Armanino Nonprofit Blog

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, April 4, 2014

FASB provides private company VIEs alternative for leases

The Financial Accounting Standards Board (FASB) has issued new guidance that permits private companies following Generally Accepted Accounting Principles (GAAP) to, in some circumstances, elect not to consolidate the financial reporting from variable interest entities (VIEs) that lease property to them. It may apply in situations where an owner of a private company is also an owner of a second business entity that leases property to the company. The guidance, Accounting Standards Update (ASU) 2014-07, Consolidation (Topic 810): Applying Variable Interest Entities Guidance to Common Control Leasing Arrangements, is a consensus of the Private Company Council (PCC) and is intended to simplify private company financial reporting regarding consolidation of lessors.

Leasing scenario

The new guidance specifically applies to leasing arrangements. Private companies commonly lease facilities from separate lessor entities owned by one of the company’s owners. The lessor entity usually is established for tax, estate planning or legal liability purposes—not to structure off-balance sheet debt arrangements. Typically, the lessor entity’s only asset is the leased facility, and the lease is the only contractual relationship between the lessee company and the lessor entity.

Existing GAAP guidance requires the lessee company to determine whether it holds a variable interest in the lessor entity (for example, a guarantee of the lessor’s debt). If it does, and the lessor is a VIE, the lessee company must assess whether it holds a controlling financial interest in the lessor under the VIE model. If the entities are under common control, the lessee generally must consolidate the financial reporting from the lessor.

The PCC found that, despite the cost and complexity of applying the GAAP VIE guidance in such a case, most users of private company financial statements consider the consolidation of the lessors under common control irrelevant. These users tend to focus on the cash flows and tangible worth of the stand-alone lessee entity, not the cash flows and tangible worth of the consolidated group presented under GAAP. Moreover, consolidation of the lessor distorts the lessee’s financial statements. As a result, users who receive consolidated financial statements often request a consolidating schedule that they can use to reverse the effects of consolidation.

New alternative for private companies

Under ASU 2014-07, a private company lessee can elect an alternative not to apply the GAAP VIE guidance to a lessor if:
  • The private company lessee and the lessor entity are under common control,
  • The private company has a leasing arrangement with the lessor, and
  • Substantially all of the activity between the private company and the lessor is related to the leasing activities (including supporting leasing activities, such as issuance of a guarantee or providing collateral on the obligations related to the leased asset) between those two companies.
In addition, if the private company explicitly guarantees or provides collateral for any obligation of the lessor related to the asset leased by the private company, the principal amount of the obligation at inception can’t exceed the value of the asset leased by the private company from the lessor. If a private company elects to apply the accounting alternative, it should apply the alternative to all current and future leasing arrangements satisfying the above conditions.

Electing the alternative would also free a private company from providing GAAP-compliant VIE disclosures about the lessor entity. The private company won’t be totally off the hook, though. It must disclose the following information:
  • The amount and key terms of liabilities (for example, debt, environmental liabilities and asset retirement obligations) recognized by the lessor entity that expose the private company to providing financial support to the entity, and
  • A qualitative description of circumstances not recognized in the lessor entity’s financial statements (for example, certain commitments or contingencies) that expose the private company to providing financial support to the entity.
These disclosures are required in combination with the other GAAP-required disclosures about the private company’s relationship with the lessor entity, such as those for guarantees, leases and related party transactions.

Effective date

A private company that elects the accounting alternative must apply it retrospectively to all periods presented on financial statements. The alternative will be effective for annual periods beginning after Dec. 15, 2014, and interim periods within annual periods beginning after Dec. 15, 2015. Early application is permitted for any period for which the company hasn’t yet issued financial statements.

Saturday, March 22, 2014

Predictive analytics and KPIs remain important to CFOs

A global data explosion is underway. By one estimate, in the next seven years, the world will generate 50 times as much data as it has up to now.

That’s exciting. And business executives are eager to harness all this data so they can better understanding the changes that are now and will soon affect the business. So they’re pushing CFOs to move aggressively on supplying that information.

Armanino’s 5th Annual CFO Evolution® Benchmark Survey found 76% of CFOs are feeling the pressure to get on with increasing the role of predictive data.

For CFOs, that process starts with prioritizing which key performance indicators (KPIs) are most important to the business, then finding the right software that can harness the data, analyze it and get the results in the appropriate hands quickly.

