A Message to Our Valued Clients

In the interest of public health and the safety of our community, and in compliance with Governor Cuomo’s executive order, Freed Maxick has suspended onsite client work and cancelled all office visits. Meanwhile, our team is working remotely to provide the same high-quality service you have come to expect. Utilizing the best technology at our disposal, we will continue to meet all of your audit, tax, and advisory needs and help you navigate the business implications of the pandemic as it unfolds. You can reach your Freed Maxick representative directly by email or phone, or contact our main line at 716.847.2651.


Summing It Up

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

To Reduce the Risk of Lending, ABL’s Need to Scrutinize Audit Opinion Letters

Author: Robert Wood

Different types of opinions have different implications for understanding the issue of “going concerns”

Accountants reconsider the “going concern” assumption each time they audit a financial statement. When the long-term viability of a borrower is in doubt, it may cause a CPA to issue a qualified audit opinion. And in a worst-case scenario, the accountant may withdraw from the job altogether.

Financial statements are typically prepared with an assumption that the company will remain a going concern. That is, the entity is expected to continue to meet its obligations in the ordinary course of business and generate a positive return on its assets.

Viability Concerns affecting Financial Statements

At times, auditors discover adverse events and conditions that can cast substantial doubt on a company’s ability to continue as a going concern over the next year.

Some possible red flags include:

  • Working capital deficiencies,
  • Loan defaults and debt restructurings,
  • Pending lawsuits and investigations,
  • Negative operating cash flow, and
  • Labor union conflicts and work stoppages.

When an auditor rejects the going concern assumption, he or she may adjust balance sheet values to liquidation values, instead of historic costs. Footnotes can also report going concern issues. Moreover, the auditor’s opinion letter (which serves as a cover letter to the financial statements) could be downgraded when uncertainties arise.

Understanding an Audit Opinion

An audit opinion can vary depending on available information, errors discovered during audit procedures, financial viability and other limiting factors. The cleanest and most desirable type of audit opinion is known as an “unqualified” one. With this type, the auditor states that the business’s financial condition, operations and position are fairly presented in the financial statements.

If there are any uncertainties regarding the going concern assumption, the auditor will likely issue a “qualified” opinion and disclose the nature of the uncertainties in the footnotes. An auditor may also choose to issue a qualified opinion if the financial statements seem to contain a small deviation from Generally Accepted Accounting Principles (GAAP), but they’re otherwise fairly presented — or if the borrower limits the scope of audit procedures.

But there are much less desirable opinions, known as “adverse opinions.” They indicate that there are material exceptions to GAAP that will affect the financial statements as a whole.

But by far the most alarming opinion is a disclaimer. It occurs when the auditor gives up mid-audit. Reasons for a disclaimer may include significant uncertainties and scope limitations within the subject company itself. Many lenders won’t accept financial statements that have this designation. In addition, lenders are likely to call the loan unless the borrower takes corrective action.

Unexpected change of auditors

Some auditors will pull the plug on long-term audit clients before they even start fieldwork if they believe there’s a need to issue a disclaimer or an adverse opinion. Sometimes the client replaces their auditors if they question long-term viability.

No matter who initiated the switch, a sudden, unexpected change of auditors could lead to going concern issues.

The future of going concern assessments

As of now, an auditor will assess a period of one year beyond the financial statement date when evaluating the going concern assumption. But last summer, the Financial Accounting Standards Board (FASB) proposed a rather controversial change to GAAP that would mandate more frequent going concern assessments and require a longer assessment period.

Under the proposal, a client’s footnotes would discuss when it’s “more likely than not” that a business won’t meet its obligations within a year without taking action outside the normal course of business — or if it’s “known or probable” that it won’t meet these obligations within two years.

Over the last five years, businesses, regulators, auditors and other stakeholders have tried to determine how to reduce diversity in financial reporting about going concern issues. A final amendment to these rules isn’t expected until FASB can work out the problems in its latest proposal.

