Armanino Nonprofit Blog

Tuesday, February 3, 2015

VC Funding Hit Its Highest Levels Since 2000

Last year, corporate venture capital (VC) activity saw a spike. According to CB Insights’ 2014 U.S. Corporate Venture Capital Year in Review Report, deals by corporate venture arms jumped 25% year-over-year, while funding rose 76% behind participation in some of very large venture deals.

Who were the most active corporate VC investors during 2014? Here are the top 20:

  • Google Ventures
  • Intel Capital
  • Salesforce Ventures
  • Comcast Ventures
  • Qualcomm Ventures
  • Novartis Venture Funds
  • Samsung Ventures
  • Cisco Investments
  • Siemens Venture Capital
  • SR One   
  • Bloomberg Beta
  • Fidelity Biosciences
  • Second Century Ventures
  • GE Ventures
  • Mitsui & Co. Global Investment
  • Microsoft Ventures
  • In-Q-Tel
  • Verizon Ventures
  • Johnson & Johnson Development Corp.
  • Bertelsmann Digital Media Investments

In addition, The Golden State—California—accounted for more than 50%of corporate VC deal share during each quarter of 2014, followed by Massachusetts and New York, which saw nearly an equal share of VC deals. 

To see additional highlights from 2014 around corporate VC financing trends, as well as top investors, geographies and deals in 2014, access the CB Insights’ report here.

Thursday, December 18, 2014

Businesses benefit from latest tax relief extender law

On Friday, Dec. 19, President Obama signed into law the Tax Increase Prevention Act of 2014 (TIPA). Previously, the Senate passed the Act on Dec. 16 and the House passed it on Dec. 3. TIPA is the latest “extender” package, a stopgap measure that retroactively extends through Dec. 31, 2014, certain tax relief provisions that expired at the end of 2013. It was drafted after the collapse of negotiations over a bill that would have made some of the provisions permanent, while extending others for two years.

Several provisions in particular will provide significant tax savings for businesses on their 2014 income tax returns—but quick action (before Jan. 1, 2015) is needed to take advantage of some of them.

Provisions affecting businesses

TIPA provisions most relevant to businesses include:

50% bonus depreciation. This additional first-year depreciation allows businesses to recover the costs of depreciable property more quickly for qualified assets. Qualified assets include new tangible property with a recovery period of 20 years or less (such as office furniture and equipment), off-the-shelf computer software, water utility property and qualified leasehold improvement property.

The provision also allows corporations to claim unused alternative minimum tax credits in lieu of bonus depreciation. The bonus depreciation extension generally applies only to property placed in service in 2014, so if you anticipate making major asset purchases in the next year or two, you might want to act quickly to make them before year end to take advantage of these benefits. But bear in mind that, if you qualify for Section 179 expensing, it could provide a greater tax benefit.

Sec. 179 expensing election.  TIPA extends higher limits under Sec. 179 of the Internal Revenue Code, which permits businesses to immediately deduct (or “expense”) the cost of qualified assets (such as tangible personal property and off-the-shelf computer software) that are purchased for use in a trade or business in the year they’re placed in service, instead of recovering the costs more slowly through depreciation deductions.

Because of the extension, a business can deduct up to $500,000 in qualified new or used assets. The deduction is subject to a dollar-for-dollar phaseout once the cost of all qualifying property placed in service during the tax year exceeds $2 million, meaning smaller businesses generally reap the greatest benefit. The expensing election can be claimed only to offset net income, not to reduce net income below zero.

Without the extension, the limit for 2014 would have dropped to $25,000, with a $200,000 phaseout threshold. Now it’s scheduled to do so on Jan. 1, 2015.

If your business is eligible for full Sec. 179 expensing, you might obtain a greater benefit from it than from bonus depreciation, because the expensing provision can enable you to deduct 100% of an asset acquisition’s cost. Moreover, Sec. 179 expensing is available for both new and used property. Bonus depreciation, however, could benefit more taxpayers than Sec. 179 expensing, because it isn’t subject to any asset purchase limit or net income requirement. You’ll also want to consider state tax consequences.

