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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.

Wednesday, September 24, 2014

Forecasting: Automate or fall behind

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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 Traditionally, the annual process took months and produced a snapshot that was out of date a few months after it was completed.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

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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

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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

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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

Wednesday, August 27, 2014

Some Accounting Software Solutions Fall Short

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It happens thousands of times every year in this great land of opportunity. Successful technology companies outgrow their entry-level accounting systems. More often than not, the system is QuickBooks.

Recently, the Armanino and the Cloud Accounting Institute issued a white paper QuickBooks to Cloud, which explores the question of when a company’s success signals it’s time to move beyond QuickBooks. Software-as-a-service (SaaS) food ordering company GrubHub, for example, provides a clear case that at a certain point in the growth cycle, QuickBooks simply can’t keep up. Here’s why many technology companies are turning to cloud accounting solutions:
  • Excel is a Headache:  One of the surest signs that you are ready to graduate from QuickBooks is that you have to dump everything into Excel to see what is going on in your company. When you were just starting out, it was enough, but now you need to perform analysis and reporting that Quickbooks just wasn’t designed for: multiple-currency transactions or complex revenue recognition calculations.
  • Hidden Costs: Take the time to compare  the total cost of your current QuickBooks set-up with some cloud accounting options. On the surface, QuickBooks is an inexpensive, out-of-the-box solution. That’s why many technology startups embrace it. But don’t be misled, because the cost of the software is just one consideration. Imagine an iceberg. Ask yourself how much of your QuickBooks’ cost is visible. What are your direct and indirect costs? 
  • Not Scalable for Growth: But, perhaps the most compelling argument is that if your firm has plans for an IPO or M&A in the future, it’s going to need a level of report generation, security and an audit trail that QuickBooks simply can’t deliver.
Success can force a firm to leave QuickBooks behind, and moving on is simply a sign of that success. Read the white paper if you’re interested in learning more about assessing whether it’s time for your firm to graduate from QuickBooks.

Tuesday, August 12, 2014

SOX compliance opens new chapter

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The route to Sarbanes-Oxley compliance has never been a straight line—and the Public Company Accounting Oversight Board (PCAOB) Staff Audit Practice Alert # 11 offered some new direction that C-level executives need to consider in making sure their firms don’t end up in the regulatory ditch. The PCAOB is sending a clear challenge in its latest advisory—don’t rely on the way you’ve always done it.

Myself and my colleagues Dave Davis, Consulting Partner, and Sean Batchelor, Consulting Manager, held a webinar earlier this year on the topic, offering helpful advice to those responsible for financial reporting.

Accounting professionals need to avoid going into autopilot mode—simply falling back on what they did last year. That kind of thinking won’t fly in the world envisioned by the latest PCAOB staff alert.
In analyzing a cross-section of recent audits, the PCAOB found:
  • 15% of opinions contained insufficient evidence to support the audit conclusions
  • 16% of audits had unreported  or unreported deficiencies
  • 70% of opinions included control deficiencies
These numbers demand a new approach and that’s exactly what the Board is seeking.
That new approach starts with the way management assesses its financial reporting risk.  Executives need to take a fresh look at risks that could result in material misstatements. They need to build proper bridges to controls they’ve selected to test. And they need to ask themselves whether their walkthroughs are robust enough.

In addition, effective management review controls include comparing documented expectations against real, recorded results and being able to understand and explain deviations, or outliers. In focusing on management review controls, the PCAOB is shining a bright light on tracking the root causes of failures and increasing scrutiny on what might have happened because of the failure—not just on what actually happened.

All of this is taking place against the background of the updated COSO Framework that changed the financial reporting landscape in May of 2013 when it was published.

And the sweeping changes taking place currently may not be the end of it. We’re also seeing an increased focus on fraud—fraud is costing business $700 billion a year. And with that increased focus will likely come with some jail time resulting from willful fraud conducted by executives.

You can review our entire PCAOB webinar here. And if you’d like to learn more about the updated COSO framework, make sure to review my blog post from earlier this year.

Friday, July 11, 2014

IRS eased ACA reporting burden, but action still required now

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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.