Monitoring viability

So, what’s the bottom line? Lenders should pay attention to audit opinion letters. The type of opinion expressed can have serious implications about your client’s ability to operate as a going concern. And downgraded opinions warrant your immediate attention.


asset based lendingFreed 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.

View full article

3 Places Where Asset Based Lenders Can Hunt Down Borrower’s Hidden Risks and Liabilities

Author: Paul Muldoon

Beware of bloated assets, understated liabilities, and unrecorded items.

cash_in_pocket.jpgMany liabilities may be out of sight, but never out of a lender’s mind. For instance, a client’s balance sheet doesn’t list pending claims, contingent costs or underfunded accounts. A proactive lender will search for undisclosed risks in order to get a complete view of their borrowers’ financial health.

Beware of Bloated Assets

The search for risks and undisclosed liabilities begins with assets. For each asset, ask yourself what could cause the account to diminish. For instance:

  • Inventory may include damaged goods. 
  • Accounts receivable may include bad debts.
  • Some fixed assets may be broken or in desperate need of repairs and maintenance.

As you can imagine, such items compromise a client’s credit standing and affect its financial ratios just as much as unreported liabilities do.

Some problems may be uncovered simply by touring the business’s facilities or reviewing asset registers for slow-moving items. And benchmarking can help.

For instance, if a borrower’s receivables are growing faster than sales, it may be a sign of aging, uncollectible accounts. Or, if a client’s repairs and maintenance expense seems low when compared to historic levels or industry norms, it might signal neglected upkeep on assets, which can be a huge gamble over the long run.

Look for Understated Liabilities

Next take a look at the borrower’s liabilities on the balance sheet and ask if the amount reported for each item is complete and accurate. A business may try to understate its liabilities in order to appear stronger or to comply with its loan covenants.

For instance, borrowers may forget to accrue liabilities for vacation time or salaries. Some might even underreport payables by holding checks for weeks (or even months). This tactic preserves the checking account while giving a lender the impression that supplier invoices are actually being paid.

Other clients might hide bills in a drawer at year end in order to avoid recording the payable and the expense. This “scam” mismatches expenses and revenues, artificially enhances profits, and understates liabilities. Moreover, delayed payments can hurt the business’s credit score and even cause suppliers to restrict their credit terms.

Uncover unrecorded items

Make sure you investigate what isn’t showing up on the balance sheet. Examples include pending lawsuits, warranties, an IRS investigation or an underfunded pension. When available, look at the balance sheet footnotes. They may shed additional light on the extent and nature of these contingent liabilities.

These risks appear on the balance sheet only when they’re “more than likely” to be incurred and “reasonably estimable.” They are subjective standards. Some borrowers may claim that liabilities are too unpredictable or remote to warrant disclosure.

Lenders should also consider the goodwill (or badwill) that’s attributable to the company’s owners and top managers. For instance, certain “key” people may be so critical to the company’s success that their unexpected departures might expose the entity to financial hardship. On the other hand, people who are exceptionally tax averse, risk-seeking or unethical can put the company at risk for IRS inquiry, lawsuits, and insurance and warranty claims.

Work with a pro

If a business’s financial statements are audited, the auditor will automatically test for these hidden risks and liabilities. They also watch for any exaggerated asset balances. Keep in mind that compiled or reviewed statements aren’t subject to the same level of scrutiny.

For added assurance from any questionable borrowers, ask for an agreed-upon-procedures engagement that can target high-risk areas and anomalies. If a ratio analysis reveals unusual trends based on the client’s track record or industry benchmarks, you may want to meet with the borrower and its accountant in order to hunt for any hidden liabilities and risks.


reducing the risk of lendingFreed 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.

View full article

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.


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.

View full article

5 Ways That Asset Based Lenders Help Protect Borrowers Against Skimmer Fraud

Author: Michael Boeheim

Skimmer fraud is a global epidemic – are you stepping up to the plate and helping your borrowers?