Depreciation-related breaks for qualified leasehold improvement, restaurant and retail-improvement property.  TIPA extends the ability to:
  • Apply up to $250,000 of the $500,000 Sec. 179 expensing limit to such property, and 
  • Apply a shortened recovery period of 15 years (rather than 39 years) to such property.
Research credit. This credit (also commonly referred to as the “research and development” or “research and experimentation” credit) provides an incentive for businesses to increase their investments in research. The credit, generally equal to a portion of qualified research expenses, is complicated to calculate, but the tax savings can be substantial.

Work Opportunity credit. 
This credit is available for hiring from certain disadvantaged groups, such as food stamp recipients, ex-felons and veterans who’ve been unemployed for four weeks or more. The maximum credit ranges from $2,400 for most groups to $9,600 for disabled veterans who’ve been unemployed for six months or more.

Transit benefit parity. TIPA extends the provision that established equal limits for the amounts that can be excluded from an employee’s wages for income and payroll tax purposes for parking fringe benefits and van-pooling / mass transit benefits. The limits for both types of benefits are now $250 per month for 2014. Without the extension of parity, the limit for van-pooling / mass transit would be only $130.

Review your tax planning now

Several of the provisions above can provide significant tax savings for businesses on their 2014 income tax returns—but you need to act before Jan. 1, 2015 to take advantage of some of them. For more information on the new legislation and how it could affect your planning, reach out to David Sordello, Corporate Tax Partner (David.Sordello@armaninoLLP.com or 408.200.6403).

Wednesday, December 10, 2014

Accounting Rules Are Changing

As companies contemplate closing the books on 2014, some updated accounting standards offer hope that the job is getting simpler.

In a recent webinar, Matt Perreault, Audit Partner and Head of Armanino’s Technology and SEC Practice, noted that the “biggest change” comes in the area of revenue recognition. The Financial Accounting Standards Board (FASB) and the International Accounting Standards Board (IASB) have been working on this area since 2006 and are moving toward alignment that will make life easier for companies working in a multi-national environment.

One area of change involves handling revenue impairments. The standards boards have offered 63 examples to help with the complex analysis.

The new standards call for capitalizing the cost of ongoing sales. These costs, which include sale commissions, had been handled as expenses. No more, the boards said.  Amortize those costs over the life of the revenue stream.

There is also a change in the handling of bad debt that requires estimating the likelihood of collection. The changes take effect in 2017 for public companies and a year later (in 2018) for private companies. Below, you’ll find a high-level overview of the changes:
  • Going Concern. Responsibility for assuring the company meets the definition of a going concern shifts to management beginning in 2016. Auditors will still offer their opinions, aided by a template that offers options of ‘no doubt’, doubt alleviated by management and reasonable doubt.  
  • Share-based Stock Compensation. New standards clarify the handling of share-based stock compensation. Performance targets should not be reflected in estimating grand date fair value.
  • Development Stage Entities. The designation of ‘development stage entity’ is out along with additional requirements detailing cash flow and stockholder equity. Risk and uncertainty disclosures remain but have moved to a different section.
  • Debt Transactions. Banks, REITs and others who repurchase agreements of debt will be able to handle those transaction as they would other secured debt transactions. 
  • Discontinued Operation. Accounting for discontinued operations undergoes changes with the addition of a standard that limits special handling to strategic shifts that have a major effect on operations. The change is designed to end inconsistencies.
  • Private Companies. Pre-IPO and non-public companies benefit from simplified rules for handling hedge accounting and intangibles including goodwill.
The accounting boards are looking at several additional changes that likely will be announced early in 2015. One of the significant areas is in the handling of cloud software to align accounting for both buyers and sellers. Other changes would eliminate the special handling for extraordinary items and simplify inventory accounting.

For more updates on year-end accounting changes, visit Armanino's events page, click on "archived" tab, and select the webinar recording titled Year-End Accounting & Disclosure Update 2014.

Monday, November 10, 2014

MacGyver Your Way to Your IPO & Beyond

As a CFO, are you ready to play MacGyver to get your company through the gantlet that is the run-up to a liquidity event? You should be prepared to perform the kind of shoestring heroics of the TV legend.