Today, 74% of KPIs are based on historical data. But CFOs would like that to shrink to 48%, the survey found. Those CFOs would like to see more use of predictive analytics, with reliance on predictive data-driven KPIs moving from today’s 28% to 47%.

According to the survey, financial KPIs lead the list with 76% considering them effective at signaling future results. Sales KPIs come next at 60%. Other KPI categories all fall below 50%–customer service (42%), employee relations (28%) and internal support (22%).

During a recent webinar releasing survey results, Tom Mescall, Partner-in-Charge of Armanino’s Consulting Department, worked through a short case study involving the software-as-a-service (SaaS) industry to illustrate how new KPIs are emerging. He pointed to the use of recurring revenue, average recurring revenue, churn rate, average cost of customer acquisition and average cost of customer service as valuable measure that can help a SaaS company predict what lies ahead.

Click here to access the entire webinar on demand—or review all of Armanino’s previous webinars here.

Tuesday, March 11, 2014

The Importance of 409A and Equity Awards for Growing Companies

For growing companies, options and other forms of equity awards are an important way of incentivizing top talent when cash is in short supply or the market demands ownership opportunity.

According to a recent Armanino webinar titled The Importance of 409A and Equity Awards for Growing Companies, Dirk Van Dyke, Managing Director of Valuation Services, and Scott Schwartz, Manager of Equity Management Solutions, outlined the analysis that normally takes place in calculating the value of a company’s common stock and its equity awards. Starting with the company’s current achievements and financial results, the company’s stage of development is a key metric in the valuation. In addition, finding the right peer group of public companies for the enterprise and its stage of development, and then evaluating the size of the potential market and growth opportunities, is important.

In its recently revised valuation guidelines, the AICPA included an important and relevant valuation method: The back-solve method. This method relies on calculating a fair market value for the company based on the price paid in a recent independent private offering. It’s a welcome change, but it also isn’t available in every valuation.

For those faced with navigating the maze of the classic income, market, cost or hybrid valuation methodologies, it’s a complex field that carries the old warning “don’t try this at home,” because according to our experts, the IRS tends to take a closer look at in-house valuations.

During the webinar, participants were also given some useful tips on making sure their company’s equity awards look good:
  • Keep thorough corporate records that include dates, issue price, number of shares, strike prices, length of term, etc.
  • Perform frequent valuations and avoid granting awards near the date of the next valuation
  • Employ an independent valuation specialist for contemporaneous 409A valuations
  • If possible, get full buy in from your auditors before finalizing your valuation and issuing awards
Access this webinar recording and presentation on demand here, or review other Armanino webinars at http://www.amllp.com/on-demand-webinars.

Tuesday, March 4, 2014

Give Maximum Priority to Data Security

When it comes to assessing the effectiveness of your company’s computer security measures, there’s no time like right now.

That’s only a slight exaggeration. Increasingly, your company and its reputation are vulnerable to outside threats that can hijack your information and make life tough for your business, your customers and you.

A recent example involving the extortion of a Twitter handle brings home just how quicklyand how unexpectedlythings can go wrong.

Since 2007, Naoki Hiroshima, a Palo Alto app developer, had maintained the one-letter Twitter handle of @N, one that he says drew offers as high as $50,000. When Hiroshima wouldn’t sell, he says a hacker used trickery to take his numerous GoDaddy websites hostage in exchange for the Twitter account. A frustrated Hiroshima gave in.

What does that story mean for you? For one, you don’t want to have to acknowledge a serious security breach to your customers, as GoDaddy did. Target is another business that has paid dearly for a hack job. No business wants that kind of damage to its reputation.