Skimmer fraud costs businesses billions of dollars annually in the United States, according to a report released in February by the Association of Chartered Certified Accountants USA (ACCA) and Pace University.

The average loss per skimmer scam was around $50,000 in 2011 — up from some $30,000 in 2010. Unfortunately, this trend isn’t showing any signs of stopping.

Skimmer scams can damage a business’s reputation, compromise its ability to service debt and generate financial losses. Even though it’s most common among restaurants and retailers, skimmer fraud is a risk for any business that takes electronic payments.

What is “Skimmer Fraud”?

“Skimmers” are electronic devices that are used to read and store electronic data. They can be installed directly on ATMs, gas station pumps and point-of-sale terminals to extract data from magnetic stripes on payment cards. Some schemes even use small cameras to simultaneously record personal identification numbers (PINs).

After skimming the electronic data, thieves will usually clone payment cards. The phony cards might be used to purchase high-end goods that can sell quite easily on the black market or online marketplaces.

U.S. is Vulnerable to These Threats

Skimmer fraud has become a global epidemic, which is often perpetrated by Eastern European crime rings. Unfortunately, the United States is especially vulnerable to these threats. Why? For one thing, it has more ATMs than any other nation, and U.S. credit cards don’t contain global chips, which makes them easier to skim and clone.

Restaurants in the United States also typically swipe customers’ cards away from the table, which creates an opportunity for dishonest restaurant staff to skim a patron’s electronic data using handheld devices. In other countries, however, payment cards are swiped at the table, never leaving diners’ sight.

While skimmers have been around for years, today’s devices are smaller, they have more memory and they incorporate advanced encryption methods that can make them harder to detect. Some skimmers even use wireless technology. In January, 13 people were indicted for operating a skimmer fraud ring. They stole upwards of $2 million using Bluetooth-enabled skimmers at gas stations.

How to Prevent or Mitigate Skimmer Scams

There are several ways you can protect your borrowers from skimmer scams. Here are just a few:

  • Inspect card readers for tampering and using skimmer detection cards.
  • Install surveillance cameras to record activity at ATMs, gas stations and ticket kiosks.
  • Prohibit cashiers from leaving their registers or terminals.
  • Require employees to swipe payment cards in customers’ plain view.
  • Equip point-of-sale terminals with anti-skimming devices.

U.S. retailers are also validating transactions using ZIP codes, driver’s licenses or PINs. What does the future hold? Look for biometric data — such as fingerprints or irises — to authenticate transactions.

Keep Abreast of Skimmer Fraud

If you want more information on the ACCA’s report, look for “skimmer fraud” on the association’s website (http://www.accaglobal.com). In addition, work our  forensic accounting team. We can provide additional information on prevention and detection.


asset based lendersFreed 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.

View full article

Don’t Let Your Client Miss the Domestic Production Activities Deduction

Author: Robert Wood, CPA, Principal

Make Your Clients’ Aware of DPAD – An Often Overlooked Tax Deduction

ABLThe end of the year is a great time to revisit certain tax-saving opportunities, especially Internal Revenue Code Section 199, involving the Domestic Production Activities Deduction (DPAD). If you are an asset based lender with clients who aren’t aware of the DPAD, or are simply intimidated by its perceived complexity, you can do a great service for them by raising awareness of the possibility that they might be leaving money on the table.

Production activities that qualify

Do you have clients in any of the following lines of business? They may qualify for the DPAD:

  • U.S.-based construction services, including renovation and building of commercial and residential properties,
  • U.S.-based manufacturing,
  • Architectural and engineering services relating to a U.S.-based construction project,
  • Leasing, selling or licensing items manufactured in the United States,
  • Leasing, selling or licensing motion pictures or recordings that are produced in the United States, and
  • Software, including all video game development in the United States.

In addition to the above list, mining, oil extraction and farming also qualify as domestic production activities. Moreover, businesses qualify even if their products are partially produced in the United States. Safe harbor rules allow businesses to take the DPAD if at least 20% of total costs result from direct labor and overhead costs incurred domestically.