Even if companies follow best practices and begin preparing two years ahead of an IPO, funds are rarely available for mounting the best accounting approach to Sarbanes-Oxley and S-1 needs. The assets simply are needed elsewhere at that moment. And quick developing merger and acquisition opportunities can put an even greater burden on financial management staffs.

In the real world, CFOs frequently find themselves staring at a short runway (often about six months) to prepare. That puts a premium on being able to identify and deal with the three key areas (systems, processes and people) quickly and efficiently. 

Any review starts with corporate governance. Understand what’s required. Look at your board. Is the required financial expert on board?  

Evaluate your people. Do you have the skills necessary? Think about where it might be wise to bring in outside experts to handle technical tasks, particularly those that are one-time in nature. And if you have been the technical accounting expert, don’t kid yourself that you can be the CFO, too. CFOs quickly get involved in so many issues, particularly around investor relations, that they can’t play a significant hands-on role. Seek skilled help early in the process.

Look at your systems. Are they scalable to an appropriate level? Consider risk management issues. And optimize processes through technology. Consider what you need to do to file quarterly reports. That’s going to mean getting out of Excel and automating accounting processes through an enterprise-level solution that’s scalable to an appropriate level for your firm.

Understand the "real" requirements. While filing an S-1 is a single event in your company’s history, it is the culmination of a lot of work. You’ll need at least two years of audited financial statements. Bankers and investors are increasingly asking for three years. Updating valuation and equity compensation require time to reconcile. It’s a subjective area that needs special care. Use outside experts.

Writing the management disclosure and analysis section also  requires a new skill and some practice. The SEC wants a clear explanation – in common English – of what the results are and why. It’s for the investors and gets a lot of SEC scrutiny. And, beware: The SEC will flag difference between the analysis section and your speeches and press releases.

The fun begins AFTER you clear the S-1 hurdle.

Now you’re on the fast track to filing quarterly financial data. Those require clean cutoffs. And that means going back and rolling those annual audited adjustments into the appropriate quarters. That can be a lot of work. Learning to do earnings per share calculations often means calling in outside help.

And then there’s tagging all your reports for XBRL (xtensible business reporting language), which is a uniform language for computers to read financial data. The SEC has set up a system of labels and all numbers require proper tagging. Software has made it easier but it’s still time consuming.

What happens if you don’t get it right? A missed filing deadline raises investor concerns and gets you increased market exchange scrutiny. It can trigger debt covenants and lead to foreclosure and de-listing (it's drastic, but it can happen). But even if you get the paperwork filed on time, other issues loom.

About 1,800 firms have gone public since 2004. One in every three has had to file a restatement. Half of those were problems with expenses (e.g., stock comp, depreciation, revenue estimates). Another 23% involved financing arrangements and 11%  involved income tax issue. A restatement typically hurts stock prices for three years.

So get it all right the first time, and focus on the essentials during your (likely) 6-month time frame...using anything and everything in your MacGyver tool kit. 

I recently reviewed all of the above, and more, with Consulting Partner John Dunican in a webinar. View the presentation slides or listen to the entire webinar here.

Monday, October 6, 2014

First application period for $45 million in CA tax credits ends October 27

As of last week (September 29) through October 27, California businesses can apply for $45 million in new income tax credits from the Governor’s Office of Business and Economic Development (GO-Biz). The California Competes Tax Credit (CCTC) program is for companies who want to expand their existing California business or start operations anywhere in the state. Businesses of any size and in any industry are eligible, and 25% of the funds must go to small businesses.

The two-phase application process is competitive and takes about 90 days from the beginning of the process to the award date. Applicants are selected based on factors such as the total jobs to be created, total investment, average employee wage, economic impact and strategic importance. Businesses who receive funds must negotiate a written agreement with the state and agree to meet certain milestones for job creation, etc. A company can apply for up to 20% of the total amount being awarded, and there is no application fee.

