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Armanino Technology Blog

Welcome to the Technology Blog hosted by the professionals at Armanino, CPAs & Consultants. This blog is set up to inform technology companies of trends, rule changes, best practices and free educational offerings that we have built to support the technology industry. Our professionals bring you their insights from an accounting and organization perspective to help your company reach its goals. We support our clients with advice, direction and best practices.

Friday, July 11, 2014

IRS eased ACA reporting burden, but action still required now

The Internal Revenue Service (IRS) has streamlined the reporting burden for employers under the Affordable Care Act (ACA)—but only if companies qualify and receive certification for 2014. In its effort to determine which employers are offering qualified coverage and which face penalties for not playing, the IRS has outlined additional reporting rules for employers with more than 50 full time employees (FTEs) or FTE equivalents.
  • IRS Section 6055 requires health insurers—including self-insured employers—to provide information on the type and period of coverage for every employee on the payroll during 2014. One copy goes to the IRS and another goes to the employee by Jan. 31, 2015 (or by March 31, if filed electronically).
  • IRS Section 6056 requires employers with more than 50 full-time employees to tell the IRS what health care coverage it offered to each employee and over what portion of the year that offer covered. That form is due Feb. 28, 2015, or March 31 if filed electronically. Sec. 6056 also requires large employers to furnish related statements to employees that the employees can use to determine whether, for each month of the calendar year, they can claim a premium tax credit.
The goal of all this is to measure whether employers have complied with ACA’s requirement to offer “minimal essential” health care coverage at an affordable price that reaches a “minimal value” threshold for all employees and their families. Employers that don’t meet the test—and just one of their FTEs or equivalents received a premium tax break for buying insurance on the health exchange—will face significant tax penalties.

The new regulations are a significant improvement from earlier drafts. Gone are demands for some data that would have been costly to administer and have not helped the IRS determine penalties. The latest rules offer a combined form that allows employers to meet both Sec. 6056 and Sec. 6066 requirements (Form 1095-C). It’s a handy tool, especially for those employers who do not self-insure and do offer qualifying coverage to all of its FTEs.

The latest regulations also provide some short-term relief from penalties for employers who can show they have made good-faith efforts to comply with the ACA’s information reporting requirements in this first year.

To learn if your organization is eligible for transitional relief—and to learn more about the required certification process—click here.

Like much of the ACA, the concrete hasn’t hardened yet and there could be additional changes before employers start filing in 2015. But these IRS regulations give employers a better measure of what’s expected as they weigh their employee benefit options.

Please note that each business situation is unique, so we encourage you to contact your tax professional at Armanino to discuss your specific business situation.

Friday, June 13, 2014

R&D Alternative Simplified Credit Election Allowed on Amended Return

On June 2, 2014, the Treasury Department and IRS released final and temporary regulations (TD 9666) for publication in the Federal Register relating to the election of the research and development alternative simplified credit (ASC).

The final regulations remove the restriction in §1.41-9(b)(2) that prohibits a taxpayer from electing the ASC under section 41(c)(5) for a tax year on an amended return. The temporary regulations allow a taxpayer to make an ASC election for a tax year on an amended return with certain restrictions:
  1. A taxpayer that previously claimed the research credit for a tax year may not make an ASC election for that tax year on an amended return.
  2. A taxpayer that is a member of a controlled group in a tax year may not make an ASC election for that tax year on an amended return, if any member of the controlled group for that year previously claimed the research credit using a method other than the ASC, for that tax year. 
These regulations are provided in response to requests received by the IRS to allow taxpayers to make an ASC election on an amended return. The requests explained that the burden of substantiating expenditures and costs for the base period under the regular credit can be costly, time consuming, and difficult. Consequently, taxpayers often need additional time to determine whether to claim the regular credit or the ASC.

These new regulations apply to elections with respect to tax years ending on or after June 3, 2014. However, a taxpayer may rely on the regulations to make an ASC election for a tax year ending prior to June 3, 2014, as long as the taxpayer makes the election before the period of limitations for assessment of tax has expired for that tax year. For more information, access a printable version of this blog posting here.

