4th Annual Fort Lauderdale Surety Education Event

1. Construction Surety Forum
October 27, 2011 – Fort Lauderdale, FL
©2011 LarsonAllen LLP
©2011 LarsonAllen LLP
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2. Construction Surety Forum
• Introduction –
Les Eiserman, CPA
• Internal Controls and Fraud Issues for Construction Contractors –
Les Eiserman, CPA
• Accounting Standards Updates and Budgeting For Contractors –
Les Eiserman, CPA and John Reed, CPA
• Succession Planning –
Sue Christopher, CPA
• Emerging Tax Issues Impacting Construction Contractors –
(Hand Outs Only)
• Social
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3. Construction Surety Forum
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4. Internal Controls and
Fraud Issues for
Construction Contractors
Presented by:
Les Eiserman, CPA
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5. Learning Objectives
At the end of the session, you will be able to:
• Understand the importance of internal controls as it relates
to reliability of financial information.
• Identify key controls that should be present for all
construction contractors.
• Determine the effectiveness of your client’s internal control
environment.
• Understand how an auditor addresses fraud.
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6. Internal Controls – Defined
Internal controls – a system or process designed to
promote reliability of financial information and efficiency
of operations.
Basic Examples would include:
• Proper separation of accounting duties
• Review of complex calculations
• Reconciliation of accounts
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7. Internal Controls Environment – Current Trends
The current environment of the construction industry is
one of downsizing and reorganization. This creates the
following potential issues in maintaining controls:
• As staff sizes decrease, fewer people have more
responsibility.
• Information received by management might not be
reviewed when they receive it.
• Added pressure for employees to look good.
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8. Internal Controls – Effects on the Bond Holder
The internal control environment should be considered
for the following reasons:
• Reliability of financial information
• Management integrity
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9. Getting Started – Reliance on the Accountant’s Report
CPA’s assessment of internal controls:
• Audit = An understanding of internal controls is developed
and a walkthrough is performed.
• Review and Compilation = Internal controls not evaluated.
• If an audit was performed, request a copy of the SAS 115
letter.
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10. Assessing Internal Controls – Grading your Client
• How do you determine the effectiveness of your client’s
internal control environment?
• Look for which controls are present and which are
absent based on the hand out provided.
• We have broken down controls into three categories:
Minimum, Expected and Best in Class.
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11. Key Internal Controls – Minimum
All companies should have these basic controls:
• Accounting functions properly segregated between
authorization, recording and custody
• Reconciliation of subsidiary accounts such as: cash, accounts
receivable, and accounts payable
• Review of accounts receivable for collectability
• Cash flow management
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12. Key Internal Controls – Expected
A good control environment should include the following:
• Detailed review of WIP schedules
• Frequent communication with project managers and
accounting staff
• Proper authorization of purchases and cost coding
• Review of payroll reports and time cards
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13. Key Internal Controls – Best in Class
An excellent control environment should include the
following:
• Proper training of employees. Cross-training to perform
multiple functions
• Established vendor lists
• Systematic application of overhead
• Expansion upon segregation of duties and additional
management oversight
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14. Discussing Internal Controls with your Client
• Determine effectiveness of control environment based on
checklist provided.
• Have client explain to you how they are producing reliable
financial information.
• Discuss the importance of internal controls and make
suggestions to your client based on key controls that are
absent.
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15. Conclusion
• Downsizing and reorganization have created greater strain on
accounting departments and management.
• Strong internal controls leads to greater reliability of
information.
• Assess the internal control environment to help determine
reliability of financial information.
• Communicate internal control concerns and assure yourself
that management is producing reliable financial information.
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16. FRAUD AND THEFT
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17. Fraud/Theft
• Auditors are required to assess the risk of fraud
and theft (obtain reasonable assurance that the
financial statements are free of material
misstatement, whether caused by error or fraud).
Absolute assurance is not attainable.
– If client has a loss, first question will be “Why didn’t
the CPA Firm catch this!?”
– Lawyers and insurance companies want to put the
responsibility on the auditors
– A CFO who missed the fraud might also want to shift
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the blame to the auditors
– Expectation GAP is wide
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18. Fraud and Theft: testing examples
• Payments by vendor, sorted by dollar amount or
number of transactions
• Vendor address and employee address
matching
• New vendor setup
• New employee setup
• List all manual checks
• Payments just below approval thresholds
• Multiple vendor payments with same amount
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• Vendors with missing contact information
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19. Questions or thoughts?
