For a lot of small to mid-size manufacturing and distribution businesses, there’s a conundrum looming over the accounting department. Often, these departments consist of just a few accountants, possibly a controller or accounting manager. Typically, the business owner serves as the de facto leader.

The team can handle payroll, accounts receivable, and accounts payable — meaning it can handle the most basic accounting functions. What many of these companies struggle with is the inability to plan for the future, forecast opportunities and obstacles on the horizon, and devise strategies accordingly. That’s the job of a CFO, and very few small manufacturers and distributors have one in their ranks.

The reason is that few of these businesses need one. Not full-time. Financial expertise and foresight are important, but small businesses don’t automatically require 40 hours of CFO input week after week. They may not be able to afford it.

That brings us to the conundrum: how does an accounting department hire a part-time executive? Fortunately, it’s a lot easier than expected.

What are CFO services? Think of them as the individual responsibilities of a CFO – things like forecasting cash flow, budgeting/planning, financial reporting, or contract negotiations – available individually and on demand.

When companies opt to work with an outsourcing firm instead of trying to hire a CFO, they get the expertise, specialization, and high-level accounting capabilities their team is lacking, but at a fraction of the cost. Maybe, more importantly, the needed assistance is available now, not whenever a qualified candidate accepts a job offer, which can take weeks or months.

Here’s an example of CFO services in action: Imagine a manufacturer needs to do a detailed costing analysis but doesn’t have the experience or sophisticated systems to get the numbers accurate. Their outsourcing firm provides them with a costing expert who understands the market segment and how costs affect sales prices, gross margins, demand forecasts, and labor needs. As a fractional CFO, the expert gives the company essential costing insights. Then, they return to the outsourcing firm until further assistance is necessary.

With CFO services, small companies don’t need to hire a CFO. They also don’t need to pay exorbitant compensation packages or make do with basic accounting resources that can only look backward. Even better than a part-time executive, CFO services are a kind of anytime expert.

Exceptional outsourced accounting firms provide two things. First, access to a full range of CFO-caliber accounting services delivered by experienced experts. Second, a serious commitment to tailoring CFO services to the client’s specific needs and changing circumstances.

We have a regional focus with global expertise. The former CFOs on our team come from diverse backgrounds and every facet of accounting, but they focus on individual industries, gaining true authority. So ask yourself, could you use CFO? If so, contact us.

Over my 39‑year career advising real estate clients on Section 1031 exchanges, I have never encountered a more common (nor more frustrating) question than the following:  

“How long do we need to hold a property (either before or after an exchange) to qualify for tax-deferred treatment?”  

While I was well-schooled on the issue, I was never really satisfied with the answer I was giving, which went something like this – 

“Well, you should wait at least one filing period, preferably two, to age the transaction, but you still run the risk that, on audit, the agent (most likely from the FTB) will argue that you did not meet the held for the requirement.”  (1) PLR 8429039 – Two years of business or investment use is sufficient to meet the requirement that the property was held for the requisite intent.

Not very comforting advice for a client-facing a potential six-figure gain.  

Well, thanks to 2 administrative law judges serving in the Office of Tax Appeals (OTA) for the State of California, practitioners are emboldened to now give a little more definitive advice in this area  (2) Appeal of Mitchell, 2018-OTA-210.

The most common of techniques for which the question mentioned above is relevant is the Drop and Swap. For those of you who are already familiar with this technique, feel free to skip ahead.

Here is the scenario.  A real estate partnership owning a property it desires to dispose of is faced with a dilemma.  Several of its partners would like to cash out their investments, while others wish to do an exchange ala Section 1031 and defer their tax by rolling their gain into the replacement property. What’s a General Partner to do?  Because it’s possible to distribute tax-free an undivided tenancy in common interest to the partners in the soon-to-be relinquished property, wouldn’t the partners be free to do what they want with their interest? 

Maybe, maybe not.  It depends on whether the transaction before the sale of the property can be structured in a way that will satisfy the taxing authorities that a) the pre-exchange transaction is, in fact, qualified for tax deferral and b) the property now in the hands of the individual partners meets the “held for requirement.” For decades, the State of California has argued (mostly successfully, sometimes not) that a partner can’t receive an undivided interest in partnership property and then immediately exchange it. Their argument is, he or she hasn’t held the property long enough to establish it was either held for investment or use in a trade or business.  

Hence, the reason for the question posed earlier – “How long is long enough?”

Sharon Mitchell and her mother both held an interest in a partnership that owned real property in Walnut Creek, CA.  Most of the partners wanted to cash out their investment, but Sharon and her mother wanted to roll their share of the equity into a Section 1031 exchange. To accommodate this, the partnership distributed to them undivided tenant-in-common (TIC) interests in the property. Since the point of this article is to try and discern a period necessary to satisfy the held-for requirement, it is essential to present a summary of the timing of the critical events occurring in this case: 

March 2, 2007 – Partnership accepts an offer to sell property, contingent on approval of the partners by March 21, 2007, and a projected closing date of August 31, 2007, which buyer agreed to extend to accommodate the seller’s Section 1031 exchange.

November 17, 2007 – A redemption agreement executed between Sharon and her mother, with the partnership agreeing to distribute to each of them their pro‑rata share in the partnership’s property.

November 20, 2007 – Partnership executes a Grant Deed to transfer title to Sharon and her mother as tenants in common. Their Grant Deeds recorded on November 29, 2007.

November 28, 2007 – Sharon and her mother transfer (and Exchange Accommodator accepts) their TIC interests to begin the process of facilitating an exchange.  That same day, the partnership, along with Sharon and her mother, execute a Grant Deed to buyers, thus signaling the close of escrow.  This Deed recorded on November 30, 2007.

As you might guess, the FTB did not take kindly to a distribution occurring just ten days (eight if you count from the date the Grant Deed was executed) as meeting the definition of qualified property.  However, the FTB was unsuccessful in convincing at least two judges (the OTA assigns a panel of 3 Administrative Law Judges to each case, one of which here dissented from the majority opinion) that the exchange did not qualify. 

Using largely long-standing federal cases as precedent,  (3) Magneson v. Commissioner (9^th Cir. 1985) 753 F 2d 1490 (Mageneson), the attorneys for the appellant successfully argued that not only did timing of the TIC transfers not matter, but that the FTB’s assertion that these pre-exchange transfers “lacked substance” was without merit.

 We could spend time reviewing arguments made in favor of the taxpayer.  However, candidly, these arguments are the same we practitioners have been making for years.  Therefore, it may behoove us to examine the comments of the dissenting judge lest we overlook opposing arguments we may fail to plan for. Informally, the FTB has already taken the position that it will not follow Mitchell).