Wednesday, June 11, 2014

Long-awaited revenue recognition rules released

The Financial Accounting Standards Board (FASB) and the International Accounting Standards Board (IASB) have issued new joint guidance that addresses one of the most important measures investors use when assessing a company’s performance and prospects — revenue. FASB’s version, communicated in Accounting Standards Update (ASU) No. 2014-09, Revenue from Contracts with Customers, standardizes and simplifies the revenue recognition process for customer contracts across different industries and geographic locations. It also requires more comprehensive footnote disclosures for all types of public and private companies.

Although companies will ultimately report the same total amount of revenue over time, their performance could look different to investors as a result of changes in the timing of revenue recognition. Many companies are expected to record revenues earlier under the new guidance. This is because the guidance requires companies to estimate the effects of variable consideration, such as sales incentives, discounts and warranties. Almost every company will be affected in some way. But companies in some industries are expected to feel the changes more than others.

The genesis of the new converged guidance

The converged guidance has been in the works for more than 10 years. U.S. Generally Accepted Accounting Principles (GAAP) and International Financial Reporting Standards (IFRS) had divergent rules regarding revenue recognition, each with its own inconsistencies and weaknesses. GAAP, which had general rules along with more than 200 industry- and transaction-specific rules, produced different accounting for transactions that were economically similar. IFRS went to the other extreme — it provided limited guidance that required inadequate detail. Moreover, it was based on different fundamental principles.

Both the new GAAP guidance and the new corresponding IFRS rule are based on the following core principle: “Recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for the goods or services.”

5 steps of revenue recognition
To help achieve that core principle, the new guidance lays out five steps a company must follow to determine when and how to properly recognize revenue on its financial statements:
  1. Identify the contract with a customer. The guidance applies to each contract a company has with a customer, assuming the contract meets certain criteria. In some cases, the company should combine contracts and account for them as a single contract. (The guidance also includes rules for contract modifications.)
  2. Identify the company’s performance obligations (or promises) under the contract. If a contract contains obligations to transfer more than one good or service to a customer, the company can account for each as a separate performance obligation only if the good or service is distinct or a series of distinct goods or services that are substantially the same. A good or service is “distinct” if a) the customer can benefit from the good or service on its own or together with other resources that are readily available to the customer, and b) the company’s promise to transfer the good or service is separately identifiable from other promises in the contract. 
  3. Determine the transaction price. The company must determine the amount it expects to be entitled to in exchange for transferring promised goods or services to a customer. The new rules list several factors the company should consider, including the effects of any variable payment or significant financing components.
  4. Allocate the transaction price to the performance obligations in the contract. The company will typically allocate the transaction price to each performance obligation based on the relative “standalone selling price” of each distinct good or service promised in the contract. Any discounts or variable payments that relate entirely to one of the performance obligations should be allocated to that obligation.
  5. Recognize revenue when (or as) performance obligations are satisfied. The company must recognize revenue when it satisfies a performance obligation by transferring the promised good or service to a customer — that is, when the customer obtains control of the good or service. The amount recognized is the amount allocated to the performance obligation.
Notably, when a performance obligation is satisfied over time, as opposed to at a single point in time, the company must likewise recognize revenue over time, by consistently applying a method of measuring progress toward complete satisfaction of the obligation.

Enhanced revenue-related disclosures
Currently, most companies provide limited information about revenue contracts. The existing rules require only descriptions of a company’s revenue-related accounting policies and their effects on revenue, including rights of return, the company’s role as a principal or agent, and customer payments and incentives. Investors and other users of financial statements indicated that the disclosure requirements in both GAAP and IFRS were insufficient.

The new rules expand disclosure requirements. They require a cohesive set of qualitative and quantitative disclosures intended to provide users of financial statements with useful information about the company’s contracts with customers. The disclosures will include information about the nature, amount, timing and uncertainty of revenue and cash flows arising from a company's customer contracts.

Industry-specific impact
The new rules will likely have a particularly significant impact on certain industries, including those that commonly sell goods or services in bundled packages or enter into contracts that include variable payment terms, such as performance bonuses or rights of return.

For example, wireless providers (which may sell a customer a phone at the same time as a service plan) and software companies (which sell licenses to software along with future upgrades or other vendor obligations) may see accelerated recognition of revenue. Currently, these companies generally recognize revenue only to the extent they have actually received cash.

