Accounting "Oopsies" - Jennifer Goodman

690 views
532 views

Published on

Accounting Topics That Can Trip You Up & Cause You To Go "Oops!"

Published in: Business
0 Comments
0 Likes
Statistics
Notes
  • Be the first to comment

  • Be the first to like this

No Downloads
Views
Total views
690
On SlideShare
0
From Embeds
0
Number of Embeds
3
Actions
Shares
0
Downloads
6
Comments
0
Likes
0
Embeds 0
No embeds

No notes for slide

Accounting "Oopsies" - Jennifer Goodman

  1. 1. A Global Reach with a Local Perspective www.decosimo.com Accounting “Oopsies” Accounting Topics That Can Trip You Up & Cause You To Go “Oops!” Jennifer Goodman, CPA, CGMA | Assurance Principal
  2. 2.  Sometimes it’s not what you see, but what you don’t see on the books and records!  Life insurance policies  Compensated absences, postemployment benefits and bonuses  Stock compensation  Legal Fees  General Accruals  Capitalization Minimums  FOB Destination vs Shipping  Deferred Tax Calculations Accounting Oopsies
  3. 3. “Accounting Oopsie” Sometimes it’s not what you see but what you don’t see on the books and records Life Insurance Policies Comp Absences, Postemployment Benefits and Bonus Agreements Stock Awards
  4. 4.  The amount that could be realized under the insurance contract as of the date of the statement of financial position should be reported as an asset. The change in cash surrender or contract value during the period is an adjustment of premiums paid in determining the expense or income to be recognized under the contract for the period.  Determine who owns the policy – NFP industry  Many of you are on boards of NFP entities. Bring this up at the next board meeting. Accounting for key man life insurance
  5. 5.  ASC 710 Compensation – a liability should be accrued for compensation if all of the following:  Obligation attributable to services already rendered  Rights vest or accumulate  Vest – obligation to pay even if employee terminated  Accumulate – rights may be carried forward  Modification rule for sick pay where accrual not required but permitted if rights accumulate but do not vest  Payment is probable, and  Amount can be estimated Compensated Absences
  6. 6.  Example – Suzanne has earned but not used 5 days of vacation and 5 days of sick pay at 12/31/13. Policy: Vacation and sick days accumulate but will not be paid if employment is terminated. An employee can only use sick days due to illness.  Should vacation and sick pay be accrued at 12/31/13?  What if new employees have to wait until second year of employment to take vacation?  Accrue at current salary rates or salary rates expected at time vacation is actually paid? Compensated Absences Example
  7. 7.  ASC 712 Compensation – nonretirement postemployment benefits (ex: severance, salary continuation, layoff benefits, health care, and training). Recognize the obligation if all of the following:  Obligation attributable to services already rendered  Rights vest or accumulate  Payment is probable, and  Amount can be estimated Postemployment Benefits
  8. 8.  Benefits “accumulate” if it increases with service (not salary)  Determine to accrue ratably during the active service period or accrued in lump at termination.  Answer:  Does obligation related to employees services already rendered?  Only accrue at point in time earned to date  Does obligation relate to rights that vest or accumulate?  No - Don’t need to accrue before employee termination event  Yes – Is payment probable and can it be estimated? If yes, accrue ratably during employees active service period Postemployment Benefits – Accruing
  9. 9.  Compensation based attaining a goal over period of time should be accrued over a period of time in relation to results achieved.  Example – Suzanne gets bonus equal to 10% of her sales for the year over $800,000. Company expects Suzanne’s sales to be $1M i.e. projected bonus $20k  What is the accrual at March 31 for $250,000 in actual sales?  Bonuses not based on formulas should also be accrued ratably if it is probable they will be paid. Postemployment Benefits – Bonuses
  10. 10.  ASC 718’s measurement objective –  Determine the fair value of stock-based compensation at the grant date assuming that employees fulfill the award’s vesting conditions and will retain the award.  The fair value of an award –  Reflect the estimated value that the company would be obligated to provide when an employee is entitled to the award and is no longer required to provide service to the employer. Postemployment Benefits – Stock Awards
