for small to medium-sized entities (FRFs for SMEs). The purpose of this article is to help practitioners understand changes in key elements of the unmodified (formerly unqualified) audit report. The article explains how, by merely changing or adding certain phrases, the unmodified report may be modified to fit various reporting circumstances that CPAs might encounter in practice. These include opinion modifications, emphasis-of-matter and other matters. The article concludes with an illustration of how to word an audit report on financial statements that use the FRF for SMEs.

The Unmodified Report An important step in learning the format of the unmodified (formerly referred to as the “unqualified”) audit report is that, like its predecessor, it follows a rather standard template. See Exhibit 1, Elements of continued on next page Today’sCPA November/December 2014

CPE ARTICLE continued from previous page Exhibit 1. Elements of the Unmodified Audit Report 1. (Title) Independent Auditor’s Report 2. (Addressee) Normally, those for whom the report is prepared 3. (Body Section 1) Report on the Financial Statements We have audited the accompanying financial statements of XYZ Co., which comprise the (specific titles of financial statements audited, dates and periods of time covered) and the related notes to the financial statements. 4. (Body Section 2) Management’s Responsibility for the Financial Statements Management is responsible for the preparation and fair presentation of these financial statements in accordance with (applicable financial reporting framework (AFRF)). This includes the design, implementation and maintenance of internal control relevant to the preparation and fair presentation of financial statements that are free from material misstatement, whether due to error or fraud. 5. (Body Section 3) Auditor’s Responsibility a. Our responsibility is to express an opinion on the financial statements based on our audit(s). We conducted our audit in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform our audits to obtain reasonable assurance about whether financial statements are free from material misstatement, whether due to fraud or error.

6. 7. 8. 9.

b. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditor’s judgment, including the c. We believe that the audit evidence we have obtained assessment of the risks of material misstatement is sufficient and appropriate to provide a basis for our of the financial statements, whether due to fraud or opinion. error. In making those risk assessments, the auditor (Body Section 4) Opinion In our opinion, the financial statements referred to above present fairly, in all material respects, the (financial information that is pertinent to the AFRF and time period selected), in accordance with the (AFRF and its origin). Auditor (firm) signature Address of audit firm (city and state) Date of audit report

the Standard (Unmodified) Audit Report. For clarity, each key element of the report is numbered for reference in the discussion below. After the title and inside address (elements 1 and 2), the body of the unmodified audit report is comprised of four sections (elements 3 through 6). Unlike its predecessor, the report sets each section apart with a subheading to clearly distinguish the nature of the work performed, the responsibilities assumed by both management and the auditor, and the opinion. The first section, labeled Report on the Financial Statements (element 3), consists of one paragraph. It begins with the statement, “We have audited,” and follows with a clear description of the specific financial statements audited, as well as dates and time periods covered by those statements. The second section, labeled Management’s Responsibility for the Financial Statements (element 4), consists of one paragraph. It describes management’s responsibility for the financial statements, as well as for the design, implementation and maintenance of relevant internal controls over financial reporting. For cases in which the FRF differs from GAAP (i.e., a special-purpose FRF), the report must also state that management is responsible for evaluating the acceptability of 40

considers internal control relevant to the entity’s preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal control. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant estimates made by management, as well as evaluating the overall presentation of the financial statements.

the framework for preparation of the financial statements in the circumstances. The third section, labeled Auditor’s Responsibilities, consists of three paragraphs. The first of these paragraphs (element 5a) describes the auditor’s overall responsibility to express an opinion on the financial statements, as well as to follow GAAS, which require the auditor to plan and perform the audit to obtain reasonable assurance that financial statements are free from material misstatement, whether due to error or fraud. The second paragraph (element 5b) goes on to provide a more detailed description of what an audit entails, including the types of judgments made and risks assessed, and evaluation of appropriateness of accounting policies and estimates made by management. The third paragraph (element 5c) contains a statement of belief that the audit evidence obtained is sufficient and appropriate to provide a reasonable basis for the opinion. The fourth section, labeled Opinion (element 6), consists of one paragraph. It expresses the auditor’s overall opinion regarding fairness of presentation, in all material respects, of the information contained in financial statements, on the basis of the applicable financial reporting framework (AFRF). Today’sCPA