But your first objective must be to safeguard the integrity of your online dealings and overall data in a time of escalating threats to their security. Here are some key practices you’ll want to consider:
  • Assessing your defenses – What processes does your company currently have in place for reviewing, analyzing, and adjusting policies and procedures? How big a priority is security, and what is your commitment to maintaining the highest levels of itfinancially, operationally and among your employees? Are all your employees qualified, well-trained, and adequately prepared for preventing, detecting, and/or responding to security issues?
  • ‘Halt, who goes there?’ – How do you know your customers are who they say they are? Credit card digits, account numbers, even Social Security numbers can be breached, and passwords are frequently too weak to withstand a threat. Employ a number of authentication hurdles to keep both you and the customer safe.
  • A two-way street – Are your employees well-schooled in what information is safeand not safeto give out over the phone? Studies have shown that Social Engineering (the application of social pressure over the phone, email, or sometimes in person) is the most effective way of breaching corporate security. If ‘Corporate IT’ contacts you asking for your username and password to fix an issue, you might be a victim if you provide that information. The @N hacker exploited a key security breach achieved over the phone to gain access to enormous amounts of information and capabilities.
  • Going to Plan B – When something goes wrong, will you be prepared? What recovery capabilities do you have in-house, and what are the outside sources of help you need to cultivate? Can you quickly recover from a breach, undo the damage, and prevent further harm?
  • Screen your friends – Are you sure you can trust the capabilities of your website and web development vendors? Are you and your tech experts convinced that they are maintaining the practices that will keep you safe? Make sure vendors can demonstrate their security capabilities.
These are but a few of the topics a company must explore as data security becomes ever more complex and challenging for you and your customers. If security is not among the very top priorities of your business, put it there. Don’t let an anonymous hacker tarnish your hard-earned reputation. At Armanino, we encourage and help our clients to establish and sustain secure information technology network and environments.

This article from CFO.com provides further depth on data security best practices.

Monday, February 3, 2014

IPOs Are Top of Mind for Technology CFOs

After a couple of chilly years, investors warmed to initial public offerings (IPOs) in 2013, and there are signs 2014 will be even better.

In 2013, 220 IPOs drew $59 billion in investment. In Silicon Valley, 28 firms went public, the most since the tech bust in 2000. Here at Armanino, we’re proud to have assisted with 9 of the last 18 Silicon Valley IPOs, and I wanted to share what we’ve learned along the way.

Relaxed monetary policies and strong market forces certainly played a role in those numbers but successful IPOs involve more than just fortuitous timing. They are the result of a company’s management team being prepared to seize the moment when conditions are right.

Companies can’t control the market conditions or market sentiment. But a strong finance team can control a company’s preparedness.

Recently released results from the 5th Annual CFO Evolution® Benchmark Survey find IPOs are top of mind. Among respondents, 39% of tech CFOs see their company filing for an IPO within the next three years, almost twice the rate for non-tech CFOs (20%).

CFOs listed presenting financials effectively during the road show and assembling the right financial team as their biggest concerns in the IPO process.

The two go hand in hand.

Our Survey shows roughly three out of four companies want to assemble an in-house team that includes a controller, account manager and support staff. They are more willing to embrace outside consultants to perform new technical and compliance functions like SEC manager, tax expert, Sarbanes-Oxley (SOX) compliance manager and internal audit manager.

This is a smart approach. IPOs involve moving into uncharted waters and having an experienced navigator to set the initial course leaves nothing to chance. Downstream, a company can make strategic choices about what functions to develop internally and which are so specialized that outside help seems prudent longer term.

IPOs are transformative events that change lives and fortunes of employees and investors alike. It’s important that they are done with care and precision.

Thursday, January 16, 2014

Potential Unrecorded Tax Liabilities Related to Traveling Employees


Do your employees periodically travel outside their state of residence for work purposes? Do you withhold individual state income tax in these states related to this travel? Are your employees aware of their income tax filing requirement in these states?

Depending on the answers to these questions, it may be an appropriate time to review your company’s policies and employee communications regarding nonresident income tax withholding and filing requirements.

Employees that are required to travel for work (often referred to as a mobile workforce), may be subject to income tax in the other state. The rules determining when the employer is required to withhold income tax and when the employee is required to file a nonresident income tax return are complex and vary widely by state. As a result, failure to understand and to comply with the states’ requirements can subject both the employer and employee to additional tax, penalties and interest.

The complexities in complying with the nonresident withholding and filing requirements in the states can include:

  • The different threshold of time spent or income earned in the other state before creating a withholding and/or income tax filing requirement.
  • The inclusion of stock option and restricted stock gains in the amount of income subject to tax in the nonresident state.
  • The lack of time reporting and tracking software that allows for multiple work locations and/or the inability to integrate this information into the payroll reporting system.
  • The calculation and application of credits for income tax paid to other states by the individual.