Oddly enough, the main objection of the dissent is not one of the usual suspects (e.g., held-for requirement, benefits, and burdens of ownership, ban against the exchange of partnership interests), but one of assignment of income (4) Court Holding v. Commissioner (1943) 2 TC 531. In fact, according to Judge Rosas, before reaching an analysis on the holding requirement, the “first question we must consider is who made the exchange …”

Judge Rosas contended that the facts in the case showed that the Partnership was the seller of the property, not the appellant.  He dismissed testimony that a February 26, 2007 counteroffer was evidence that the buyers knew the appellant was going to do a Section 1031 exchange.  He points out that the counteroffer only names the Partnership and “is silent about appellant holding a 10-percent partnership interest, about her holding a 10-percent TIC interest in the Property, about her being one of the sellers, or about her wanting to undertake a Section 1031 exchange.”  He adds further that documentary evidence and testimony suggest that the day escrow closed “was the earliest date the buyers were even made aware of the appellant’s ownership interest and intentions.”

It is hard to argue with this assertion, although it is not clear why the buyer’s knowledge has any relevance to the seller’s intent. Further, there was, in fact, evidence that Sharon and her mother had always made clear their intention to do an exchange and therefore needed to have their partnership interests redeemed before any sale. While this case provides much‑needed support for a drop and swap to qualify under Section 1031, partnerships anticipating following in the footsteps of Mitchell will still be well-advised to “drop early” and name the TIC owners in the listing agreement (if possible) and the purchase documents to reduce the risk of a challenge to the reported exchange.

If you are anticipating a Drop and Swap and would like guidance on the period necessary to “hold the property,” the answer appears to be “zero,” according to the arguments in Mitchell.  However, if you wish to overcome an assignment of income issue, I’m not sure I would follow this advice. Mitchell has been designated “Non‑precedential” by the OTA. Thus, at present, the FTB is not bound to follow its result. Requests to re-designate the opinion to “Precedential,” thereby bringing more clarity and certainty in this area, have already been made, with more to follow.

It is clear from the Mitchell case (and the OTA’s refusal to grant a rehearing) that the FTB may have lost its final battle on this front.  The question is, will the IRS come to a similar taxpayer-friendly conclusion?  Posing this question to my good friend and SF tax attorney Ed Kaplan of Greene Radovsky (Ed was the lead attorney on the Rago Development case (5) Appeal of Rago Development, et al. 2015-SBE-001, June 23, 2015), one of the taxpayer-friendly cases cited in Mitchell):

“Standing in a field of sheep, yes, I’m still bullish.  As for the IRS National Office, they’ve been sitting on their hands for years, allowing California to try to create new ‘federal’ law in the 1031 arena.  I haven’t seen a single exchange challenged by the IRS for years; it’s always the FTB.  It will continue to be the FTB, even after the opinion is re-designated “precedential,” which I believe will happen sooner rather than later.  

Magneson either means what it says, or it doesn’t.  If you change the form of how you hold your property interest, nothing else changes.  Your intent in holding your property investment remains the same, as it looks to the beneficial owner to determine intent.  I think we’re safe here in the 9^th Circuit and have always believed that the IRS’s choice to not pursue a split in the Circuits was its acknowledgment that it was correctly decided.  

Let the FTB continue to wave red capes.  I’m bullish.” Thanks, Ed.  I guess we’ll just need to be careful where we step.

Roughly half of CFOs believe an economic recession will hit by the end of 2020, and about three-quarters expect a recession by mid-2021, according to the 2019 year-end Duke University/CFO Global Business Outlook survey. In light of these bearish predictions, many businesses are currently planning for the next recession. Are you? Here are four steps to help your company strengthen its balance sheet against a possible downturn.

The balance sheet shows your company’s financial condition — its assets vs. liabilities — at a specific point in time. Some line items are more critical to your success than others. For example, inventory is a top priority for retailers, and accounts receivable is important to professional service firms.

A “common-sized” balance sheet can help you determine what’s most relevant. This type of statement presents each account as a percentage of total assets. Items that represent the highest percentages are generally the ones that warrant the most attention.

Ratios compare line items on your company’s financial statements. The four categories of financial ratios: 1) profitability, 2) solvency, 3) asset management, and 4) leverage. While profitability ratios focus on the income statement, the others assess items on the balance sheet.

For example, the current ratio (current assets ÷ current liabilities) is a solvency measure that helps assess whether your company has enough current assets to meet current obligations over the short run. Conversely, the days-in-receivables ratio (accounts receivable ÷ annual sales × 365 days) is an asset management ratio that gauges how efficiently you’re collecting receivables. And the debt-to-equity ratio (interest-bearing debt ÷ equity) focuses on your company’s use of debt vs. equity to finance growth.

The common-sized balance sheet and ratios can be used to create “goals” for each key line item. What’s right depends on the nature of your business and industry benchmarks.

For example, you may strive to meet the following goals over the next year:

Once you’ve set goals, devise a plan to achieve them. For example, you might cut fixed costs or forgo buying equipment to build up your cash reserves. In turn, stockpiling cash — along with improving collections — might help boost your current ratio.

Part of your plan should be forecasting how the changes will filter through the financial statements. This exercise can help you determine whether your goals are realistic. For example, if you decide to build up cash reserves, it might be difficult to simultaneously pay down debt. You can generate only a limited amount of incremental cash in a year. Forecasting can help pinpoint the shortcomings of your plans.

Markets are cyclical. So, it’s only a matter of time before another downturn happens. We can help you take steps to position your organization to weather the next storm — whenever it arrives.

Contingent liabilities reflect amounts that your business might owe if a specific “triggering” event happens in the future. Sometimes companies are unclear when they’re required to report a contingent liability on their financial statements under U.S. Generally Accepted Accounting Principles (GAAP). Here are the basics.

Operating a business comes with a degree of uncertainty. For example, a company might be involved in a legal dispute that could result in the payment of a settlement based on a verdict reached in a court. However, at the time of the company’s financial statements, whether there will be a settlement liability and the date and amount of any settlement have yet to be determined. This is an example of a contingent liability that may or may not materialize in the future.

Other examples of contingent liabilities are 1) warranties triggered by product deficiencies, and 2) a pending government investigation. Conversion of a contingent liability to an expense depends on a specific triggering event.

Recording a contingent liability is a noncash transaction, because it has no initial impact on cash flow. Instead, the creation of a contingent liability notifies stakeholders of a potential liability that could materialize in the future. This is consistent with the need to fully disclose material items with a likelihood of impacting a company’s finances in the future.

A contingent liability can be categorized as:

Remote losses typically don’t require disclosure in your financial statements. If a loss is reasonably possible, you would add a note about it to the company’s financial statements. The same approach applies when the loss is probable, but it remains impossible to estimate the magnitude with any degree of certainty.