Mind the limitations

The lines of business that are specifically excluded from claiming the DPAD include leasing or licensing activities to a related party, cosmetic construction services (such as decorating or painting ), and selling food or beverages prepared at a retail establishment.

The DPAD is generally equal to 9% of the lesser of a borrower’s qualified production activities income (known as QPAI) or its taxable income (or adjusted gross income for estates, individuals, and trusts). The DPAD generally can’t exceed 50% of W-2 wages paid to employees.

Understand the mechanics

If a client engages in only qualified domestic production activities, the QPAI will typically equal its taxable income. Companies that manufacture or produce partially outside the United States must implement cost accounting mechanisms to make sure their tax deduction is calculated accurately.

To show how the deduction works, suppose ABC manufactures widgets in the United States. The revenue from domestic widget manufacturing is $4 million, with $2 million of domestic manufacturing costs. ABC also reports $500,000 of income derived from repairing software, which doesn’t qualify as a domestic production activity. Total W-2 wages were $600,000, including $400,000 to provide needed repair services.

The QPAI thus equals $2 million ($4 million of software revenues - $2 million of manufacturing costs). ABC can deduct $180,000 under IRC Section 199 (9% × $2 million of QPAI), assuming ABC has at least $180,000 of taxable income. Moreover, the deduction would be limited to W-2 wages attributable to software production ($600,000 - $400,000 = $200,000).

This is a simplified example. S corporations and other pass-through entities also qualify for the DPAD, which reduces their owners’ personal tax obligations. Eligible borrowers should revisit their calculations and consult a tax professional to ensure full compliance and adequate documentation.

Freed Maxick’s Asset Based Lending Team works with dozens of asset based lenders across the country. We can assist you in helping you show your clients ways to minimize their taxes.

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

View full article

Smart ABL Lenders Use Cash Conversion Cycles to See Borrowers’ Liquidity Problems

Author: Robert Wood, CPA, Principal

Guidance on Factoring Timing into the Liquidity Equation

how asset based lenders reduce risk of lendingAs you know, many loan covenants include a minimum liquidity threshold based on static metrics, such as the quick ratio or current ratio. Asset based lenders have learned the hard way that a large decline in liquidity can foreshadow bankruptcy. But few banks consider (or even know about) the cash conversion cycle (CCC), which factors timing into the liquidity equation.


Understanding liquidity

The term “liquidity” refers to an asset’s nearness to cash. For instance, current assets (those that will be consumed or converted to cash within the next 12 months) determine a company’s liquidity. Marketable securities are generally more liquid than trade receivables, which in turn are typically more liquid than inventories.

Common liquidity metrics

Static liquidity measures tell whether a company’s current assets are sufficient to cover its current liabilities. A loan agreement, for example, may require a borrower to maintain a current ratio of 1.75. What this means is that, for every $1 of current liabilities, the client should have at least $1.75 of current assets.

The quick ratio (also known as the acid-test) is a more conservative static liquidity measure. It compares the most liquid current assets, such as cash, trade receivables and marketable securities, to current liabilities.

Pretend you’re comparing two borrowers. Borrower A has a current ratio of 2.5 and a quick ratio of 1.8. Borrower B, on the other hand, has a current ratio of 1.5 and a quick ratio of 1.0. Both borrowers have sufficient current assets to cover their current liabilities, but Borrower A seems to be more liquid and, thus, healthier. But, if you compute the CCC, you may very well come to a different conclusion.

The CCC difference                           

Current ratios assume that cash, inventories and receivables are all immediately available to pay off any debt. The CCC accounts for the timing of converting all current assets to cash and then paying off current liabilities. It’s really a function of three other ratios: CCC = Days in Inventory + Days in Receivables - Days in Payables.

As you can see, the CCC gauges how efficiently a client manages working capital. A positive CCC shows the number of days a company must borrow or tie up capital while waiting for payment from customers. A negative CCC, however, represents the number of days a business has received cash from customers before it has to pay its suppliers. A strong borrower will have a low or even negative CCC.