Software companies could also be affected by rules regarding recognition of royalties from licenses. The distinction between term licenses and perpetual licenses will be eliminated, with the focus shifting to the performance obligations under a license.

The licensing rules could affect media companies that collect sales- or usage-based royalties on intellectual property, as well. The new rules allow recognition of such revenue only when the underlying sale or usage occurs.

The new rules apply only to revenues from customer contracts related to the transfer of nonfinancial assets. Contracts that remain within the scope of other FASB topics include insurance contracts, leases, financial instruments, guarantees and nonmonetary exchanges between entities in the same line of business to facilitate sales.

Additional guidance
The guidance also includes rules for accounting for some costs related to obtaining or fulfilling a contract with a customer — addressing whether to capitalize or expense them. Incremental costs of obtaining a contract (those that wouldn’t otherwise be incurred, such as sales commissions) are recognized as an asset.

For fulfillment costs, the company will apply any other applicable standards (such as those for software or property, plant and equipment). If none apply, the company recognizes an asset from the costs if they meet certain criteria.

What now?
The new guidance is effective for public companies for annual reporting periods (including interim reporting periods within) beginning after Dec. 15, 2016. Early implementation is not allowed for public companies.

For nonpublic companies, compliance is required for annual reporting periods beginning after Dec. 15, 2017, and interim and annual reporting periods after those periods. A nonpublic entity may elect early adoption, but no earlier than the effective date for public entities.

Although the first applicable reporting period is more than two years away, the rules will require many companies to implement new controls, processes and systems. The time to begin preparing is now, especially if you choose to adjust the results from prior periods and provide the three-year comparison required under retrospective application of the new guidance. Please contact us for help getting started.

You can access a PDF version of this blog posting here.

Monday, May 19, 2014

Internal Control Reporting Changes: The New COSO Framework

In our recent webinar, New COSO Framework—Imperative Internal Control Reporting Changes, me and my colleagues, Consulting Partner David Davis and Consulting Senior Manager Dave Osburn, walked through the first internal controls overhaul in more than 20 years. And with new Committee of Sponsoring Organizations (COSO) implementation deadlines upon us, it’s time for companies to stop procrastinating and get with the program.

Since 1992, accountants and auditors have been using COSO standards of internal controls, but the world has changed—and governance practices need to keep pace. Sarbanes-Oxley (SOX) further changed the landscape in 2002. Technology, globalization and stronger corporate boards have brought other changes. Financial reporting controls simply weren’t broad enough to handle the job.

COSO 2013 Framework has been enhanced by expanding the financial reporting category of objectives to include other forms of reporting, such as non-financial and internal reporting. The new COSO considers many changes in the business and operating environments that have occurred over the last few decades.  This includes the use of technology, the globalization of business and the greater demands and complexities in laws.  

Instead of drilling up from monitoring activities to the board’s role, the new methodology essentially flips the existing COSO cube on its head, suggesting that the construction of an internal controls environment starts at the top of the organization. In addition, COSO 2013 adds practical examples to the guidance and builds in more structure. That’s a significant step forward, but not enough to erase memories of a trying launch of COSO 1992.

A poll of those taking part in the webinar found 67% hadn’t begun adjusting to the new standards, which isn’t great, because the clock is ticking. Here are two important dates:
  • May 15, 2014: Companies filing 404 reports after May 15 will have to disclose whether the report is based on COSO 2013 or COSO 1992.
  • December 15, 2014: The new guidelines take effect before year end, so companies working on a calendar year can’t close the books without embracing the new framework.
So what does a company need to do to be in compliance?

I suggest a methodology that starts with learning what COSO 2013 demands and assessing current compliance. From there, pick a single project manager (internal or external to your company) to own the process of developing and implementing changes. But that’s not the end. The board and top executives need to monitor and approve the changes, as well.

Implementing and adhering to the new COSO Framework is important and goes to the very heart of the corporate culture. So, getting a head start makes a lot of sense.

Monday, May 12, 2014

Is your stock plan audit and IPO-ready?

Nothing is worse than having to respond to significant audit questions around stock option accounting right in the middle of an audit or an IPO S-1 filing.