These four sections are followed by the auditor firm signature (element 7), the location of the firm (element 8) and date (element 9). In reaching the opinion regarding conformity of financial statements with requirements of the AFRF, the auditor should evaluate whether: a. The financial statements adequately refer to or describe the AFRF. This requires that management identify the AFRF, prepare fairly presented financial statements on the basis of the AFRF and include an adequate description of the AFRF in the financial statements. b. The financial statements achieve fair presentation within the context of the AFRF. c. The financial statements adequately disclose significant accounting policies. d. The accounting policies selected and applied are consistent with the AFRF and are appropriate. e. The accounting estimates made by management are reasonable. f. The information presented in the financial statements is relevant, reliable, comparable and understandable. g. The financial statements provide adequate disclosures to enable intended users to understand the effect of material transactions and events on information conveyed in the financial statements. h. The terminology used in financial statements, including titles, is appropriate.

Reports with Modified Opinions The former standard for audit reports used the term “qualified” to describe two categories in which a departure from the “unqualified” opinion language is necessary: (1) material misstatements in the AFRF; and (2) scope limitations in the audit engagement. In contrast, although AU-C 700 retains the term “qualified” as well as its two categories, it classifies “qualified” as one of three types of “modified” opinions, the other two being adverse and disclaimer. Exhibit 2 shows these modifications in tabular form. Material misstatements in the AFRF and material scope limitations are defined exactly as in the former standards. The term “material” also carries the same definition as in the former standards: affecting the decision process of a reasonably well informed user of financial statements. As was the case with former standards, the adverse opinion is regarded as the extreme case of the material misstatement qualified opinion, with the difference being a judgment regarding pervasiveness. Similarly, the disclaimer of opinion is considered the extreme case of the material scope limitation, with the difference being a pervasiveness judgment. Pervasive effects on the financial statements are those that, in the auditor’s professional judgment (1) are not confined to specific elements, accounts or items in the financial statements; (2) if so confined, represent or could represent a substantial proportion of the financial statements; or (3) with regard to disclosures, are fundamental to users’ understanding of the financial statements. Modified opinions for both material misstatements and material scope limitations, and their extremes (adverse and disclaimers, respectively), require insertion of a modification (previously referred to as explanatory) paragraph immediately before the opinion paragraph (element 6 in Exhibit 1). The heading of this paragraph should be Basis for (Qualified, Adverse or Disclaimer of ) Opinion. Today’sCPA November/December 2014

In cases of qualified or adverse opinions resulting from material misstatements that relate to specific amounts in the financial statements, the “Basis for …” paragraph should contain both a description and quantification of the financial effects of the misstatement, if practicable. If not practicable, the auditor should state that is the case. If disclosures of financial effects are made in financial statement footnotes, the basis for modification paragraph may be shortened by referring to those footnotes. In addition, the last paragraph of the Auditor’s Responsibilities section (element 5c in Exhibit 1) is modified to indicate the type of opinion (qualified or adverse). Also, the opinion section (element 6) is modified by (1) changing the heading to indicate the type of opinion (either qualified or adverse); and (2) modifying the language of the paragraph after “In our opinion” to except for … (with reference to the “Basis for” … paragraph) for the qualified opinion or because of … (with reference to the “Basis for” … paragraph) for the adverse opinion. In cases of qualified or disclaimer of opinions resulting from material scope limitations (the inability to obtain sufficient appropriate audit evidence), the reasons for that inability should be included in the “Basis for…” paragraph. In addition, the opinion section (element 6 of Exhibit 1) is modified by (1) changing the heading to indicate the type of opinion (either qualified or disclaimer); and (2) modifying the language of the paragraph after, “In our opinion,” to except for the possible effects of the matter … (with reference to the “Basis for” … paragraph) for the qualified opinion or because of the significance of…(with reference to the “Basis for” … paragraph) for the disclaimer of opinion. For a disclaimer of opinion, the Report on Financial Statements section (element 3) is modified by changing “We have audited” to “We were engaged to audit.” In addition, the Auditor’s Responsibility section is reduced to one paragraph, consisting of the first two sentences of element 5a in Exhibit 1 followed by: “Because of the matter(s) described in the Basis for Disclaimer of Opinion paragraph, however, we were not able to obtain sufficient appropriate audit evidence to provide a basis for an audit opinion.”