Who is more efficient now?

If we return to the example, let’s suppose that Borrower A maintains 60 days in inventory, 80 days in receivables and 30 days in payables, which generates a CCC of 110 days. But, let’s suppose Borrower B has 45 days in inventory, 45 days in receivables and 60 days in payables, which generates a CCC of 30 days. All of a sudden, Borrower B looks a lot more efficient. Why?

Borrower B is carrying less inventory and incurring lower carrying costs. It also collects from customers much faster than Company A is. Plus, it extends its payments to suppliers longer, therefore taking advantage of a form of interest-free financing.

So, based on our expanded liquidity analysis, Company B looks a lot stronger, so long as its inventories can meet customer demand, suppliers aren’t angry with the two-month lead time on payables, and collections are without excessive early bird discounts.

The bottom line

The CCC offers greater insight into a borrower’s liquidity position over time when used in conjunction with traditional static measures of liquidity. But before you make any credit decisions, make sure you evaluate other metrics, such as profitability, leverage and growth, and then compare the borrower to others in its industry.

Freed Maxick’s Asset Based Lending Team works with dozens of asset based lenders across the country. We can assist you in evaluating the integrity of your loan portfolio using CCC and other types of analyses.

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

View full article

Asset Based Lenders Must Analyze Their Borrower’s Expansion Strategies

Author: Paul Muldoon, CPA, CIE, CFE, Senior Manager

Be the voice of reason when it comes to customer growth.

ABLWhether a client’s business growth happens through internal expansion or external acquisition, they share certain denominators. Borrowers usually need more capital — either private equity or debt — to achieve their objectives. And these entrepreneurs tend to overestimate how they will perform while underestimating timing and financing constraints.

Asset based lenders often serve as the voice of reason by 1) reviewing expansion plans skeptically — that is, by asking key questions — before approving an expansion or acquisition loan, and 2) requiring borrowers to provide financial statement projections and other analyses.

Clients have several expansion strategies from which to choose. And lenders should analyze these tactics carefully.

Build from within

Clients can take the slow and steady path by stepping up sales themselves. Internal growth strategies might include building a new plant, developing a new product or service, purchasing new machinery or expanding into new markets.

But, building from within isn’t without its drawbacks. First, management must devote a lot of time to marketing and selling, which means there’s less time for normal operations. This scenario can be especially disruptive for a business that relies on just a few key individuals. Likewise, integrating new equipment or facilities can consume time at the expense of customer service and existing sales.

Moreover, new products may cannibalize existing ones, or a new target market might reject a product extension. Conducting preliminary tests via free trials, surveys and focus groups is an inexpensive way to avoid costly marketing miscalculations.

Consider an acquisition

Purchasing another business is the fast track for growth. An acquisition usually provides assets and an established track record, including a pre-existing client base, immediate cash flow, an assembled workforce and customer referrals.

Business combinations make the most sense so long as the value of the combined entity is greater than the sum of its parts. So, acquisitions should create value via operating synergies, economies of scale, and cross-selling opportunities. Your competitors will likely be the most obvious acquisition candidates.

Of course, acquisitions don’t always pan out. Some potential reasons for failure include seller misrepresentations and incongruent corporate cultures.

The most successful transitions require the seller’s ongoing efforts. In-depth due diligence can minimize acquisition risk.

Do it jointly

Joint ventures and other contractual relationships with other businesses, such as franchising and licensing, allow companies to grow with minimal capital infusion. By starting slowly, the two entities can test their congruence and, if they’re compatible, add incremental layers over time.

Develop projections

Clients face many growth opportunities but typically have limited resources to pursue all of their ideas. When you’re prioritizing and selecting expansion alternatives make sure you have projected financial statements.

Normally, projections begin with an expected percentage increase in sales. Then the growth rate flows through to other areas related to sales, such as variable expenses, inventory, receivables and payables. Thorough projections will depict all three financial statements: the balance sheet, income statement, and statement of cash flows.