On the other hand, if a loss becomes probable and can be reasonably estimated, your company would report a contingent liability on the balance sheet and a loss on the income statement. If the amount fluctuates and you can estimate the revised amount with confidence, you should update the amount recorded in the financial statements accordingly. The contingent liability remains on the balance sheet until your company pays it off.

Determining whether a liability is remote, reasonably possible or probable and estimating losses are subjective areas of financial reporting. External auditors are on the lookout for new contingencies that aren’t yet recorded. They also will evaluate whether existing loss estimates are still reasonable.

During audit fieldwork, be ready to provide supporting documentation to your auditors and, if necessary, work with them to adjust your financial statements to reflect any changes in the circumstances surrounding your contingent liabilities.

For more information on reporting contingent liabilities contact us.

The concept of “matching” is one of the basic principles of accrual-basis accounting. It requires companies to match expenses (efforts) with revenues (accomplishments) whenever it’s reasonable or practical to do so. This concept applies when companies make advance payments for expenses that will benefit more than one accounting period. Here are some questions small business owners and managers frequently ask about prepaid expenses.

It’s common for companies to prepay such expenses as legal fees, advertising costs, insurance premiums, office supplies, and rent. Rather than immediately report the full amount of an advance payment as an expense on the income statement, companies that use accrual-basis accounting methods must recognize a prepaid asset on the balance sheet.

A prepaid expense is a current asset that represents an expense the company won’t have to fund in the future. The remaining balance is gradually written off with the passage of time or as it’s consumed. The company then recognizes the reduction as an expense on the income statement.

Immediate expensing of an item that has long-term benefits violates the matching principle under U.S. Generally Accepted Accounting Principles (GAAP).

Deducting prepaid assets in the period they’re paid makes your company look less profitable to lenders and investors, because you’re expensing the costs related to generating revenues that haven’t been earned yet. Immediate expensing of prepaid expenses also causes profits to fluctuate from period to period, making benchmarking performance over time or against competitors nearly impossible.

Some service providers — like your insurance carrier or an attorney in a major lawsuit — might require you to pay in advance. However, in many circumstances, prepaying expenses is optional.

There are pros and cons to prepaying. A major downside is that it takes cash away from other potential uses. Put another way, it gives vendors or suppliers interest-free use of your business’s funds. Plus, there’s a risk that the party you prepay won’t deliver what you’ve paid for.

For example, a landlord might terminate a lease — or they might file for bankruptcy, which could require a lengthy process to get your prepayment refunded, and you might not get a refund at all. Banks also might not count prepaids when computing working capital ratios. And since reporting prepaid expenses under GAAP differs slightly from reporting them for federal tax purposes, excessive prepaid activity may create complex differences to reconcile.

With that said, your company might receive a discount for prepaying. And companies without an established credit history, that have poor credit or that contract services with foreign providers, may need to prepay expenses to get favorable terms with their supply chain partners.

Start-ups and small businesses that are accustomed to using cash-basis accounting may not understand the requirement to capitalize on business expenses on the balance sheet. But matching revenues and expenses is a critical part of accrual-basis accounting. Contact us with any questions you may have about reporting and managing prepaid expenses.

Goodwill shows up on a company’s balance sheet when the company has been acquired in a business combination. It represents what’s left over after the purchase price in a merger or acquisition is allocated to the company’s tangible assets, identifiable intangible assets, and liabilities. Periodically, companies must test goodwill for “impairment” — that is, whether the carrying value on the balance sheet has fallen below its fair value. Goodwill impairment testing can be complicated.

Under current U.S. Generally Accepted Accounting Principles (GAAP), public companies that report goodwill on their balance sheet must test goodwill at least annually for impairment. Instead of annual impairment testing, private companies may elect to amortize acquired goodwill over a useful life of up to 10 years.

All companies — regardless of whether they’re publicly traded or privately held — must test goodwill for impairment when a triggering event happens. Examples of triggering events that could lower the fair value of goodwill include:

Impairment may also occur if, after an acquisition has been completed, there’s an economic downturn that causes the parent company or the acquired business to lose value. Impairment write-downs reduce the carrying value of goodwill on the balance sheet. They also lower profits reported on the income statement, which may raise a red flag to lenders and investors.

Calculating goodwill impairment was originally a two-step process: First, businesses must figure out whether an impairment exists, and then they must put a dollar figure on it. The second step includes determining the implied fair value of goodwill and comparing it with the carrying amount of goodwill on the balance sheet.

The rules for goodwill impairment testing were simplified in Accounting Standards Update (ASU) No. 2017-04, Intangibles — Goodwill and Other, Simplifying the Test for Goodwill Impairment. The changes go live for fiscal periods starting after:

Early adoption is permitted for testing dates after January 1, 2017. The updated guidance nixes the second step of the impairment test. Instead, a business will perform the impairment test by comparing the fair value of a reporting unit that includes goodwill with its carrying amount.

Few companies employ internal accounting staff with the requisite training and time to handle goodwill impairment testing. And most auditors won’t perform valuation services for their audit clients for fear of violating their independence standards. Instead, valuation specialists are often called in to handle these complex assignments. Contact us for more information.

Change-in-control events — like merger and acquisition (M&A) transactions — don’t happen every day. If you’re currently in the market to merge with or buy a business, you might not be aware of updated financial reporting guidance that took effect in November 2014. The changes like pushdown accounting, provide greater flexibility to post-M&A accounting.

Accounting Standards Update (ASU) No. 2014-17, Business Combinations (Topic 805): Pushdown Accounting (a consensus of the FASB Emerging Issues Task Force), made pushdown accounting optional when there’s a change-in-control event. The update applies to all companies, both public and private.

Pushdown accounting refers to the practice of adjusting an acquired company’s standalone financial statements to reflect the acquirer’s accounting basis rather than the target’s historical costs. Typically, this means stepping up the target’s net assets to fair value and, to the extent the purchase price exceeds fair value, recognizing the excess as goodwill. Previously, U.S. Generally Accepted Accounting Principles (GAAP) provided little guidance on when pushdown might be appropriate.

For public companies, Securities and Exchange Commission (SEC) guidance generally prohibited pushdown accounting unless the acquirer obtained at least an 80% interest in the target and required it when the acquirer’s interest reached 95%. The SEC has rescinded portions of its pushdown accounting guidance, bringing it in line with the FASB’s updated standard.

Under the updated guidance, all acquired companies may decide if they should apply pushdown accounting. Whether it’s appropriate depends on a company’s circumstances. For some companies, there may be advantages to reporting assets and liabilities at fair value and adopting consistent accounting policies for both parent and subsidiary. Other companies may prefer not to apply it to avoid the negative impact on earnings, often associated with a step-up to fair value.