Emphasis-of-Matter and Other Matter Paragraphs The former standards for audit reports confined the definition of “emphasis of matter” to four rather narrowly defined circumstances in which the CPA could, at his/her discretion, insert explanatory language into the report while taking care not to use language that might imply a qualified opinion (see item 9 later in this paragraph).

Exhibit 2. Reports with Modified Opinions Opinion type Cause for Opinion Modification

Matter is material, but not pervasive

Matter is material and pervasive

Material misstatements

Qualified

Adverse

Scope limitation

Qualified

Disclaimer

continued on next page 41

CPE ARTICLE continued from previous page The new standard retains this definition, but expands it to include all of the circumstances that formerly were referred to as “explanatory language in the standard report.” The new definition of “emphasis-ofmatter” is as follows: “a paragraph included in the audit report that is required by GAAS or included at the auditor’s discretion, and that refers to a matter appropriately presented or disclosed in the financial statements that, in the auditor’s professional judgment, is of such importance that it is fundamental to users’ understanding of the financial statements.” An emphasis-of-matter paragraph is not a substitute for either (a) the auditor expressing a modified opinion, or (b) required disclosures in the financial statements. Emphasis-of-matter items include: 1) consistency modifications for changes in accounting principle; 2) consistency modifications for correction of misstatements in previously issued financial statements; 3) changes from opinions previously expressed on prior periods’ financial statements due to a matter disclosed in the current period; 4) subsequent discovery of facts that become known to the auditor after the audit report release date that result from an item disclosed in the financial statements; 5) substantial doubt about the entity’s ability to remain a going concern; 6) when financial statements prepared in accordance with an FRF generally accepted in a foreign country are also intended for use in the United States; 7) special-purpose financial statements (see later discussion); 8) audits of single financial statements and specific elements, accounts or items in a financial statement; and 9) the auditor may insert a paragraph to emphasize (a) an uncertainty relating to the future outcome of unusually important litigation or regulatory action; (b) a major catastrophe that has had, or continues to have, a significant effect on the entity’s financial position; (c) significant transactions with related parties; or (d) unusually important subsequent events. Use of emphasis-of-matter language in the audit report requires the auditor to communicate with those charged with governance the expectation of inclusion of these paragraphs and the proposed wording. Emphasis-of-matter paragraphs should refer only to information appropriately presented or disclosed in the financial statements and should be fundamental to users’ understanding of them. The auditor should also have obtained appropriate audit evidence that the matter is not materially misstated in the financial statements. Emphasis-ofmatter information in the audit report should: 1) be placed in a separate paragraph immediately after the opinion paragraph; 2) be labeled with a separate heading – Emphasis of Matter; 3) include a clear reference to the matter being emphasized, and state where relevant disclosures that fully describe the matter can be found in the financial statements; and 4) indicate that the auditor’s opinion on the financial statements is not modified with respect to the matter emphasized. The specifications for exact wording of the nine emphasis-of-matter items listed above are essentially unchanged from previous standards. 42

AU-C 706 adds another category called “other matter paragraphs” defined as follows: a paragraph included in the audit report that is required by GAAS or included at the auditor’s discretion, and that refers to a matter other than those presented or disclosed in the financial statements that, in the auditor’s professional judgment, is relevant to users’ understanding of the audit, the auditor’s responsibilities, or the audit report. Circumstances that require other matter paragraphs include: 1) a change from an opinion previously expressed in prior period comparative financial statements (formerly known as “updating the audit report on prior period comparative financial statements”); 2) reference to a predecessor auditor in comparative financial statements; 3) reference to a review or compilation in a prior period on comparative financial statements; 4) reference to prior period comparative financial statements that were not audited, reviewed or compiled; 5) reference to subsequently discovered facts that became known to an audit after the audit report release date; 6) reference to other information included with financial statements that requires revision but which management refuses to revise; 7) report on supplementary information presented with financial statements; 8) reference to required supplementary information; 9) reference to certain types of restricted-use special-purpose financial statements; 10) reports on compliance with aspects of contractual agreements or regulatory requirements included in the audit reports; 11) other types of restricted use reports; and 12) reports on interim financial information accompanying audited financial statements when certain conditions exist. Other-matter paragraphs should generally be included after both the opinion paragraph and emphasis-of-matter paragraphs. This paragraph should contain the separate heading Other Matter. At first glance, all of these potential modifications of the audit report to match various circumstances might seem confusing. However, while wording of specific paragraphs requires detailed reading of the AU-C 700 series of standards, it is important to note that all of them use the general reporting framework outlined in Exhibit 1. Additionally, in everyday practice, rarely does more than one or two of the circumstances outlined above occur at any one time for a given client. Understanding these facts to then craft an explanatory paragraph or two and attach it to the basic format of Exhibit 1 can greatly simplify the process of crafting the appropriate audit report.

