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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.

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.

Wednesday, September 17, 2014

Avoiding equity management headaches

Let’s face it: Equity management is one of those thankless jobs that nobody wants to own.

It starts innocently enough while a startup is eager to attract and incentivize its talent to do great things. At that point, who has time to worry about managing stock options? We’ve got real work to do. Later, it becomes a turf question. Is this a job for HR or payroll or accounting or legal? It’s a complex task but the volume doesn’t justify a full-time expert. And nobody on staff is eager to take ownership. But when an IPO is on the horizon, equity management becomes a crucial issue and getting it right means unraveling those years of benign neglect.

Solutions are available, though. This is what me and my colleague, Niki Rahimi, a consultant with Armanino’s Equity Management Solutions practice, explained during our recent webinar. The key points to remember are the rules and communication.

During the webinar, Niki and I presented multiple, short case studies to illustrate the complexities involved in equity management and explored where things can get off track. Important trouble spots worth monitoring include:
  • Grants to new hires that don’t make the board minutes
  • Terminated employees still on the books
  • Issuing grants from expired plans or non-allowable grant types
  • Merger transactions and conversions   
  • Grants to foreign employees
One of the best steps is investing software that can grow with the company. And that doesn’t include spreadsheet programs. As companies grow and the importance of equity management becomes clear, companies face a new set of challenges. Sometimes it’s a lack of bandwidth or specific skills. That’s when outsourcing some or all of the complex tasks becomes an attractive and cost-effective solution. In many cases, investing in software that can automate the equity management process and/or turning to outside expertise can deliver a 30% return on investment.

All that said, I want to leave you with a piece of wisdom from one of my clients: “You’re not going to be a hero for getting stock option reporting right, but you will get a lot of grief for getting it wrong.”

To watch the entire webinar, visit our recap page.

Tuesday, September 9, 2014

New Accounting Standard Tackles Disclosures About Business Continuity

The Financial Accounting Standards Board (FASB) has updated U.S. Generally Accepted Accounting Principles (GAAP) to eliminate a critical gap in existing standards. The new guidance, found in Accounting Standards Update (ASU) 2014-15, Presentation of Financial Statements — Going Concern (Subtopic 205-40): Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern, clarifies the disclosures management must make in the organization’s financial statement footnotes when management has substantial doubt about its ability to continue as a “going concern.” The guidance applies to all companies.

The Gap in GAAP
Except in limited circumstances, financial statements that comply with GAAP are prepared under the presumption that the organization will continue to operate as a going concern — what’s commonly known as the going-concern basis of accounting. If and when an organization’s liquidation becomes imminent, financial statements are prepared under the liquidation basis of accounting.

An organization, however, might face certain adverse conditions or events that raise substantial doubt about its ability to continue before it’s clear that liquidation is imminent, during which period financial statements must still be prepared on the going-concern basis. Until now, GAAP provided no guidance on management’s responsibility to evaluate or disclose such conditions. Although footnote disclosures regarding these conditions have commonly been provided, different organizations have had different views about when substantial doubt exists. This has led to variations in whether, when and how organizations disclose the relevant conditions and events.

Other Prevailing Standards
U.S. auditing standards and federal securities law require auditors (not management) to evaluate whether there’s substantial doubt about an organization’s ability to continue as a going concern for a reasonable period of time not to exceed one year beyond the date of the financial statements being audited. U.S. auditing standards further require auditors to consider the possible financial statement effects, including footnote disclosures on uncertainties about an organization’s ability to continue for a reasonable period of time.

The SEC has also provided guidance on the disclosures it expects from an organization when an auditor’s report includes an explanatory paragraph that reflects substantial doubt about the organization’s ability to continue for a reasonable period of time.

International Financial Reporting Standards (IFRS) require disclosures when management is aware of material uncertainties related to events and conditions that may cast significant doubt on the organization’s ability to continue as a going concern. Under IFRS, the assessment period is at least one year from the financial statement date, with no upper time limit.

Evaluating “Substantial Doubt”
FASB issued ASU 2014-15 in response to stakeholders’ concerns about the lack of guidance in GAAP on what qualifies as substantial doubt. In the guidance, it opted to incorporate and expand on certain principles currently in U.S. auditing standards. The disclosures required under the new guidance, therefore, may not substantially alter the information disclosed in many audited financial statements. Nonetheless, FASB found it beneficial to define management’s responsibility under GAAP to evaluate when and how substantial doubt about the organization’s ability to continue as a going concern should be disclosed in the financial statement footnotes.

The ASU’s definition of “substantial doubt” amounts to a high threshold. It calls for a focus on significant uncertainties about an organization’s ability to continue, rather than requiring a broader consideration of all uncertainties and risk factors.

Under the new standard, an organization’s management must evaluate whether conditions or events raise substantial doubt about the organization’s ability to continue as a going concern for a period of one year from the date the financial statements are issued or, when applicable, available to be issued. (The one-year limit diverges from IFRS but is consistent with U.S. auditing standards.) Substantial doubt exists when conditions or events, considered in the aggregate, indicate that it’s probable (meaning likely to occur) that the organization will be unable to meet its obligations as they become due within one year.