How your company handles its stock options comes under the microscope during important moments—audits and equity events—and the key to avoiding problems lies in keeping track of the details.

Some tips for getting ready for one of those moments when stock options are scrutinized:
  • Switch to quarterly or even monthly valuations and expense calculations as you near an equity event, because annual reviews are aren’t enough 
  • Keep your auditors in the loop and receive their buy-off on your justifications and calculations to help avoid complications later 
  • Don’t cut corners when it comes to stock options and tax, especially as it relates to foreign employees, and look to local tax experts to guide you through the maze of complicated requirements
  • Get away from using spreadsheets to make the complex calculations and find a software solution that can automate and streamline your calculations—reducing human error and providing you with a clear audit trail
For more tips on how you can better prepare your stock option plan prior to an equity event, access and audio/video recording of my latest webinar: Is Your Stock Plan Audit and IPO-Ready?

Tuesday, April 29, 2014

San Francisco Business Tax and Fee Changes

In 2012 San Francisco voters approved complex and sweeping changes to the city’s business tax and annual business registration fees, via Proposition E. The measure replaces the existing payroll-based tax with a tax based on gross receipts and increases business registration fees, beginning this year.

For businesses, the first filings impacted by the changes are the upcoming 2014 quarterly tax installment payment, due April 30, and the 2014 annual business registration fee, due May 31.

Small businesses with $1 million or less of gross receipts are exempt from the receipts-based tax, as are tax-exempt organizations without unrelated trade or business income.

New Tax Formula is More Complex

Under the old system, businesses operating in San Francisco paid a flat 1.5% payroll tax. Under the new, more complicated formula, businesses pay a progressive tax based on their gross receipts from business activity in San Francisco.

The gross receipt tax rates vary by industry and go up as the amount of annual gross receipts increases. There are seven different industry-related groups of tax rates. The groups are based on North American Industry Classification System (NAICS) codes, and the rates range from 0.075% to 0.65%, depending on the group and the amount of gross receipts (see table below).

Gross Receipts Tax Will Phase In Over 5 Years 

The gross receipts tax will phase in and the payroll-based tax will phase out over the next five years. During this time, businesses will pay an increasing percentage of the receipts-based tax plus a decreasing payroll-based tax amount (see chart below)

To read about real-case scenarios that assist in illustrating the above phase in model, click here.

Administrative Offices Pay a Different Tax

In lieu of a gross receipts tax, companies with administrative offices in San Francisco will pay an annual administrative office business activities tax of 1.4% of their San Francisco payroll costs. This tax applies to companies with at least 1,000 employees in the U.S. and total combined gross receipts of more than $1 billion. Administrative services include executive office oversight, legal, accounting, personnel, and other companywide support services.

Business Registration Fees Will Increase 

Each year businesses in San Francisco must apply for (or renew) their business registration certificate and pay an annual registration fee for the upcoming fiscal year, which starts July 1. The fee is due May 31. Proposition E changes the way the annual business registration fees are calculated and increases them, starting this year.

For the fiscal year beginning July 1, 2014, the business registration fee will continue to be calculated based on San Francisco payroll expense. As of the fiscal year beginning July 1, 2015, the fee will be calculated based on gross receipts.

The annual registration fees for 2014/2015 will range from $75 to $35,000 (see table 2). Previously the maximum business fee was $500. For 2015/2016 the fees will range from $90 to $35,000, except for retailers, wholesale trade and certain services. This group of businesses will have fees ranging from $75 to $30,000.

Exempt organizations do not have to pay the business registration fee, as long as they are not engaged in unrelated trade or business in the city.

Meeting the demand of better KPIs

Armanino recently uncovered in our CFO Evolution Survey that 87% percent of CFOs said they are facing an increase in demand for information based on predictive data with the executive team and internal department heads leading this demand. Chief among the challenges in meeting their needs was isolating and analyzing the volume and variety of data that is really important; the pieces that will lead to the key performance indicators (KPIs) the CFO organization needs.
Our latest white paper Mastering Reporting and Analytics will provide the CFO organization with insight into KPI reporting, using and customizing KPIs and choosing the right amount of KPIs for your business.