In recognition of the complexity of complying with the different requirements in the various states, there have been two recent efforts made to standardize the rules: federal legislation in the form of H.R. 1129, the “Mobile Workforce State Income Tax Simplification Act of 2013”; and the Multistate Tax Commission's (MTC’s) mobile workforce withholding and individual income tax model statute.

H.R. 1129 would generally prohibit any state from imposing an income tax on a nonresident in the state for 30 days or less, and exempt employers from withholding of tax and information reporting requirements for employees not subject to income tax under the Act. The bill was referred to committee on March 13, 2013.

The MTC’s mobile workforce withholding and individual income tax model statute would:

  • Establish a 20 work-day de-minimis threshold under which the state would not require withholding or individual income tax filings.
  • Cover both employer withholding and nonresident individual income tax filings.
  • Apply to only state tax and not local withholding or individual income taxes.
  • Be contingent on the employee’s resident state enacting a substantially similar provision.

Provide a safe-harbor from withholding penalties for the employer if it relied on certain information and miscalculated the number of days. Unfortunately, based upon the lack of comprehensive support for H.R. 1129 (and previous similar bills) and the states’ opposition to federal preemption of their right to tax nonresidents, and the unlikelihood of broad adoption of the MTC’s model statute by the states, it does not appear that a legislative solution will be forthcoming in the near future.

If you have a mobile workforce, I encourage you to review your company’s policy regarding nonresident income tax withholding and filing requirements and the potential impact on your employees.

Friday, December 20, 2013

Tech for Tech CFO Innovation: Technology Forum Event Takeaways

We’ve entered a new period of business innovation. The Cloud and SaaS-based software solutions continue to gain traction in the marketplace, while companies continue to encounter the ever-increasing emergence of mobile as a requirement. With this innovation comes a unique opportunity for CFOs to become the driving force in the transformation of their organization.

Our 6th Annual Technology Forum–titled Emerging & Existing Technology: Strategies for Finance Transformation—brought 150 technology company executives to South San Francisco for a morning discussion with Silicon Valley’s leading CFOs and technology experts. Each year, the forum is designed to help finance executives of technology companies become strategic and forward-thinking business leaders.

I was proud to host the program and guide attendee discussions on how best-of-breed CFOs are leveraging technology for their organizations and becoming a catalyst for change in the enterprise. We tackled important topics on big data analytics, and how the proliferation of cloud technology tools are enabling CFOs to fill their enterprise resource planning (ERP) gaps and transforming their back office with more efficient processes to support growth and create a competitive advantage. 

During the discussions panels and thought-provoking keynotes from Peter Levine, partner at Andreessen Horowitz (a16z), and Brian Kinion, vice president of finance at Marketo, I filled my notepad with key points. I thought you might find some of them interesting, so I’ve selected my top 5 takeaways from our 6th Annual Technology Forum:

  1. Bridge the gap between Finance and IT. As a key player in the C-Suite, CFOs are in the best position to evaluate value-add applications and prevent further departmentalization of IT. CFOs should work hand-in-hand with their CIOs to help departments achieve mission-critical, SaaS-based applications and break down data silos. 
  2. Invest in the long term. Sometimes, it is valuable to push past the short-term view of ROI and think of the long-term solution that allows for scalable growth. For CFOs, there is a sort of badge of honor in saying no. But when it comes to investing in technology solutions, CFOs must recognize its long-term value for the organization.
  3. Don’t overlook analytics. The question is not if your organization will mount an analytics effort but when. Nobody really wants more data. CFOs want to know how to make the data they have more valuable. CFOs that tackle big data quickly will gain a competitive advantage.
  4. Fill ERP gaps. Streamlining the accounting process is vital, yet many ERP solutions have gaps. While holding onto Excel workarounds might be comforting, CFOs are finding that automating processes is becoming essential.
  5. Foster cross-functional interaction.  A focus on cross-functional interaction across the business units is the gateway to the kind of understanding that will enable CFOs to become true strategic business leaders. They don’t have to know it all, they just have to know where/what/who to ask.
CFOs who are adopting technological approaches to corporate strategy have a unique opportunity to drive transformation and should be asking themselves, “Am I being an advocate for the right changes that will drive value across the entire organization?”

 If you missed attending the event and would like to join the discussion, Armanino hosts CFO roundtables and webinars throughout the year. To learn more about these topics visit amllp.com.