Management’s evaluation should consider both qualitative and quantitative information about relevant conditions and events. This information includes the organization’s current financial condition, conditional and unconditional obligations due or anticipated within one year, and the funds necessary to maintain operations.

Disclosure Requirements
When management identifies conditions or events that raise substantial doubt, it must consider whether its plans for mitigating those conditions or events will be effective. The mitigating effect of the plans should be considered only to the extent that 1) it’s probable that the plans will be effectively implemented, and, if so, 2) it’s probable that the plans will mitigate the conditions or events that raise substantial doubt about the organization’s ability to continue as a going concern.

If the plans alleviate the substantial doubt, the organization must make footnote disclosures that allow users of the financial statements to understand:
  • Principal conditions or events that raise substantial doubt, before consideration of management’s plans,
  • Management’s evaluation of the significance of those conditions or events in relation to the organization’s ability to meet its obligations, and
  • Management’s plans that alleviated substantial doubt.
If, however, management’s plans don’t alleviate the substantial doubt, the organization must indicate in the footnotes that substantial doubt exists about the organization’s ability to continue.
  • Management also must disclose information that allows users to understand:
  • Principal conditions or events that raise substantial doubt,
  • Management’s evaluation of the significance of those conditions or events in relation to the organization’s ability to meet its obligations, and
  • Management’s plans that are intended to mitigate the conditions or events that raise substantial doubt.
If conditions or events continue to raise substantial doubt in subsequent reporting periods, the organization should continue to make the required going-concern disclosures in those periods. Disclosures should become more extensive as additional information becomes available about relevant conditions or events and management’s plans.

Effective Date
The changes in ASU 2014-15 will take effect for the annual financial statement period ending after Dec. 15, 2016, and for annual periods and interim periods thereafter. Early application is permitted. If you need help to determine whether early application is advisable for your circumstances, or if you have questions about how the new guidance may affect the preparation of your company’s financial statement, please contact Paul Peterson, Audit Partner, at Paul.Peterson@amllp.com or 925.323.1448.

Friday, August 29, 2014

IRS releases final rules for tax treatment of dispositions of MACRS property

On August 14, the IRS issued final regulations (“regs”) regarding the proper tax treatment of dispositions of tangible depreciable property under the Modified Accelerated Cost Recovery System (MACRS). The regs largely complete the IRS’s overhaul of the federal tax regs addressing the proper treatment of expenditures incurred in acquiring, producing or improving tangible assets. The final regs affect all taxpayers who dispose of MACRS property.

The final regs generally follow the proposed regs that were issued in September 2013. The publication provides “rules for determining gain or loss upon the disposition of MACRS property*, determining the asset disposed of, and accounting for partial dispositions of MACRS property.” In coming days, the IRS is expected to update the revenue procedures (Rev. Proc. 2014-17) to provide further guidance for complying with the regulation.

All taxpayers will be expected to comply with the final disposition regs beginning with their first tax year that begins on or after January 1, 2014. Before the final regs were published, temporary regs were given for tax years beginning on or after January 1, 2012. To help in the transition to the final regs, for a limited time taxpayers may choose to apply temporary regs. The ability to make the late election or partial disposition applies only to tax years ending between January 1, 2012 and December 31, 2013.

The final regs retain the definition of a disposition as described in the proposed regs, including retirements of structural components and partial dispositions, or components of assets other than buildings. A partial disposition refers to the replacement of a structural component, such as a roof, with another component performing the same function.

The partial disposition rule, generally, is elective. But it’s mandatory in certain circumstances, including for dispositions that result from a casualty event (e.g., a fire or storm) or a like-kind exchange.

The final regs also include a special partial disposition rule for situations where the IRS disallows a taxpayer’s repair deduction for the amount paid or incurred for the replacement of a portion of an asset and requires capitalization of that amount.

The partial disposition rule allows taxpayers to claim a loss on the disposition of a component (structural or otherwise) of an asset without having identified the component as an asset before the disposition. The rule reduces the number of cases where an original part and any subsequent replacements of that part must be capitalized and depreciated simultaneously.

Generally, the specific facts and circumstances of each disposition are considered when determining the disposed asset for tax purposes. But the final regs make clear that the asset may not consist of items placed in service by the taxpayer on different dates.

In the event that a taxpayer is unable to determine the depreciation of assets using traditional means, the regs allow for a “reasonable method” to be used if consistently applied. The regs (and likely the revenue procedures that will be published) provide guidelines in defining a reasonable method to be used.

The final regs clarify the 2013 proposed regs regarding the manner of making disposition elections for assets included in General Asset Accounts (GAA). The regs provide rules for establishing, depreciating and disposing of assets from GAA’s. Each GAA may only include similar assets, those that placed in service the same year, with the same depreciation method including bonus depreciation. Each general-asset account is treated as the asset.

Take Action
The final regs apply to tax years beginning on or after January 1, 2014, but taxpayers may choose to apply them to taxable years beginning on or after January 1, 2012. If you have any additional; questions or need help determining the best approach for implementing the new rules, contact Mike Waldron, Director of Tax, at 408.200.6408 or Mike.Waldron@amllp.com.

*See Department of Treasury IRS T.D. 9689