CFOs and CPAs often use debt as a “plug” figure to balance projections. This figure is very helpful for lenders, because it shows how much, and when, the loan proceeds will be needed. Historic results offer an important frame of reference when reviewing the projections.

Don’t ignore the time value of money

One big problem with projections is that they often ignore the time value of money. That’s because they describe what’s likely to happen given a set of circumstances. Thus, it’s difficult to compare detailed projections against other investments that a business might be considering. As a result, other financial tools, such as internal rate of return calculations and a net present value analysis, generate comparative metrics.

Expect growing pains

Your clients’ expansions will likely come with growing pains. So, make sure their strategies are sound before issuing new loans.

Freed Maxick’s Asset Based Lending Team works with dozens of asset based lenders across the country. We can assist you in evaluating the merit and integrity of borrowers’ requests for expansion strategy funding.

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

View full article

Asset Based Lenders: FASB Proposals Affect Private Borrowers’ Financial Statements

Author: Robert Wood, CPA, Principal

FASB Eases Rules for Private Businesses

As you might know, the Financial Accounting Standards Board (FASB) has talked about easing its rules for small private firms for years. Fortunately, FASB recently proposed some revisions to Generally Accepted Accounting Principles (GAAP) to accommodate the needs of private businesses and their stakeholders.

These proposals may have an impact on the asset based lending industry.

4 areas targeted:

ABLThe FASB proposals target four specific areas: amortization and impairment of goodwill, intangible asset recognition, variable interest entities, and certain types of interest rate swaps. So, how might these proposals affect your private borrowers’ financial statements? Read on.

1. Intangible asset recognition

The current GAAP requires that companies recognize intangible assets acquired in business combinations at their fair value on the acquisition date. These intangibles need to be reported as separate line items if they meet either the contractual-legal criteria or the separable criteria.

Some examples of contractual-legal intangibles include domain names, trademarks and customer contracts. Some examples of separable intangibles include unpatented technology, customer lists and recipes.

FASB’s proposed change allows private companies to recognize only contractual-legal intangibles on the acquisition date, while other intangible assets would be combined with goodwill. This proposal might cause private companies to recognize more goodwill in business combinations and fewer intangible assets.

2. Goodwill

As you may know, goodwill is the residual intangible asset that’s recognized in a business combination after recognizing all other identifiable assets and liabilities assumed. As of now, GAAP requires businesses to record goodwill at its fair value on the acquisition date. Then it’s tested each year for impairment at the reporting unit level.

The reporting units may be based on product lines or geography. It may be necessary to employ interim impairment testing if a triggering event, such as the loss of a major customer or discontinued product line, takes place. Impairment occurs when the fair value of a reporting unit’s goodwill falls below its book value.

FASB proposes that private businesses amortize goodwill on a straight-line basis over a useful life of no more than 10 years. Private companies would test for goodwill impairment only when a triggering event occurs. The proposal simplifies impairment testing to apply at the entity level, not at the reporting unit level.

Under these proposed changes, private businesses would make fewer and less complicated computations to report goodwill in business combinations. Thus, goodwill would receive similar treatment as other finite-lived intangible assets, such as patents and copyrights.

3. Interest rate swaps

When clients can’t qualify for inexpensive fixed rate debt, they can instead obtain variable rate debt and then enter into an interest rate swap with another entity. This will help reverse their exposure to interest rate risk. Those that enter into an interest rate swap don’t trade debts. Instead, they agree to make each other’s interest payments as if they had swapped debts.

Generally speaking, GAAP requires businesses to use complex hedge accounting techniques to report interest rate swaps at fair value. Or they can measure debt at its amortized cost and make swaps separately at fair value. But, both methods can create income statement volatility over the life of the swap.