After pushdown is applied to a change-in-control event, the election is irrevocable. Acquired companies that apply it in their standalone financial statements should include disclosures in the current reporting period to help users evaluate its effects.

If you’re contemplating an M&A deal, we can help you decide whether pushdown accounting is a smart choice for reporting your transaction. Whichever option you choose, our accounting pros also can help you comply with financial reporting requirements under GAAP.

Can financial reporting analysis really help your business grow? Absolutely! To employ a data-driven finance approach, CFOs need to move finance functions up the analytic value chain to offer more detailed analyses, better forecasting, and increasingly granular information on products, suppliers, customers, and more. In turn, their analyses inform the business, increase corporate agility, and point the way to cost savings.

5 Financial Reports businesses can start analyzing to make better business decisions:

The income statement indicates the profit and loss of a company over a period of time. It essentially takes all your income, revenue, or sales, and subtracts your expenses. In standard practice, you would want to see actuals for the month, quarter-to-date, year-to-date versus the budgeted or forecasted values or amounts from the prior two years. For best practice, you can have a rolling 12 month income statement, which would give you a stronger indication of how your company’s sales and expenses are changing over the past year. While it is often delivered as a quarterly statement, the income statement should ideally be issued monthly.

Having your income statement available on a daily basis will allow your CEO to know what your results are overall before month-end. Generally speaking, most expenses are in the same ballpark range, so reviewing the income statement two to three days before month-end should give your CEO and CFO a good idea of your company’s profit. Key indicators to analyze within the income statement include margins, expenses as a percentage of sales and earnings before interest, taxes, depreciation, and amortization (EBITDA).

The balance sheet shows your company’s assets, liabilities, and equity at a point in time. By comparing your balance sheet year-over-year, you can see how these key aspects have changed, indicating whether or not the financial health of your company has improved or declined during this time frame.

More specifically, the level of liquidity of an item impacts where it is placed in the balance sheet, with more liquid assets (for example, trade debtors, inventory cash) called current assets, being classified separately from less liquid assets in the assets section. Similarly, current liabilities are also classified separately from long term liabilities in the liabilities section.

The balance sheet provides key financial ratios that analysts and banks use to assess the health of your company, including:

Here is a good resource which expands on the different values and ratios a balance sheet can provide.

The cash flow statement is one of the most vital reports for a business but many businesses do not prepare or perform cash flow forecasting due to resource constraints or simply not knowing how to even start. The cash flow statement shows you how much cash was generated and how it was used. There are three core sections to a cash flow statement – operating activities, investing activities, and financing activities. Comparing these activities will allow you to see how well your company is managing its operations.

The cash flow statement shows you the actual movement of your dollars. This is where the income statement and cash flow differ. Your income statement could show a very rosy number for revenue but if most of that was contributed via credit sales, cash flow would not reflect this. Hence the phrase, cash is reality.

There are two main methods for preparing a cash flow statement – direct and indirect. Many ERP systems can be configured to provide data to enable the preparation of a cash flow statement using the direct method. However – it does take discipline.

The indirect method is more common as it takes information from the income statement and balance sheet. Numbers can then be easily linked between these three financial statements.

While the income statement, balance sheet and cash flow reports form the three key financial statements, they are prepared on a monthly, quarterly, and annual basis. This creates what we call a “black hole” for the CEO during the course of a month.

Why is this? For example – major expense items such as salaries and rent are paid at the end of the month. Thus, an income statement would show a healthy profit for the entire duration of the month and a sudden drop when all the expenses are booked.

Another example would be that of managing cash on a day-to-day basis. The CEO and CFO should be alerted in advance if a certain payment is due and there is insufficient cash to cover it.

The working capital report can help to partially offset these concerns. Working capital is money available to the company for day-to-day operations, which is current assets – current liabilities.

Many organizations prepare it on a weekly basis by collecting key information such as receivables, payables, inventory, bank position, bank limit, top 10 supplies payments due, and top 10 debtors. The working capital report should be able to quickly identify if a company is unable to meet its short term obligations and trigger the CEO or CFO to look for ways to mitigate that risk such as extending credit and focusing on debt collections.

In addition to this, the working capital report can also address whether or not the company is utilizing its loans and overdrafts effectively, allowing its finance teams to quickly identify underutilization or overutilization and thus prevent it from becoming an ongoing problem.

The sales analysis report is the one report we recommend companies to review on a daily basis. This is because sales is a very important number – when sales is performing on target, all other items will fall into place. It should contain more granular information on sales than reported in the other reports mentioned above.

For example, the report could show sales data by major product lines, customer segments, or sales reps. It can also highlight quantities sold and post-discount prices to provide the average selling price for the day or month-to-date. These numbers can then be compared to the company’s sales targets to offer a solid perspective on how sales has performed over a specific period of time.

Looking at the amount of sales achieved in the sales analysis report would allow the CEO and CFO to assess the company’s financial position on a daily basis. In turn, they would be able to identify areas where volume of sales or average price is dropping or sales are higher or lower than expected, and review production and purchasing plans to fix the issue or take advantage of the opportunity.

With these five financial reports in hand, you can equip your executive team with the financial information they need to make smarter business decisions for your organization. Together, they give your executive team a holistic perspective on how the business is doing and where they should put their focus to benefit the company the most.

Watch this free webinar to learn how to build and instantly access these financial reports from Sage Intacct using our platform, Limelight. Feel free to visit our Sage Intacct and Limelight pages to see how our experts can help your company.

January is here, and that means that the highly anticipated accounting changes to revenue recognition have become effective. This new guidance, formally referred to as Revenue from Contracts with Customers (ASC Topic 606), will have a significant impact on virtually every business in every industry across the United States. As with all major changes to accounting regulations, our aim is to ensure that our clients understand these changes and feel confident and prepared for what’s to come.

In today’s globalized economy, creating harmonized standards has become a necessity for creating a comprehensive framework for addressing all revenue recognition issues across borders and industries. ASC 606 was first issued in 2014 by the Financial Accounting Standards Board (FASB) in consultation with the International Accounting Standards Board (IASB) with the goal of aligning U.S. standards (GAAP) with international accounting standards (IFRS). The guidance went into effect for non-public companies for annual periods beginning December 15, 2018.

ASC 606 is applicable for all contracts with customers, whether it be tangible or intangible goods or services. Contracts excluded from this standard are leases, insurance contracts, financial instruments, guarantees, fixed-odds wagers and contracts falling within the scope of other standards.

