Tuesday, September 25, 2007

Employee or Independent Contractor

Many businesses try to avoid having employees. "We'll just call everyone an independent contractor." Unfortunately, this is an approach that can be fraught with risk.

The IRS has a 20 question test they will use to determine if an individual is an independent contractor or an employee. Key questions include:
  • Does the individual set their own hours?
  • Does the individual provide their own equipment or is it provided by the business?
  • Does the individual supervise themselves or are they supervised by the business?
  • Does the individual perform these services for other entities?

Generally speaking, the IRS will decide someone is an employee.

I've dealt with this issue several times over the years, and it just came up again this morning. We have a client that is going to get a large capital investment from an investment fund. The investment fund's attorneys asked this morning if the people performing service for the company are really independent contractors or employees. The issue here was the investment fund wants to make sure they are aware of all liabilities as of the date of investment. If the IRS was to come in and retroactively decide the independent contractors were actually employees, there would be back payroll taxes, workers compensation and sundry other liabilities. Fortunately, our client was in the clear on this.

Post investment, we expect this client to really ramp up operations and hire full time employees. And put them on payroll.

Monday, September 24, 2007

IRS Offers Guide for Homeowners in Foreclosure

From my friends at the Michigan Association of Certified Public Accountants:

The IRS unveiled a special new section on IRS.gov for people who have lost their homes due to foreclosure. The IRS also reassured homeowners that, although mortgage workouts and foreclosures can have tax consequences, special relief provisions can often reduce or eliminate the tax bite for financially strapped borrowers who lose their homes. The question and answer page on IRS.gov has a variety of information, including a worksheet designed to help borrowers determine whether any of the foreclosure-related relief provisions apply to them.

Disclosing Climate Change

The California Public Employees' Retirement System, asset managers, and environmental groups filed a petition with the Securities and Exchange Commission (SEC) on September 18, 2007, asking the agency to issue interpretive guidance that addresses how climate change and related risks must be incorporated in corporate disclosures under existing law. The group says the risks many corporations face regarding climate change are material to shareholder investment decisions.

This is a very interesting notion, and one that I haven't encountered, or, for that matter, ever even thought of.

An entity's financial statements are supposed to disclose various contingencies, as required by Statement of Financial Accounting Standards, No. 5, Accounting for Contingencies. Other accounting standards require disclosing various risks faced by the entity. For example, an entity should disclose the existence of customer's that comprise more than 10% of revenue. The thinking - the reader of the financial statement should be aware of that and the risks associated with it. Say a business has one customer that comprises 69% of revenues. The entity would likely be in trouble if it lost that customer.

Same thing goes for economic risks. Assume the entity is a bar that is located right across the street from a factory. If the factory goes, the bar probably does too. The reader of the financial statements would want to know that.

Which is why I am intrigued by this petition. Assume you are reading the financial statements of an entity that is located right on the water. Because of global warming, the entity might literally be under water in 10 years. I think that is something that the reader of the financial statements would want to know.

This is an interesting topic and one I am going to try to continue to follow.

Thursday, September 20, 2007

Update on FASB Financial Statement Presentation Project

The Financial Accounting Standards Board ("FASB") has an ongoing joint project with the International Accounting Standards Board ("IASB") relating to financial statement presentation. According to the FASB:

(The) joint FASB/IASB project was undertaken to establish a common, high-quality standard for presentation of information in the financial statements, including the classification and display of line items and the aggregation of line items into subtotals and totals. The objective of this standard is to present information in the individual financial statements (and among the financial statements) in ways that improve the ability of investors, creditors, and other financial statement users to:
  • Understand an entity’s present and past financial position
  • Understand the past operating, financing, and other activities that caused an entity’s financial position to change and the components of those changes
  • Use that financial statement information (along with information from other sources) to assess the amounts, timing, and uncertainty of an entity’s future cash flows.

What does this mean? Essentially, this is a part of the project to bring US accounting standards and international accounting standards together. This really is an important project, as in theory it make it easier for investors to understand financial information.

But what caught my eye was an announcement that the IASB revised their standards on financial statement presentation to be in conformity with FASB Statement 130, Reporting Comprehensive Income. Statement 130 introduced the concept of other comprehensive income. Items reported as comprehensive income under 130 includes changes in fair value of certain investments, changes in value in certain derivatives such as interest rate swaps, and other specific items. The standard writers didn't think these items should be reported as part of net income, but thought there should be a way to report this.

So they came up with other comprehensive income. I was hoping that concept would go away, not spread internationally.