The Unmodified Report on Financial Statements Prepared Under the FRF for SMEs The FRF for SMEs is a new accounting option for privately held, largely (but not necessarily exclusively) owner-managed businesses that are not required to use GAAP. It draws on a blend of traditional methods of accounting with some accrual income tax methods. The FRF for SMEs consists of accounting principles that are especially suited and relevant to a typical SME. Some examples of those principles include Today’sCPA

Exhibit 3. Audit Report on Financial Statements Prepared in Accordance with the Financial Reporting Framework for Small and Medium-Sized Entities (FRF for SMEs) (Single Year) 1. (Title) Same as Exhibit 1. 2. (Addressee) Same as Exhibit 1. 3. (Body Section 1) Identical to Exhibit 1, up to parenthesis. Specific financial statement titles should be Statement of Financial Position as of (date), and related Statements of Operations and Cash Flows for the year then ended, and the related notes to the financial statements. 4. (Body Section 2) Identical to Exhibit 1, element 4, up to information in parenthesis. Modify as follows: …the financial reporting framework for small and mediumsized entities described in Note X; this includes determining that the FRF for SMEs is an acceptable basis for the preparation of the financial statements in the circumstances. Management is responsible for the design, implementation and maintenance of internal control relevant to the preparation and fair presentation of financial statements that are free from material misstatement, whether due to fraud or error.

use of historical cost rather than complicated fair value measurements, and refraining from use of complicated accounting for derivatives, hedging activities or stock compensation. The FRF for SMEs is intended to be used by small and medium-sized for-profit entities to confirm their assessments of performance, measure what they own and what they owe, and to understand their cash flows. It should be used only by SMEs that have no intention of becoming a public entity in the future. If the entity has those intentions, they should consider using at least the Financial Accounting Foundation’s (FAF’s) Private Company Council (PCC) modifications to GAAP, if not unmodified GAAP. Because it is not considered GAAP, the FRF for SMEs is treated by AICPA as a special-purpose framework, like the cash basis and tax basis methods. CPA practitioners performing audit, review or compilation engagements on financial statements prepared under the FRF for SMEs framework would follow the same standards as they do when reporting on other special-purpose frameworks. Audit reports on financial statements prepared in accordance with the FRF for SMEs would require the addition of an emphasis-of-matter paragraph, much the same as the audit report accompanying other comprehensive basis of accounting (OCBOA) prepared financial statements. Before accepting an engagement to audit financial statements prepared under the FRF for SMEs, the practitioner should become thoroughly familiar with the framework and determine whether it is an acceptable reporting framework for his/her clients. This will require analysis of the purposes for which the financial statements are being prepared, the intended users, and steps taken by management to determine whether the FRF for SMEs is acceptable in the circumstances. C. William Thomas, CPA, Ph.D. Today’sCPA November/December 2014

5. (Body Section 3) Identical to Exhibit 1, element 5. 6. (Body Section 4) Identical to Exhibit 1, element 6, up to parenthesis. Modify as follows: …financial position of (entity) as of (date) and its results of operations and cash flows for the year then ended, in accordance with the financial framework for small and medium-sized entities described in Note X. 7. (Add emphasis-of-matter paragraph) We draw attention to Note X of the financial statements, which describes the basis of accounting. The financial statements are prepared based on the financial reporting framework for small and medium-sized entities, which is a basis of accounting other than accounting principles generally accepted in the United States of America. Our opinion is not modified with respect to this matter. 8. Auditor (firm) signature 9. Address of audit firm (city and state) 10. Date of audit report

The practitioner should obtain the agreement of management that it acknowledges and understands its responsibility to include all informative disclosures that are appropriate for FRFs for SMEs. These include a description of the framework, a summary of significant accounting policies and how the framework differs from GAAP. However, the effects of those differences from GAAP need not be quantified. The auditor should evaluate whether the financial statements are suitably titled to reflect the FRF. For example, financial statements that follow the FRF for SMEs should use statement of financial position and statement of operations rather than balance sheet and statement of income. Once these differences are understood, Exhibit 1 can be modified quite simply to fit financial statements prepared on the basis of the FRF for SMEs. Exhibit 3 illustrates these modifications in elements 3, 4 and 6, along with the addition of an emphasisof-matter paragraph. The remainder of this report is identical to Exhibit 1.