In addition to removing inconsistencies and weaknesses from current guidance, the new standard exists to:

Companies will need to exercise significant judgement in applying the guidance and must ensure consistency for all contracts with similar characteristics and circumstances. We also expect that disclosure will be greatly expanded since a certain level of judgment is required.

ASC Topic 606 includes a five-step model for recognizing revenue from contracts with customers.

The first step in applying the new revenue recognition standard is to determine whether a contract exists with a customer.

Identify all performance obligations contained in the contract, meaning all promises to transfer a good or service to a customer.

Next is to determine the transaction price, which is the amount the company expects to be entitled to in exchange for transferring the promised good or service.

The fourth step is to allocate the transaction price to the various performance obligations previously identified. The allocation should be done on the basis of the standalone selling price of each promised good or service within the contract.

The final step is to recognize the revenue when (or as) the company satisfies the promised good or service (performance obligation) to a customer.

The new revenue standard also provides guidance for costs incurred while obtaining a contract. Incremental costs of obtaining a contract should be capitalized if they are recoverable. This includes only costs that would not have been incurred if that contract had not been obtained. Costs to fulfill a contract should also be capitalized if they are directly related to a contract and are expected to be recovered.

There are two methods allowed for initial implementation

Under this method, the company must apply the new standard to each prior period being presented, thus restating prior years as if the new standard had always been in effect.

Under this method, the company must apply the new standard as of the beginning of the period during which the standard is first implemented (for example, as of January 1, 2019). However, this method also requires the company to disclose the amount by which each financial statement line item was affected by the adoption during the year of initial implementation. This requires tracking revenue recognition under both the old guidance and the new guidance in the year of adoption.

Several practical expedients are available under each method, all of which must be disclosed and consistently applied.

If using the full retrospective method, practical expedients include:

If the modified retrospective method is used, practical expedients include:

Generally, the assessment of this five-step model should be performed on a contract-to-contract basis. However, a group of contracts may be assessed together if the company reasonably expects that the assessment would not change if each contract had been considered separately.

The application of the new revenue standard requires a company to make multiple judgments and estimates. Like all judgments and estimates, they should be both reasonable and supportable. Some of the most significant judgments include:

Since this new revenue standard will impact every industry, we recommend that our business clients identify, inventory, and summarize the company’s types of contracts as soon as possible. Other things to consider include:

Whether you are well on your way to implementation or in the early phases of preparation, we are here to help you through every stage of the process. If you have questions about the new revenue recognition standard or want to learn more about how your company may be affected, contact us.

As your family grows, your estate matures, and your assets become more substantial, it’s probably time to start thinking about an estate and trust plan. Estate and trust planning is a crucial step for those looking to ensure that their assets are distributed when and how they wish. Need more convincing? Here is our Top 40 list of facts and tips about estates and trusts.

The probate process for an estate can be very expensive in terms of probate costs, fees, and attorney charges. If your assets are contained in a revocable living trust instead, you can avoid many of these costs.

Much of the estate probate process is recorded in the public record. A living trust is private. Upon your death, there does not need to be announcements in the paper to invite creditors to file claims, to contest your will, or to notify disgruntled relatives. Your beneficiaries do not need to be made public.

In California, unless you change the seniority of the beneficiaries of your estate, the order goes spouse, dependents, parents, siblings, nieces/nephews, grandparents, aunts/uncles, and cousins.

By avoiding potential court delays or judicial interferences, a trust can potentially allow your estate to be settled in a shorter period of time.

Your trust document contains instructions for managing your assets, as well as how the funds will be used in the event of your death or incapacity. Without a trust, while you still get to designate who gets your assets, you do not have a say in what they do with them.

With special planning built into your trust agreement, you may be able to reduce any potential estate taxes that would be charged upon your death.

Any property placed in a trust before you marry remains the property of that trust. As long as you do not commingle those assets with assets acquired during marriage, a trust can be an effective way for you to keep property separate and control who will receive it.

While a will is only effective after your death, a trust can be used to control your assets when you are still living but no longer have the capacity to control the assets yourself.

If your beneficiaries don’t have the capability or desire to manage the assets, you’ll be giving them, having trustees manage those assets can solve the problem. A trust will allow access or control those heirs have over their inherited property to be limited.

Depending on the type of trust, a trust can protect assets from creditors, marriage breakdown, or those who might influence your beneficiaries.

An irrevocable life insurance trust (ILIT) in which an independent trust purchases a life insurance policy can, within certain limitations, result in keeping the life insurance proceeds from being part of your taxable estate.

A trust can be designed to allow distributions for specific purposes, such as college tuition or health care expenses.

A trust can be designed to hold assets while a beneficiary is a minor or a young adult and then distribute all or a portion of the assets once the beneficiary reaches a certain age.

Charitable remainder trusts can be designed to allow the grantor an annual payment during their lifetime, with the balance transferring to a charity when the trust terminates. The grantor may also receive an income tax charitable deduction based on the charity’s remainder interest when the property is contributed to the charitable remainder trust.

You may be concerned that if your surviving spouse remarries, your assets could end up in the hands of his or her new family rather than your children.  A trust can be used to provide for a surviving spouse during their lifetime, with the remainder of the assets being transferred to the children upon the death of the surviving spouse.

Once you have established a revocable living trust, be certain to review how your assets are titled periodically. If your assets are titled to you personally rather than your trust, you have defeated the purpose of forming the trust in the first place.

If you own assets in states or countries other than your state of residence or your country of citizenship, you may want to consider placing those assets in a trust. Otherwise, your estate may have to be probated in multiple states or countries due to having assets in that state or country. It would also be prudent to meet with local attorneys in the countries where you have assets to ensure proper estate planning is done according to local laws and also to ensure double taxation does not occur at death due to inconsistencies between estate tax rules that apply to the U.S. and the foreign country.

If you are married, your living trust can include a provision that will let you and your spouse utilize both of your exemptions, which can save a substantial amount of money for your loved ones down the road.

If one of your heirs requires special assistance, consider setting up a special needs trust. A special needs trust can be set up for a person who receives government benefits not to disqualify the beneficiary from such government benefits.

If a deceased taxpayer has a sizable estate under the filing threshold for the federal estate tax, a surviving spouse should consider filing an estate tax return to take advantage of portability laws. Portability allows the surviving spouse to apply a deceased spouse’s unused exemption to their own estate when they pass away. However, an estate tax return must have been filed for the estate of the first spouse to die to take advantage of the unused exemption.

With the introduction of state-level estate taxation, estate planning strategies have become more complicated in recent years. There are currently 18 states (plus the District of Columbia) that impose either an estate or inheritance tax or both.

Introduce your team of advisors to your successor trustees. Inviting the team of advisors to family meetings is a good common practice and great way to ensure everyone is on the same page.