FASB has proposed two simpler methods for private businesses that use interest rate swaps: the simplified hedge approach and the combined instrument approach. The simplified hedge approach is quite similar to the current GAAP rules for reporting swaps, except that qualifying interest rate swaps are valued at settlement value, and not fair value.

With the combined instrument approach, qualifying interest rate swaps aren’t reported separately on the balance sheet. There is an exception for periodic accruals from interest rate settlements, however.

4. Variable interest entities

In the aftermath of the Enron scandal, FASB required consolidation of variable interest entities with their parent companies in order to prevent management from using them to disguise lackluster performance or fraud.

Consolidation has, indeed, been burdensome for small business owners who own buildings personally and then lease them to their companies. Under this proposal, private firms wouldn’t need to consolidate results from a lessor entity if they have a formal lease agreement, are under common control and substantially all of their interactions relate to leasing activities. The proposal, however, would require detailed disclosures of the leasing arrangements.

The debate rages on

ABLThis fall, FASB and the Private Company Council are supposed to discuss the comments received on the four proposals mentioned above. Keep your eyes and ears open for news later this year on whether FASB will enact the changes and when they’ll become effective.

Freed Maxick’s Asset Based Lending Team works with dozens of asset based lenders across the country. Contact us for any questions or concerns you may have on wither the FASB or AICPA proposals.

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

View full article

How Asset Based Lenders Can Help Customers Avoid Internet Fraud Schemes

Author: Mike Boeheim

Protect Your ABL’s Assets by Helping Your Clients Recognize and Stop Internet Fraud

fraudAs people flock to the Web to make purchases, they risk being snared by Internet fraud. Asset based lenders need to be aware of the latest scams that could affect your customers and impair debt service.

Popular Fraud Tactics

As you can imagine, cybercrime can take many forms, such as credit and debit card fraud, mobile phone transaction fraud, pay-per-click (PPC) scams, and, of course, identity theft.

Fraudsters can get very creative when “trolling” the Internet for opportunities. For instance, some might use malware to collect credit card information from unsecured merchant websites. PPC fraudsters also cause unsuspecting merchants to incur charges every time customers click on their ads. Then they redirect the customers to their website, thereby “stealing” the sale.

Help Your Clients Stop Internet Fraud

Determine whether your clients are taking appropriate steps to protect themselves against Internet fraud. Ask whether they’re analyzing transactions and identifying which are at a higher risk for cybercrime. Some examples of online order form red flags include customers who use drop shipment forwarding addresses, or post office boxes and payments split between multiple debit and credit cards. All of these can signal the use of stolen cards.

According to a survey by technology provider FIS’s ClearCommerce®, an e-payment processing and fraud prevention service;

other warning signs you need to be aware of include differences between billing and shipping addresses, the country of the billing and IP address, or the area code and the billing ZIP code. International shipping addresses — especially those in former Eastern Bloc countries or the Middle East may be suspect, Of course, just the existence of a red flag doesn’t mean that fraud has taken place. But it does mean that borrowers should take a closer look at the potentially high-risk order before processing it.

Asset Based Lenders Need to do Due Diligence too

As part of your due diligence, ask your clients whether they’ve taken steps to secure their IT against fraud. Transaction screening software can take a lot of the guesswork out of identifying these high-risk transactions. Another security measure you should pass along to your clients is to couple automated address verification services with card security code systems. This will not only verify the cardholder’s address, but also crosscheck the security code on the back of the card.

All borrowers should employ and maintain encryption codes, antivirus software, firewalls, and operating system and browser updates. By taking these measures, the client will be protected on the merchant side, as well as when ordering for its own materials, downloading, or sharing information with any supply chain partners.

Don’t go it alone

Of course, maintaining secure, efficient computer systems can be quite daunting and way outside the bailiwick of most entrepreneurs. So, if one of your borrowers simply can’t afford a dedicated IT professional, a CPA can help them tackle the cybercrime prevention tasks mentioned above on an as-needed basis.