Know the Key Differences The clarified auditing standards have changed the unmodified audit report in several important ways. This article describes these changes and the modifications to fit various circumstances. The article also discusses how the report is changed to fit financial statements prepared using the FRF for SMEs, which is the most recently developed FRF by AICPA. By becoming familiar with the basic report (Exhibit 1), as well as the new terminology and the FRF for SMEs, practitioners should be equipped with the tools they need to draft the most appropriate audit report to fit their client’s financial reporting circumstances. n

is the J.E. Bush Professor of Accounting in the Hankamer School of Business at Baylor University in Waco. Thomas can be reached at Bill_Thomas@baylor.edu. 43

CPE QUIZ

By C. William (Bill) Thomas, CPA, Ph.D.

Brushing Up on the New Audit Report and Relating it to the Financial Reporting Framework for Small to Medium-Sized Entities 1 Which sections (by sub-heading) of an audit report with an unmodified opinion refer to the applicable financial reporting framework (AFRF)? Report on the Management’s Opinion Financial Statements responsibility A. No Yes No B. Yes Yes No C. Yes No Yes D. No Yes Yes

2 When single-year financial statements are presented, an auditor normally would express an unmodified opinion in an unmodified report if the: A. Auditor is unable to obtain sufficient appropriate audit evidence related to one or more account balances in the financial statements. B. Entity omits information necessary for the financial statements to be fairly presented. C. Entity follows the financial reporting framework for small and medium-sized entities (FRF for SMEs) in preparing its financial statements. D. Prior year’s financial statements were audited by another CPA whose report, which expressed an unmodified opinion, is not presented.

3 Restrictions imposed by the circumstances prohibit the observation of physical inventories, which accounts for 25 percent of all assets. Alternative audit procedures cannot be applied for inventories, although the auditor was able to obtain sufficient appropriate evidence for all other accounts in the financial statements. The auditor should issue a: A. B. C. D.

Modified report with an emphasis-of-matter paragraph and a qualified opinion. Modified report with an emphasis-of-matter paragraph but an unmodified opinion. Modified report with an unmodified opinion and an other-matter paragraph. Disclaimer of opinion.

4 In which of the following circumstances would an auditor not express an unmodified opinion? A. There has been a material change in accounting principle. B. The auditor is unable to obtain audited financial statements of an affiliate accounted for under the equity method. C. The auditor wishes to emphasize a significant transaction with a related party. D. A lawsuit, properly disclosed in footnotes to financial statements, threatens the company’s future operations.

5 The factor considered by the auditor when deciding whether to express a qualified opinion vs. either an adverse opinion or a disclaimer is the: A. Materiality (vs. immateriality) of the effects or possible effects on the financial statements. B. Significance of an item to a particular entity. C. Pervasiveness of the effects or possible effects on the financial statements. D. Effects or possible effects on the financial statements taken as a whole.

6 All of the following describe the nature of pervasive effects of misstatements on the financial statements except: A. Pervasive effects, with regard to disclosures, would cause a reasonable person to misunderstand the nature of a significant component of the financial statements. B. Pervasive effects are not confined to specific elements, accounts or items of the financial statements. C. Pervasive effects, with regard to disclosures, are fundamental to users’ understanding of the financial statements. D. Pervasive effects represent a substantial proportion of the financial statements.

7 Which of the following statements is not true about the financial reporting framework for small and medium-sized entities (FRF for SMEs)? A. The FRF for SMEs was promulgated by AICPA. B. The FRF for SMEs may be applied equally to public and non-public for-profit entities. C. The FRF for SMEs was designed to be a cost-beneficial solution for ownermanagers and others who need financial statements, but without the need for some of the complexities required by GAAP. D. The FRF for SMEs draws upon a blend of traditional methods of accounting and some accrual income tax methods.