  11. 11.  The fair value of stock-based compensation is measured on the grant date. The following criteria should be satisfied to establish a grant date:  A mutual understanding of the award’s key terms and conditions  The company is contingently obligated to issue shares or transfer assets to employees who fulfill vesting conditions.  An employee begins to benefit from, or be adversely affected by, subsequent changes in the employer’s stock price  Awards are approved by the board of directors, management, or both if such approvals are required, unless perfunctory.  The recipient should meet the definition of an employee (i.e., grant date cannot be established prior to first day of employment) if the award is for employee service. See employment agreement example Postemployment Benefits – Stock Awards
  12. 12. “Accounting Oopsie” Accounting for Legal Fees Capitalize, Expense or Accrue?
  13. 13.  Acquisition related costs 805-10-25 (finder’s fees, advisory, legal, accounting, valuation, and other professional or consulting fees)  General rule - expense acquisition fees  Exception – registering and issuing debt securities  Capitalize and amortize  Exception – registering and issuing equity securities  Paid in capital Accounting for Legal Fees – Business Combinations
  14. 14. Accounting for Legal Fees - Business Combination Footnote Consideration $1,949,000 Identifiable Assets Acquired: Inventories $ 170,000 Machinery and equipment $1,109,000 Other intangibles $595,000 Total identifiable assets $1,874,000 Goodwill $75,000 $1,949,000 Legal fees expensed in operations $ 157,000
  15. 15. Debt treatment Fees b/t borrower/lender Cost incurred with third parties Unamortized cost of old loan Extinguishment Accounting Expensed Capitalized Written off Modification Accounting Reflected in debt premium or discount Expensed Leave on books and continue to amortize Accounting for Legal Fees – Debt Modifications and Debt Extinguishments
  16. 16.  You pick your policy!  Select an accounting policy that provides for either the inclusion or exclusion of estimated legal fees  Consistently apply such a policy  If policy is to include legal fees as part of loss contingency accrual –  Costs should be accrued even when the related loss is not accrued Accounting for Legal Fees – Loss Contingencies
  17. 17. “Accounting Oopsie” Timing on When to Record Accruals
  18. 18.  A liability has three essential characteristics:  it embodies a present duty or responsibility to one or more other entities that entails settlement at a specified or determinable date, on occurrence of a specified event, or on demand  the duty obligates a particular entity, leaving it little or no discretion to avoid the future sacrifice, and  the transaction or other event obligating the entity has already happened Recording Accruals – General Definition
  19. 19. A CPA has been engaged to audit the financial statements for the year ended 12/31/2013. Is it proper to accrue the fee as an expense in 2013? Recording Accruals – Example #1
  20. 20. Mgmt. has committed to shut down plant Line 3 and the line is not operating as of 12/31/13. Half of the equipment will be relocated to plant Line 2 and half of the equipment is currently up for sale for 50,000. The lessor was notified of bldg. lease termination by year end. Mgmt. has identified the following costs associated with the shut down: NBV of equipment $ 1,000,000 One-time termination benefits paid in 2014 $ 50,000 Remaining bldg. lease pits due in 2014 – do not plan to sublease forgoing 40,000 $ 100,000 Estimated equipment relocation/set-up cost $ 200,000 Estimated general cost for shut down $ 75,000 What losses/impairments should be accrued at 12/31/13? Recording Accruals – Example #2
  21. 21. Property held for sale (half of 1,000,000 less FMV) $ 450,000 One-time termination benefits paid in 2014 Assumes employees have been identified, there is an expected completion date and employees were informed $ 50,000 Lease (100,000 less sublease value 40,000) $ 60,000 Cannot accrue for relocation costs or “general accruals”. Commitment to an exit or disposal plan by management does not, by itself, result in the incurrence of a liability. Exit and Disposal Cost Obligations can be tricky! ASC 450 Recording Accruals – Example #2
  22. 22. “Accounting Oopsie” Fixed Asset Capitalization Policies and Capitalization Minimums
  23. 23.  For expediency, many entities adopt policies specifying the minimum cost that a property unit must have before it is capitalized.  These policies are acceptable as long as the minimum is reasonable and, where necessary, exceptions are made to recognize that such policies are merely conventions. Fixed Asset Capitalization Policies