That may not be where you would like to receive your assets. Estate planning is especially important for unmarried couples and blended families, as state law will award assets to biological relatives if there is no will.

Heirs may have died or remarried, or the person you chose to administer your estate may longer be capable of doing so. It is best to review your documents and make sure they are still relevant and still reflect your wishes.

You can keep them in a strongbox at home, in your lawyer’s vault, or both. Do not keep them in a safe deposit box in a bank. Without your will, your heirs may be unable to access the safe deposit box without a court order.

Remember that your heirs will need to file your final income tax return, so it is a good idea to ensure that someone knows where you keep your records.

Often, these are overlooked in the estate planning process, but since so much of our lives are online, it is best to be certain someone can access your email and other online accounts after your death to handle your correspondence and ensure your accounts are shut down in an orderly fashion.  Also, not closing online accounts containing credit card information can be an identity theft risk.

This includes names and contact information for wealth managers, bankers, CPAs, insurance agents, doctors, and attorneys.

Who will raise your children if both parents are killed in an accident?  It is important to plan for their care and how any life insurance payouts and money you leave to your children will be handled for their benefit.

You need to choose someone who will carry out your wishes.  A simple estate can be handled by a friend or relative with the help of an estate lawyer, but a more complex estate may require professional management.

This names someone to make medical decisions for you if you cannot make them for yourself.  It helps avoid the threat of people having conflict over what you may have intended.

Also called an advanced directive. It guides the person making medical decisions about what you want in certain scenarios.

This allows someone to manage your affairs. It can be limited to certain functions or can be all-encompassing. Or you can have a springing power of attorney, which only takes effect if a doctor declares you incapacitated.

The beneficiary designations on these accounts control who receives the account, not your will, so it is important to keep these updated so that your account doesn’t get passed to someone you no longer want it to go to, such as an ex-spouse.

This will assist your executor in gaining control over your assets after you pass and prevent them from having to dig through all the paperwork in your home to determine which financial institutions they need to contact. This also applies if one spouse handles all the finances.

You can skip life insurance if you have no one to support you or you have enough money saved to provide for your spouse. Otherwise, if you are the primary source of income for your family, you should consider buying enough life insurance coverage to meet your family’s expenses after you are gone.

Funerals can be expensive and typically occur before your executor has control of your assets. Making arrangements can help your children or other heirs deal with a stressful, unexpected, high cost event that they may not have the available funds to cover.

After making all your estate plans, consider meeting with your family and advising them of your choices. This does not mean that you need to share all of your financial information with them, simply let them know where they can find the information if something happens to you, along with some ideas as to your wishes.

A gift of up to $14,000 ($15,000 in 2018) can be made by a donor to as many recipients as he or she likes, free of federal gift tax.

Payments of tuition made directly to a college or university for the benefit of another, such as a grandchild, are not subject to federal gift tax.

If you have questions about estate and trusts or want to learn more about how to start your own, contact us.

It can often feel like accounting is its own language. With so many phrases, acronyms, and organizations to recognize, we have created a cheat sheet for the 40 most commonly used accounting phrases worth knowing.

1. Debit:  An accounting entry to record a transaction where there is either an increase in assets and expenses or a decrease in liabilities, equity, and revenue.

2. Credit:  An accounting entry to record a transaction where there is either an increase in liabilities, equity, and revenue or a decrease in assets and expenses.

3. Double entry accounting method:  A method of recording transactions in which each transaction is entered into one or more accounts. The account debits must equal the account credits.

4. Cash basis accounting:  Accounting method by which revenues and expenditures are recorded when received and paid.

5. Accrual basis accounting:  Accounting method that reports income when earned and expenses when incurred, rather than only in the periods in which cash is received or paid by the company.

6. GAAP:  Stands for Generally Accepted Accounting Principles. GAAP represents a set of rules, conventions, and procedures set by the Financial Accounting Standards Board (FASB) to define accepted accounting practice in the United States.

7. Net worth:  Equal to the excess of assets over liabilities.

8. Book value:  Amount that an asset or liability shows on the balance sheet of a company.

9. Market value:  Amount the investors are willing to pay for a share of stock on the open market.

10. Preferred stock:  A type of capital stock with certain preferences over common stock, such as a priority claim on dividends and assets.

11. Common stock:  The value assigned to a company’s issued shares. This type of capital stock has no preferences, such as regarding dividends or voting rights.

12. Bank reconciliation:  A comparison of the balance shown on the bank statement and the balance of the cash account in the company’s general ledger. Differences are identified and researched.

13. Write off:  Charging an asset account to expense or loss.

14. Bad debt:  Portion of an account, loan, or note considered uncollectible.

15. Contingent liability:  Potential liability arising from a past transaction or a subsequent event.

16. Appreciation:  Increase in the value of an asset such as a stocks, bonds, or real estate.

17. Depreciation:  Expense allowance made for wear and tear on an asset over its estimated useful life.

18. Amortization:   Allocation of the cost of an intangible asset over a period of time.

19. Salvage value:  Selling price assigned to retired fixed assets or unsellable merchandise through regular channels.

20. Asset:  What a company owns, such as any owned tangible or intangible item that has an economic value useful to the owner.

21. Liability:  What a company owes, or a company’s debts or financial obligations.

22. Owners’ or Stockholders’ equity:  An ownership interest in a corporation in common or preferred stock. Equal to total assets minus total liabilities.

23. Paid in capital:  The portion of the stockholders’ equity paid in by the stockholders, as opposed to capital arising from profitable operations.

24. Revenue:  Money received by the company for goods sold or services provided.

25. Expense: The fixed, variable, or accrued costs a company incurs through its operations.

26. Net income:  A company’s net earnings or profit, equal to total revenue minus total expense.

27. General ledger:  A financial record that contains all the asset, liability, owner equity, revenue, and expense accounts.

28. Subsidiary ledger: A financial record that contains the details to support a general ledger control account.

29. Trial balance:  a financial record that lists and compares the totals of debit and credit balances in the general ledger to check that they are equivalent.

30. Chart of accounts:  A complete listing of every account in the general ledger of an organization.

31. Balance sheet:  A financial report summarizing a company’s assets, liabilities, and owners’ or shareholders’ equity at a given time.

32. Profit and loss statement:  A financial report that summarizes a company’s performance by showing revenues and expenses during a specific period of time, such as monthly, quarterly, or annually. Also known as Income Statement.

33. Statement of cash flows:  A financial report that shows cash inflow and outflow from operating, investing, and financing activities.

34. Accounts receivable:  Money that is owed to a company by a customer for products and services that were provided on credit.

