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Summing It Up

Keeping you ahead of the curve with timely news & updates.


Tax Effects of Intercompany Asset Sales: FASB's New Financial Reporting Requirements

ASU 2016-16 Adds Transparency and Simplifies Reporting

FASBReportingRequirements_iStock-542189312-240957-edited.jpgThe presently prescribed method of accounting for income taxes on the sale of assets between affiliated companies (intra-entity transfers) has in recent years generated discord between accounting professionals and the Financial Accounting Standards Board (FASB). With FASB’s October 24, 2016 issuance of ASU 2016-16, however, the concerns of the accounting profession in this respect have been largely addressed.

FASB stipulations to this point have required that recognition of the income tax effects of intra-entity transfers be deferred until the asset is subsequently sold outside the affiliated group, a rule running counter to the general ASC 740 principle that current and deferred income taxes be recognized in the year that the event triggering them occurs.

Under the newly enacted ASU 2016-16, this deferral methodology goes away for all intercompany asset sales other than sales of inventory (which will remain under the previous FASB guidance). Companies will now be required to recognize the income tax effects (current and deferred) of intercompany non-inventory asset sales in the period in which they occur, despite the transaction being eliminated from consolidated pre-tax income. Thus, this new guidance both simplifies the accounting procedures for intra-entity transfers and adds transparency to their financial reporting, as the income statement tax effects recorded will typically coincide with any cash tax impact incurred in the same reporting period.

While FASB did not prescribe new financial statement disclosure requirements in this pronouncement, it has commented that existing disclosure requirements may apply to intra-entity transfers and their tax ramifications. For instance, companies may have to cite the tax effects of intra-entity transfers within their effective tax rate reconciliations or in disclosing the types of temporary differences giving rise to their deferred tax assets and liabilities.

ASU 2016-16 becomes effective for publicly traded companies in years beginning after December 15, 2017, including interim periods within those years (i.e., first quarter of 2018 for calendar-year companies). For non-public entities, they become effective for annual reporting periods beginning after December 15, 2018 and for interim reporting periods within annual reporting periods beginning after December 15, 2019. Early adoption is permitted, but can only occur in the first quarter of a reporting year (e.g., first quarter 2017 for calendar year companies).

Questions? Contact us to discuss the new reporting requirements and what they might mean for your company.

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Asset Based Lenders Need to Understand the New GAAP Exceptions

Author: John Costello

FASB releases new ASUs regarding alternate reporting methods but don’t worry – it’s good news for Asset Based Lenders!

For a number of years, small businesses and their accountants have complained about the growing complexity and costs of complying with Generally Accepted Accounting Principles (GAAP). That led the Financial Accounting Standards Board (FASB) to solicit feedback from private company lenders and other stakeholders about the usefulness of certain complex accounting rules.

Accounting standard updatesThe feedback showed that many lenders are disregarding complicated accounting measures — including the subsequent reporting of impairment losses, goodwill following business combinations, and simple interest rate swaps — when evaluating a business’s financial condition and operating performance.

In January 2014, FASB released a couple of Accounting Standards Updates (ASUs) that offer private companies some alternate reporting methods. It’s critical for lenders to understand the new GAAP exceptions, which will go into effect for most private businesses at the end of 2014. Early adoption is permitted, as well.

Reporting Goodwill After a Merger or Acquisition

The first GAAP exception for private businesses applies to those that report goodwill following an acquisition or a merger. According to FASB Accounting Standards Codification Topic 350, Intangibles Goodwill and Other, goodwill is “a residual asset calculated after recognizing other (tangible and intangible) assets and liabilities acquired in a business combination.”

But, put another way, goodwill is the portion of the purchase price that’s left over after a buyer allocates fair value to all identifiable liabilities and assets. Goodwill can actually be a valuable asset. It’s commonly associated with professional practices, but retailers, manufacturers and even contractors can possess certain elements of goodwill that are transferable in a business combination.

The fair value of goodwill can decrease over time, particularly if a deal doesn’t live up to the buyer’s expectations. So GAAP requires that companies test for impairment. This occurs when the carrying value of goodwill exceeds its fair value. Nonprofits and public companies must test for impairment at least annually. And if triggering events occur, impairment testing should be even more frequent. (See the sidebar “Watch out for triggering events.”)

ASU 2014-02, Intangibles — Goodwill and Other (Topic 350): Accounting for Goodwill, offers a different method for private companies that acquired goodwill in a business combination. Instead of testing for impairment each year, private companies can elect to amortize goodwill straight-line over 10 years (or fewer, if they can justify a shorter useful life). Private businesses still need to test for impairment whenever a triggering event occurs. But they must compute impairment at only the entity level.

So, here’s what lenders must know about the goodwill exception’s alternate method: Smaller numbers of private borrowers will incur impairment losses, because amortization will automatically lower the carrying value of any goodwill over time. Moreover, the alternate method also reduces the need for valuations and makes reporting more predictable.