  24. 24.  Entity has annual sales of $2.5M  Net income is $300k  Total PPE NBV is $4M Capitalization policy is all tangible property with a useful life over 1 year is capitalized if purchase price is over $5k. Is this policy reasonable? Fixed Asset Capitalization Policies - Example
  25. 25. Capitalization policy is tangible property with a useful life over 1 year is capitalized if purchase price is over $5k.  Entity purchases a nice executive chair for CFO for $4,999. The $4,999 chair is expensed.  Entity purchases 100 chairs for training facility at $500 per chair. This $50,000 purchase is expensed.  Entity remodels CFO’s office and purchases a desk for $4,000, matching credenza $2,500, matching custom file cabinets $3,000, chair $4,999 and installation cost of $501. This $15,000 purchase is expensed. Did the entity properly account for the furniture? Fixed Asset Capitalization Policies - Example
  26. 26. “Accounting Oopsie” FOB shipping vs destination
  27. 27.  FOB terms are an important consideration in product sales, because they determine the point at which title to the product, and thus the risks and rewards of ownership, has legally passed to the buyer.  FOB destination indicates that title to the product passes upon delivery to the customer.  FOB shipping point indicates that title to the product passes at the time of shipment. FOB shipping point vs destination
  28. 28.  FOB terms are an important consideration in product sales, because they determine the point at which title to the product, and thus the risks and rewards of ownership, has legally passed to the buyer.  FOB destination indicates that title to the product passes upon delivery to the customer.  Revenue recorded when it reaches customer  FOB shipping point indicates that title to the product passes at the time of shipment.  Revenue recorded when it ships VERY IMPORTANT – review your transportation cost terms and associated agreements carefully but you must also consider your implicit business practices FOB shipping point vs destination
  29. 29. Products shipped FOB shipping point can generally be considered delivered when the goods leave the seller’s premises because the risk of loss is transferred at shipment and the buyer has the rewards of owning the product .  Example: Product is sold FOB shipping point as indicated on the invoice. However, for this important customer, the seller has agreed to be responsible for hiring and paying the shipping agent and insuring the goods in transit. Can the seller recognize the sale upon shipment? FOB shipping point vs destination
  30. 30. Products shipped FOB destination are not considered to be delivered until the goods reach the customer.  Example: A third party shipping agent rather than the seller has assumed the risk of physical loss on the products during transit. Can the seller go ahead and recognize the sale since they no longer have the risk of loss during transit? FOB shipping point vs destination
  31. 31. The phrase “synthetic FOB destination” is used when a vendor offers free-on-board (FOB) shipping point terms, but also has a standard business practice of replacing goods that are lost or damaged while in transit to the customer.  Example: A company has a implied (not written) policy of replacing lost or damaged goods results. The contractual terms specifically state that product is FOB shipping point. Can the Company recognize revenue at the time of shipment? FOB shipping point vs destination
  32. 32. “Accounting Oopsie” Deferred Tax Calculations See deferred tax example
  33. 33. Questions
  34. 34. JENNIFER GOODMAN, CPA, CGMA Assurance Principal | jennifergoodman@decosimo.com Jennifer Goodman is an assurance principal with more than 15 years experience in public accounting. Jennifer provides audit and assurance services, including audits of internal control over financial reporting, to privately held businesses, public companies, not-for-profit organizations and manufacturing and distribution clients. She contributes to the firm’s manufacturing and distribution team by providing cost accounting expertise, insights into best practices and specialized advice regarding internal control issues. Her experience also includes financial statement audits, audits of internal control over financial reporting and limited scope consulting engagements for foreign firms performing assurance engagements for foreign SEC filers.

×