35. Accounts payable:  Money a company owes its creditors for delivered goods or services that were purchased on credit.

36. Fixed cost:  Costs that remain constant within a defined range of activity, volume, or time period.

37. Variable cost: Costs that change in direct proportion to changes in productive output.

38. Compilation: Presentation of financial statement data without the accountant’s assurance as to conformity with GAAP.

39. Review:  Accounting service that provides some assurance as to the reliability of financial information. However, it does not involve a CPA examining GAAP.

40. Audit:  A professional examination of a company’s financial statement by a CPA to determine that the statement has been presented fairly and prepared using GAAP.

Have questions? We’re here to help, so feel free to contact us.

In today’s start-up culture, it’s common for companies to offer employees the opportunity to own stock in the business. Employee stock options are a great way to boost engagement, attract employees and retain top talent. While most folks know the basic benefits of receiving stock, many employees are taken off guard by the tax implications that follow.

Whether you’re explaining these concepts to your workforce, or you’re an employee trying to better understand your options, it’s important to fully understand how those options can affect your tax planning strategy.

An employee stock option is a benefit that gives the employee the right, but not the requirement, to buy stock in the company at an agreed-upon price within a certain period of time. The employee’s benefit comes when they can buy the stock (exercise price, A.K.A. strike price) at a price below the current stock value.

Typically, a stock option granted to employees will have a vesting date (the date the employee can buy stock at the exercise price) as well as an expiration date. The option must be exercised within that timeframe. The value of the stock at time of exercise is determined by the current value of the stock, which naturally fluctuates over time.  The difference between the value of the stock upon exercise and the price paid for the stock by the employee is the gain from the option, also referred to as the bargaining element.

There are two types of stock options, Incentive Stock Options (ISO) and Non-Qualified Stock Options (NQSO). This overview will focus on how they are taxed. Profit from ISOs have the potential to be taxed as long-term capital gain, which is a considerably lower rate than NQSOs, which are generally taxed as ordinary income.

Employees with ISOs have some specific tax benefits that other options lack. Unlike NQSOs, taxes are generally deferred until the stock is sold, rather than exercised. The benefit? Any proceeds from an exercise or sale become subject to taxation at the lower, long-term capital gains rate rather than ordinary income rates.

However, there is one critical caveat to be aware of. The difference between the exercise price and the fair market value of the stock on the day of exercise must be calculated as part of the Alternative Minimum Tax (AMT) adjustment. For companies with substantial growth, that number could be very large — an issue many employees fail to account for come tax season. Essentially, the employee will be taxed on the profit they might have made if the stock was sold on that day. For this reason, it’s important to have a good forecast of the tax consequences. In some cases, it’s recommended to sell a portion of stock in order to cover the associated AMT taxes.

It’s often beneficial to do what is referred to as a “Section 83(b)” election.  This election allows an employee to “exercise” stock options at the date of (or near) the grant when the exercise price is equal to the fair market value. That means there is no AMT adjustment to report and no added tax liability. Since the stock has yet to vest, this election treats the option as exercised solely for tax purposes. This special election also begins the holding period for long-term gain treatment, meaning holding can start earlier than the actual exercise date.  This achieves the potential for long-term gain treatment on a sale at an earlier date.  However, the employee still has to have the money to buy the stock at the date they make the election.

Employees that exercise an ISO should receive a form 3921 after calendar year-end. It is common for employers with stock plans to miss this filing, resulting in insufficient information to file a proper tax return for the employee.

NQSOs are essentially any stock option that does not meet the ISO qualifications. When an employee exercises an NQSO (also known as NSO), the spread between the exercise price and the fair market value on the date of exercise will be reported as ordinary income. This shows on the employee’s W-2 and the expense will be recognized by the employer. Employers are required to withhold both federal and state taxes when an employee’s option is exercised. Companies have a couple of methods to choose from, but the most common is to simply require the employee to pay the withholding amount in full at the time of exercise. This is done by “holding back” some of the stock value in order to pay the withholding taxes. The company must also pay its share of employment taxes at the time of exercise.

If the employee exercises the option and decides to hold the stock, the fair market value on the date of exercise becomes the cost basis (the price point) for when that stock is sold later on. The difference between the sell price and the cost basis is treated as capital gain/loss, which is subject to a 20% favorable rate, if it’s long term.

NSQOs holders can benefit from an 83(b) election and begin their holding period on an earlier date than the exercise date. However, they will still have to pay for the stock out of pocket and risk paying tax on gains if their exercise price does not match the value at grant date.

On the other hand, if the stock option is exercised and sold immediately, referred to as a same-day sale transaction, there is usually no gain or loss on the sale of the stock. In this case, everything is reported under ordinary income because the sell price of the stock is very close, if not the same, to the fair market value of the stock at that time.

If you want to learn more about employee stock options, or want to find out how you can better explain them to your employees, please contact us.

Whether you’re a business owner or an individual planning for the future, knowing the right questions to ask your accountant gives you a powerful advantage. Having a list of both current and future questions to discuss during your time together will help keep you efficient, prepared, and on track to meet your financial goals. Here is our list of Top 40 Questions to Ask your Accountant.

1. How does the legal structure of my business affect my taxes?

2. Am I on track for my growth goals?

3. What are the industry-specific tax regulations that I should know about?

4. What can I cut down for better cash flow?

5. Do you have any recommendations on collection policies for faster sales?

6. Should I consider seeking equity or debt financing?

7. Do I need an employee benefit plan audit?

8. Do you have referrals for lenders and investors?

9. Do I need a financial statement audit?

10. Do I qualify for R&D credits?

11. How can I avoid red flags or mishaps with my returns or audit?

12. What are my best choices for valuing inventory for tax purposes?

13. When do I need to start paying estimated taxes?

14. What accounting software do you recommend?

15. What is my breakeven point?

16. How can I be prepared for the upcoming tax season?

17. How long do I need to keep my business records?

18. What qualifies as a business deduction?

19. How is my business impacted by the 2017 Tax Reform Act?

20. Am I required to collect sales tax?

1. What information and/or records should I keep, what can I toss, and how long should I hold on to the retained documents?

2. How will the 2017 Tax Reform Act affect me?

3. Can I deduct my car for any of my business purposes?

4. What direct business expenses can I deduct and are there any limitations?

5. How much of my household bills and/or equipment is deductible as a business expense?

6. When should I set up my estate and trust?

7. Should I consider charitable donations as a transfer of wealth?

8. How many dependents can I claim?

9. Are there any deductions that I am not currently claiming that I should?

10. How often should I consult with you about my taxes?

11. Can you help me estimate my taxes for the upcoming year?

12. Should I increase my 401(k) contributions?

13. Should I change my tax withholding?

14. Do you have recommendations for a financial advisor?

15. Am I on track for my retirement goals?

16. What is the best way to pass my wealth to my children?

17. What can I do to protect my dependents from tax implications upon my death?

18. What sort of events in my life are important for you to know?

19. I own my business, what steps should I take to separate my business and personal expenses?

20. What can I do to maximize my deductions better?

Have questions for us? Contact us for help.