Understand that, because impairment is tested at the entity level, strong business segments may temporarily hide any “underperforming” acquisitions. So if a private borrower reports impairment under the alternate method, you should take it seriously.

An Easier Method for Interest Rate Swaps

The second GAAP exception applies to normal interest rate swaps. Following the recent financial crisis, certain borrowers could get only variable rate loans. So, they used simple interest rate swaps to get the consistency of fixed-rate payments. However, this strategy inadvertently opened up a can of worms of complex, and costly, accounting requirements that many private businesses weren’t prepared to handle.

Under GAAP, swaps are usually considered derivatives that must be reported at fair value. ASU 2014-03, Derivatives and Hedging (Topic 815): Accounting for Certain Receive-Variable, Pay-Fixed Interest Rate Swaps — Simplified Hedge Accounting Approach, offers another method. It allows a private company to measure qualifying swaps at settlement value, rather than fair value. That means interest expense is pretty much the same as if the borrower had entered into a fixed-rate loan directly.

Private borrowers can choose the alternate method on a swap-by-swap basis. New and existing swaps alike may qualify for the simplified treatment.

FASB is hoping that the alternate method will make financial statements much easier to understand and a lot less costly to prepare for small businesses. And lenders can expect to see fewer confusing earnings fluctuations that used to result from changes in the fair value of borrowers’ simple interest rate swaps.

A Welcome Change

Certain accounting rules were originally drafted with public companies in mind. Small businesses tend to operate more simply, though, so FASB’s move to allow exceptions for private companies is highly lauded by many small companies and their constituents.

Even if there are no impairment losses recorded when a triggering event occurs, that event can still compromise debt service and disrupt operations. If you notice one or more of these events when monitoring your clients, ask about how management plans to mitigate its adverse effects.

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Freed Maxick’s Asset Based Lending Team works with dozens of asset based lenders across the country. We can help you reduce the risk of lending or assist your clients with our business advisory, audit, fraud detection and prevention, and tax services.

For more information about our business advisory, audit, and other accounting services contact us here, or call us at 716-847-2651.

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Tax Update

FASB reaches Consensus and Ratifies EITF Issue No. 13-C

On June 26, 2013 the Financial Accounting Standards Board effectively ratified the guidance provided by the Emerging Tax Force Issue No. 13-C. The following is a summary of the consensus:

  • Unrecognized tax benefits should be netted against tax losses or credit carryforwards from the same jurisdiction that could be utilized to offset the UTB.  The UTB would reduce the deferred tax asset established for these losses or credits and would not be recorded as a separate liability.

  • The new standard requires prospective adoption but allows optional retrospective adoption (for all periods presented).

  • For public companies, the standard must be adopted in years beginning after December 15, 2013 (and in interim periods).

  • For private companies the standard must be adopted in years beginning after December 15, 2014 (and in interim periods).

  • No new disclosures are required. However, if the gross amount of the loss or credit (i.e. the amount listed on the income tax returns as-filed) is disclosed, then further explanation may be needed to explain the difference on the returns versus the amount in the financial statements.

  • At this time, it appears as if the SEC requirements for the disclosure of UTBs will not change. Therefore, the gross amount of UTBs would still appear in the footnote disclosure.

  • It will still be important to continue to track the UTBs. For example, there could be an adjustment to the UTB presentation if the position on the UTB changes, or if the loss or credit carryforwards are used. Similarly, if the loss or credit has a full valuation allowance against it, then the VA could change as well if the UTB is no longer necessary. 

When it comes to taxes, Freed Maxick CPAs is different than most accounting firms in Western New York. To us, tax time is all the time. We’re sticklers about deadlines and compliance, but our larger goal is tax management. So we keep a year-round eye on federal, state and local tax laws, including those pending. We alert you to any changes that may affect you and help you respond in a timely way.

We have no doubt that we bring a level of in-house tax expertise second to none in Upstate New York. We have the experience and resources necessary to resolve all your tax issues no matter what the complexity, including:

ASC 740
Canadian Services
Capitalization vs. Repair 
Cost Segregation Services
Foreign Bank Account Report Compliance
IC-DISC
International Tax Services

New York (NY) State Excelsior Jobs Program
Personal Tax Services
Research & Development (R&D) Tax Credits
State and Local Tax Services
State Tax Analysis & Resolution
Tax Credits
Tax Planning and Consulting
Transfer Pricing Analysis – Study
Tax Planning and Consulting

CONTACT US Freed Maxick CPAs is Western and Upstate New York’s (NY) largest public accounting firm and a Top 100 firm in the U.S. Freed Maxick provides audit, tax and consulting services to closely-held businesses, public (SEC) companies, not-for-profits and governmental entities in Buffalo, Rochester, Syracuse, Albany and NYC, New York.

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