The concept behind it all makes sense. But I had a client do an interest rate swap last year which resulted in having to make all sorts of changes to the statements and I had to explain to them why we needed to have a new financial statement reporting other comprehensive income.

Here is to hoping the next aspect of this project makes things easier for people to understand.

Tuesday, September 18, 2007

COSO Releases Discussion Document with Guidance on Monitoring Internal Control

Got this in my morning round up:

On September 17, 2007, the Committee of Sponsoring Organizations of the Treadway Commission (COSO) released a new discussion document, Guidance on Monitoring Internal Control Systems, and requested public comments. Developed by COSO and led by a team from Grant Thornton LLP, the guidance is designed to help organizations monitor the quality of their internal control systems.

The guidance applies to the internal control objectives over financial reporting, as well as the objectives related to effective operations and compliance. In addition, it includes the principles of effective internal control over financial reporting developed by COSO in 2006, and reiterates the importance of those principles to all organizations, regardless of size.

Topics covered by the guidance include:

  • monitoring as a component of internal control systems;
  • the fundamentals of monitoring;
  • the nature of information used in monitoring;
  • designing effective monitoring;
  • communicating and addressing the results of monitoring;
  • the scalability of monitoring; and
  • the principles of effective internal control over financial reporting.

Through an online feedback portal, COSO is asking specific questions about the clarity and applicability of the guidance. The comment period will end on October 31, 2007. Input from respondents will be used in developing an exposure draft, to be released later this year, including tools, case studies, and implementation guidance. The final full publication is scheduled for release during the first quarter of 2008.

In case you don't know, the COSO principles are kind of best of breed when it comes to considering internal control systems, and the Public Company Accounting Oversight Board especially likes it.

Tuesday, September 11, 2007

Not a Good Day For Kwame Kilpatrick

It took the jury all of 3 hours to convict Detroit Mayor Kwame Kilpatrick in a whistle blower lawsuit brought against him by two former Detroit police officers.

From my casual following of the case, the verdict is the correct one.

But the city, not Kilpatrick, is on the hook for $6.5 million. That doesn't seem quite right.

Michigan Business Tax and FAS 109

I get lots of emails from the Michigan Association of Certified Public Accountants. Here is an excerpt from one I got yesterday:

Senate Bill 687, introduced in late August, proposes a technical fix to the new Michigan Business Tax as it relates to FAS 109. Due to the mechanics of the accounting rules under GAAP, many companies in Michigan are facing an adverse earnings impact in the current calendar quarter from the implementation of the MBT. GAAP requires that a tax expense be recognized for book purposes when book income exceeds income reports on a tax return. Many people doing business in Michigan that have recorded such “deferred tax” liability in prior years are now facing the requirement of adjusting their liability for the MBT by recording a one-time increase in their tax expense that will have the effect of lowering their earnings in 2007. Senate Bill 687, which met successful passage in the State Senate on August 30, would prevent calendar-year companies from recording a charge to earnings in their current calendar quarter. As long as this proposal is enacted by the end of September, companies will not be forced to adjust their liability.

So what does this mean? The current Michigan Single Business Tax (SBT) is not an income tax. Therefore, the expense from it does not get reported in the line item "Provision for income taxes" that would show up just before "Net Income." Instead, it is reported as a component of selling, general and administrative expenses.

However, the new MBT, unlike SBT, is partially based on income. When you have taxes based on income, you become subject to FAS 109, Accounting for Income Taxes. FAS 109 is what explains how to calculate deferred tax assets and liabilities for temporary differences between financial and tax income. The common deferred tax item is accelerated depreciation for tax purposes.

Here is the big problem as I see it: Assuming that S Corporation and LLCs are going to have to pay this tax, they will, if material, have to start reporting deferred tax assets and liabilities for the income tax portion of the MBT, and the income tax portion of the MBT will be reported in the provision line in the income statement.

I'm not excited about this.

Thursday, September 6, 2007

Info on the New Michigan Business Tax

The Michigan Department of Treasury website now has a Michigan Business Tax overview, analysis and FAQ. The Michigan Business Tax taxes effect in January 2008. Taxpayers expecting to have a 2008 tax liability exceeding $800 must file quarterly estimates.

Tuesday, September 4, 2007

A New Question I'm Going To Ask Clients

I was reading an interesting article called Why CPAs Lose Clients and picked up on an interesting quote:

“When was the last time you asked your client what they need instead of telling them what services you can offer them?”

The question was asked by Allan Boress, a fellow CPA and CFE who helps professionals grow their practices.

What a simple question. I wish I had thought of it myself. I'm going to start asking it.