Fraud Awareness3Freed Maxick’ s Asset Based Lending Team works with dozens of asset based lenders across the country. We can assist you in evaluating the integrity of your customers’ collateral by performing pre-loan surveys and rotational collateral monitoring field examinations.

Freed Maxick also provide specialized forensic accounting services.

If you or your clients need assistance in fraud detection, prevention or remediation, contact us, or call me directly at 716-847-2651.

View full article

Asset Based Lenders Can Help a Business Survive Through Ownership Change

Author: Bob Abraham

Protecting Your Investment in a Client with Succession Planning Advice is Smart Business

You’ve likely heard the saying: “The only constant in life is change.” Most asset based lenders recognize this “reality” and they plan ahead with their clients to tackle future challenges, such as a change in management. The following fictitious tale shows how it’s done.

The Story of Susan and John

Some six years ago, Susan Matthews told her lender, John Deep-Pockets, that she wanted to retire at age 55 with her husband in Maui. She wanted to turn over Matthews Foods to her daughter, Abigail.

John was quite concerned about this move, since he knew firsthand how bad the failure rate was for second-generation owners. On top of that, Abigail, a young speech therapist, lacked the manufacturing experience, technical know-how and fiscal discipline that had made Matthews Foods a model borrower for the last 20 years.

John knew he had to have a heart-to-heart discussion with Susan about the future of Matthews Foods. Although Susan really wanted to see Abigail take over the reins, she wondered if Abigail was truly qualified for the job and willing to dig in. Moreover, Susan wondered if Matthews Foods would survive her.

When Susan admitted that her daughter really didn’t have much of a “head for business” or even an interest in learning the trade, she gifted stock to Abigail, which provided her with a passive income stream, as well as a seat on the company’s board of directors. Susan’s treasurer filled in as interim CEO and assembled a professional management team that would handle all the day-to-day operations going forward.

Susan did make her dreams come true and retired in Maui. Although she isn’t involved with the company anymore, her legacy still lives on through Matthews Foods. The new management team took the company to the next level, and is currently considering a public offering.

Get up Close and Personal

At some point all companies outgrow the “first-generation” entrepreneurs. Maybe the founder wants to retire, or has health issues. Or perhaps the business reaches a critical mass that exceeds the founder’s abilities. When current management is struggling just to stay afloat, the owner must deal with some tough choices. For example, should it bring in a family member, sell to a larger organization or hire more experienced outsiders? In order to recognize when it’s time to upgrade management, lenders should visit the borrower’s premises to get acquainted with all the staff.

When interviewing owners and managers, it’s important to consider their health, ages and retirement goals. Determine if the owners are so buried in administrative chores that they are spending less time in important management activities such as selling new accounts and brainstorming ideas.

Also, ask to see the business’s organizational chart and job descriptions. Every company should have a tiered structure and a viable succession plan. Such planning can help minimize the risk of relying too heavily on key people. Also evaluate the qualifications of any up-and-coming managers. Consider whether they truly have what it takes to run the show. If they don’t, mentoring and training are in order.

Time for Change?

If one of your borrowers is in a similar situation as Susan, it’s time for a management upgrade or change. With higher-than-average unemployment rates in the United States, it’s truly an employer’s market. There are hundreds of skilled but out-of-work managers that would likely be eager to jump aboard your borrower’s ship.

Lenders can help introduce borrowers to their networks of business contacts. Moreover, lenders often know of retired corporate executives who would be willing to fill a seat on the board of directors. Experienced people like these can be invaluable advisors to a business in need of advice.

As a lender, you value established customer relationships. And when you see a change in a relationship on the horizon, take advantage of the opportunity to render sound advice and prepare yourself for the future.


ABLFreed Maxick’s Asset Based Lending Team works with dozens of asset based lenders across the country. We can assist you in evaluating the integrity of your customers’ collateral by performing pre-loan surveys and rotational collateral monitoring field examinations.

We also provide specialized succession planning services to assist your clients with ownership transitions.

For more information about our services for asset based lenders, contact us here, or call us at 716.847.2651.

View full article