For the 2014-2015 fiscal year, GO-Biz has allocated a total of $151.1 million of CCTC tax credits. There are three application periods for this funding – one in 2014 and two in 2015 (see chart below). The CCTC program began in 2013 and granted $28.9 million in income tax credits to 29 businesses in its first year.

You can find information about the tax credits and the application process here. The application form is available at www.calcompetes.ca.gov.

Thursday, October 2, 2014

The Periodic Table of Tech: Key Players in Tech Investing and M&A

Yesterday, CB Insights released an interesting info-graphic they titled The Periodic Table of Tech, which showcases the 118 venture capital firms, micro-VCs, angels, accelerators, late stage investors and acquirers you should know.

According to their latest blog, "The firms (and individuals) on the list were drawn from a mix of data-driven posts [CB Insights] produced...that analyzed investor quality, network strength and financing and M&A deal activity." The categories of those included in the table are defined below:
  • Venture capital firms included make venture equity investments across the stage spectrum and geographies focusing on high-growth opportunities in tech and have received significant LP commitments to date ($200M to well over $1B+).
  • Corporate venture capital (VC) firms have separately identifiable corporate venture units and made over 80% of their investments into tech categories, i.e., internet, mobile, software, hardware/electronics). Corporate-affiliated funds with LP commitments such as SAP Ventures are not included here (but are part of the VC category).
  • Growth/late-stage investment firms focus on growth-stage companies with established revenue typically in the tens of millions and/or a record of significant traction. Some, but not all, growth investors are part of firms that also have funds investing in the public markets.
  • Micro VC firms are those with funds ≤$100M and which have made 80%+ of investments at the early-stage (seed/Series A).
  • Angel investment groups often bridge the gap between angel investment and institutional VC, providing either a managed fund or direct investment from angel group members.
  • Angels/Angel Investors are, often, wealthy individuals who offer early-stage capital, advice and networks to startups in exchange for equity or convertible debt.
  • Accelerators/venture studios/holding companies typically offer some combination of equity investment, mentorship and resources around company development.
  • Tech acquirers are public tech corporations acquiring private tech companies for business growth, sales expansion, new technologies and/or talent. 
We think this is certainly worth a closer look. That said, CB Insights admits there are some companies and/or individuals that could be missing from the table. Do you agree? And if so, which companies or individuals should be added and why?

Wednesday, September 24, 2014

Forecasting: Automate or fall behind

The speed of business is accelerating and with it the demand on financial officers to produce actionable data in real time.

It’s a trend that’s not going away and smart companies are making big changes in their internal processes to keep up.

In a recent Armanino webinar, John Dunican, Partner, and Bryan Rogers, Senior Manager,  with our CFO Advisory Service practice outlined both the challenges and the solutions.

The emergence of big data is one driver. By one estimate, Dunican said, over the next seven years 50 times more data will be produced than ALL of the data available today. That opens great opportunities for analysis but it also spells the end of spreadsheet accounting at the corporate level. If you’re paying CPAs to transfer data onto a spreadsheet, it’s a good sign something is wrong, Dunican said.

Another factor is the rise of mobile computing. When decision making data need to be shared among more than a few executives, the process demands software automation not CPAs with faster typing fingers. Dunican drew an analogy to the early days of the auto when opponents called for faster horses instead of adapting.

Dunican and Rogers pointed to the budgeting cycle as one key process ripe for change. Traditionally, the annual process took months and produced a snapshot that was out of date a few months after it was completed. Rather than focusing efforts on justifying variations, focus on building better real time forecasting systems that can drive decisions, they urged.

One popular step is ditching the annual budget drill in favor of rolling quarterly budgets and forecasts that turn the budget into a living document that can be shared via the cloud.

The switch to automated budgeting and forecasting software is consistent with the findings of Armanino’s CFO Evolution survey which show financial officers eager to reduce the time they spend as accountants and increase the time they spend as executives engaged in strategic planning.

It’s also consistent with surveys showing CFOs looking ahead to merger and acquisition activities put the reliability of business planning and forecasting as their top concern. They want real time access to accurate key performance indicators. And that’s going to mean a shift to automated software.
To watch the webinar, click here.