8 CPAs who perform audits on financial statements prepared in accordance with the FRF for SMEs: A. Are in violation of professional standards. B. Must issue an adverse opinion for audited financial statements because they are not in accordance with GAAP. C. Should follow special standards for auditing these financial statements. D. Should follow the same auditing standards as they do when reporting on other special purpose framework financial statements.

9 The typical audit report on financial statements prepared in accordance with the FRF for SMEs would include: A. A modified opinion. B. An emphasis-of-matter paragraph.

C. An other-matter paragraph. D. None of the above.

10 Report modifications for the standard report on financial statements prepared in accordance with the FRF for SMEs would contain additional language in which paragraph(s)? A. B. C. D.

“Report on the financial statements” (introductory paragraph). “Management’s responsibility for the financial statements” paragraph. “Auditor’s responsibilities” paragraph. Both a and b.

Today’sCPA

Today’s CPA offers the self-study exam above for readers to earn one hour of continuing professional education credit. The questions are based on technical information from the preceding article.

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To request a classified ad, contact Donna Fritz at dfritz@tscpa.net or 800-428-0272, ext. 201. All classified ads must be paid in advance. $1,100,000 GROSS. West of Ft. Worth CPA practice. Highly profitable, turn-key, predominately tax (80%). Solid fee structure and tenured staff. TXN1351 $204,000 GROSS. Gainesville, TX. Turn-key CPA practice. Tax svcs approx. 80% of revenues, solid fee structure, and strong cash flow approx. 60%. TXN1356 $270,000 GROSS. Arlington Tax & Bkkping. Solid fee structure, tenured staff, and loyal client base. 95% revenues from repeat customers (Tax 85%). TXN1362 $1,360,000 GROSS. Dallas, TX. Highly profitable CPA Practice, Tax (50%), Acctng (41%) Consulting (9%). Strong fee structure, cash flow nearly 60%! TXN1366 $250,000 GROSS. Mansfield CPA Practice. Tax (60%), Accntng (30%) Other svc. (10%). High-quality client base includes good amount of businesses. TXN1367 $230,000 GROSS. Las Colinas, TX CPA Practice. Tax work (60%), Accounting (38%), strong fee structure and steady, year-round income. TXN1368 $78,000 GROSS. Dallas, TX CPA Practice. Tax work (76%) Accounting (24%), loyal client base, excellent cash flow to owner near 90%! TXN1369 $128,000 GROSS. West Houston tax practice comprised of about 440 individual returns. Staff in place to help in smooth transition. TXS1135 $160,000 GROSS. Southern Coastal Town. Acctng (64%), tax (28%), desirable location, trained staff, and seller financing may be available. TXS1140 $1,2000,000 GROSS. Coastal Bend Area CPA practice. Highly profitable, good mix of tax, acctng, consulting/planning. CPA staff in place. TXS1146 $303,000 GROSS. Jackson-Victoria-Calhoun Co Practice. Tax (80%), Accounting (16%). Good reputation and staff in place to assist with transition. TXS1148 $120,140 GROSS. Houston. 2 virtual offices Sugar Land & Jersey Village. IRS Rep (69%) Ind. and Bus. tax prep (31%), owner cash flow (90%+)! TXS1149 $87,000 GROSS. Gonzales, Lavaca, Fayette Co. Ind. Tax prep-simple returns, transition assistance available, good local reputation, room for growth. TXS1150 $1,900,000 GROSS. West Houston. Tax (71%), accounting (21%), and other (8%), desirable location, solid fee structure, staff (CPAs) in place. TXS1151 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

Today’sCPA November/December 2014

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 email 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 no-obligation, confidential on-site personal consultations to discuss your situation. We offer a large database full of qualified buyers, financing for your buyer and confidentiality throughout the entire process. If you like the idea of an experienced professional to guide you through the selling process, please contact us today at 888-7266282 or Retire@NaabConsulting.com. Mention promo code #24 for additional incentives. 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. BUYING OR SELLING? First talk with Texas CPAs who have the experience and knowledge to help with this big step. We know your concerns and what you are looking for. We can help with negotiations, details, financing, etc. Know your options. Visit www.accountingpracticesales.com for more information and current listings. Or call toll-free 800-397-0249. Confidential, no-obligation. We aren’t just a listing service. We work hard for you to obtain a professional and fair deal. ACCOUNTING PRACTICE SALES, INC. North America’s Leader in Practice Sales

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