It’s true, it can often seem like accountants have their own language. Communicate with your accountant and finance department like a pro with our Top 40 List Accounting Acronyms List. 

1. A&A — Audit and Assurance

2. AR — Accounts Receivable

3. ASU — Accounting Standards Update

4. AP — Accounts Payable

5. ASB — Auditing Standards Board

6. Big 4 — Traditionally, the four largest CPA firms in the world: PwC, Deloitte, EY, and KPMG

7. BV — Business Valuation

8. CPA — Certified Public Accountant

9. CAQ — Center for Audit Quality

10. CFO — Chief Financial Officer

11. COO — Chief Operating Officer

12. COGS — Cost of Goods Sold

13. C2B — Consumer—to—business

14. CPU — Cost per Unit

15. CR  — Credit

16. DR — Debit

17. ERP — Enterprise Resource Planning

18. FASB — Financial Accounting Standards Board

19. FinREC — Financial Reporting Executive Committee

20. GL — General Ledger

21. GAAP — Generally Accepted Accounting Principles

22. GAAS — Generally Accepted Auditing Standards

23. GP — Gross Profit

24. IPO — Initial Public Offering

25. IASB —  International Accounting Standards Board

26. IFRS  — International Financial Reporting Standards

27. LOR — Letters of Response  — Peer Review

28. LLC — Limited Liability Company

29. PAT — Profit After Tax

30. PBT — Profit Before Tax

31. PR — Purchase Requisition

32. PCC — Private Company Council

33. PRB —  Peer Review Board

34. P&L — Profit and Loss Statement

35. PCAOB — Public Company Accounting Oversight Board

36. PA  — Public Accountant

37. SOC — System and Organization Control Reporting

38. SEC — Securities and Exchange Commission

39. SOX — Sarbanes—Oxley

40. VAT — Value—Added Tax

Busy season is over, summer is here, what better way to celebrate than a list of our Top 40 Accounting jokes? 

1. What do accountants suffer from that ordinary people don’t? Depreciation.

2. Two things in life are inevitable: death and taxes. At least death only happens once.

3. There are just two rules for creating a successful accountancy business: 1)Don’t tell them everything you know. 2) [Redacted]

4. For every tax problem there is a solution that is straightforward, uncomplicated, and wrong.

5. What does an accountant say when boarding a train? “Mind the GAAP.”

6. How do you know when an accountant is on holiday? He doesn’t wear a tie and comes in after 8am!

7. What did the overworked asset say to the other asset? I feel so under depreciated.

8. Be audit you can be.

9. What is the definition of a good tax accountant? Someone who has a loophole named after him.

10. A woman went to the doctor who told her she only had 6 months to live.
“Oh No!” said the woman. “What shall I do?”
“Marry an accountant,” suggested the doctor.
“Why?” asked the woman. “Will that make me live longer?”
“No,” replied the doctor. “But it will SEEM longer.”

11. How many accounts does it take to screw in a light bulb? How many did it take last year?

12. Some say that nobody should keep too much to themselves. The IRS office is of the same opinion.

13. What do you call a financial controller who always works through lunch, takes two days holiday every two years, is in the office every weekend, and leaves every night after 10 p.m.? Lazy.

14. Accountant after reading a nursery rhyme to his child, “No, son. It wouldn’t be tax deductible when Little Bo Peep loses her sheep. But I like your thinking.”

15. What do you call an accountant without a spreadsheet? Lost.

16. How do you drive an accountant completely insane? Tie them to a chair and mess up their excel formulas.

17. Why are accountants always so calm, composed, and methodical? They have strong internal controls.

18. Why do accountants get excited at the weekends? Because they can wear casual clothes to work.

19. Did you hear about the deviant Forensic Accountant? He got his client’s charges reduced from gross indecency to net indecency.

20. There are 3 types of accountants. Those who can count and those who can’t.

21. A fine is a tax for doing wrong. A tax is a fine for doing well.

22. What do you call an accountant without a calculator? Lonely.

23. How can you tell when the chief accountant is getting soft? When he actually listens to marketing before saying no.

24. Where there’s a will, there’s a tax shelter.

25. What would an accountant want for a superpower? Telepathy with an excel spreadsheet.

26. How does Santa’s accountant value his sleigh? Net Present Value.

27. What do you call a trial balance that doesn’t balance? A late night.

28. An accountant is having a hard time sleeping and goes to see his doctor. “Doctor, I just can’t get to sleep at night.” “Have you tried counting sheep?” “That’s the problem – I make a mistake and then spend three hours trying to find it.”

29. Why does Santa like visiting the UK? He can claim Gift Relief.

30. Accountants don’t die, they get derecognized.

31. America is the land of opportunity. Everybody can become a taxpayer!

32. What’s the difference between death and taxes? Congress doesn’t meet every year to make death worse.

33. Ever wonder why they call it a Form 1040? For every $50 you earn, you get $10, they get $40.

34. The best things in life are free — plus tax, of course.

35. Why did the auditor cross the road? Because he looked in the file and that’s what they did last year.

36. Children may be tax deductible, but they’re still taxing.

37. A farmer sends his accounting sheepdog, Spot, off to gather in his 8 sheep. On returning the farmer is astonished to find he now has 10 animals in his pen and asks the dog to explain. “Woof! You asked me to round them up, woof”, barks Spot.

38. Why don’t skunks have to pay taxes? Because they only have one scent.

39. How do you know when an accountant’s having a mid-life crisis? He gets a faster calculator.

40. Welcome to the Accounting department, where everybody counts.

Here is a simplified comparison:

While the list above displays their differences, there are also similarities. The first similarity is that both plan their audit effort around the areas that pose the highest risk to the achievement of company objectives. The second similarity is that both types of audits assess internal controls to determine if they are in place and working to ensure the reliability of financial data. Internal audits, which have a heavier focus on controls, usually add coverage of controls that help ensure effectiveness and efficiency of operations, compliance with laws and regulation, and safeguarding of assets. A third similarity is that both types of audits are performed in accordance to certain professional standards — such as the Statement on Auditing Standards for external audits and the International Standards for the Professional Practice of Internal Auditing for internal audits.

With all their similarities and differences, both types of audit services can play an important role in creating an effective governance structure and can help contribute to the company’s success. If you have questions about the internal or external audit process, please contact us.