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20. Accounting Standard
Updates
Presented by:
Les Eiserman, CPA
John Reed, CPA, CCIFP
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21. Accounting Standards Update
I. Update on US GAAP / IFRS Convergence
Projects
a) Revenue recognition project – long-term contract
implications
b) Accounting for leases
II. Update on Private Company Financial
Reporting
III. Questions and discussion
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22. Revenue Recognition
• Initial exposure draft – June 2010
• 6 months of “re-deliberation” to address public
comments / concerns
• Re-exposure during the 4th Quarter, 2011 with
120-day public comment period
• FASB: Effective date no earlier
than 1/1/2015 for Public Companies
©2011 LarsonAllen LLP
and 1/1/2016 for Private Companies
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23. Revenue Recognition – Modifications to Draft
Identification of performance obligations:
• “An entity should account for a bundle of promised
goods or services as one performance obligation if the
entity provides a service of integrating those goods and
services into a single item that the entity provides to the
customer”
• Separate performance obligation only if:
− Pattern of transfer of the good or service is different from the
pattern of transfer of other goods or services in the contract, and
− Good or service has a distinct function – defined by:
 Entity regularly sells the good or service separately, or
 Customer can use the good or service either on its own or
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together with resources that are readily available to it
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24. Revenue Recognition – Modifications to Draft
Concept – Continuous Performance:
Revenue can be recognized over the performance period if
one of the two following conditions are met:
1. “Entity’s performance creates or enhances an asset that the
customer controls as the asset is created or enhanced”
Or
2. “Entity’s performance does not create an asset with alternative
use to the entity and at least one the following is met:
i. Customer receives a benefit as the entity performs each task, or
ii. Another entity would not need to reperform the task(s) performed to
date if that other entity were to fulfill the remaining obligation to the
customer, or
iii. Entity has the right to payment for performance to date even if the
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customer would cancel the contract for convenience”
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25. Revenue Recognition – Modifications to Draft
Contract Combination:
Contracts that are entered into at or near the same time
with the same (or related) entities should be combined if:
1. Contracts are negotiated as a package with a single
commercial objective, or
2. Amount of consideration in one contract depends on
the other contract
3. Goods and services in the contracts
are interrelated in terms of design,
technology or function
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26. Revenue Recognition
What’s the conclusion?
 Everything to date continues to
be “extremely preliminary” and
subject to change. It is too
early to draw decisive
conclusions
 It appears the concept of % of
completion in continuing to be
incorporated into the concept.
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27. Accounting For Leases
Background:
• Initial exposure draft in August 2010
• 780 comment letters
• September 23 – Decision to re-expose
the revised proposal in the 1st half of 2012
• Implementation – likely at least 2015 or later
• Existing leases will not be grandfathered, so it
should be something we are discussing with
clients that have substantial long-term rental
activity
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28. Accounting for Leases – Lessee
Tentative decisions made:
• What is a lease? – right to use a explicitly or implicitly
identifiable asset “for a period of time”
• Lessee Accounting:
– Liability (payment obligation) and asset (right to use)
◊ Asset: Amortize based upon pattern of consumption / economic benefit
◊ Liability: Amortize using the effective interest method
• Lease term: non-cancellable period plus options to extend
or terminate the lease when there is a significant economic
incentive – Historical and subjective tests may also be
considered
• Short-term leases: Exempt from reporting requirements?
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At least for now
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29. Accounting for Leases - Lessor
Tentative decisions made:
Lessor Accounting:
• Broad disagreement / many unresolved issues
• Currently status:
• Performance obligation method – scrapped
• All leases (other than ST) will use the “receivable and
residual” approach – formerly called “derecognition”
Recognize a lease receivable for the lessor’s right to receive lease
payments
– Allocate the carrying value of the underlying asset being leased
between the portion related to the right of use granted to the lessee and
the portion retained by the lessor (i.e., the residual asset)
– Recognize profit, if profit is reasonably assured, or any indicated loss
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30. Private Company Financial Reporting
• Financial Accounting Standards Board (FASB)
created in 1973 to set standards for US GAAP.
Since that time there has been an ongoing debate
over whether there should be different standards for
public (“Big GAAP”) and private (“Little GAAP”)
entities
• In 2009, the Financial Accounting Foundation (FAF)
which oversees the FASB created a “Blue Ribbon
Panel” task force to study the issue. The Blue
Ribbon Panel made its recommendations in
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January, 2011.
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31. The Blue Ribbon Panel Recommendations
• The Blue Ribbon Panel recommended a single
set of accounting standards for both private and
public companies but allowed for differences in
disclosure and accounting transaction
measurement between public and private
companies.
• The Panel also recommended the creation of a
private company standards board separate from
the FASB to adopt the disclosure and
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measurement differences.
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32. Public Response to the BRP Recommendations
• The FAF received over 1,400
comments, including comments from
LarsonAllen, sureties and agents. The vast
majority supported the Panel’s
recommendations
• The AICPA pushed for endorsement of the Blue
Ribbon Panel’s recommendations.
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33. The FAF Releases Their Private Company Plan
• The FAF recommendations were released 10-4-
2011.
• All parties agreed that there shouldn’t be
separate standards for GAAP. What was agreed
was a differential GAAP (not a separate GAAP).
Differential GAAP is where private company only
differences are codified into GAAP. Separate
GAAP would require two separate systems of
codification.
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34. FAF Private Company Proposal Comment Period
• The FAF is recommending a private company
committee that makes recommendations that
FASB must ratify. A separate board would have
eliminated the ratification by the FASB. Since the
private company committee is to be chaired by a
FASB member, the groups are tied together closer
than the Blue Ribbon Committee would have liked.
• The comment period ends January 14, 2012. To
comment use the toolkit at:
https://apps.aicpa.org/pcfr/.
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35. Contract Cost Allocations (Discussion)
• What Allocations Does GAAP Require?
• What Really Is Generally Accepted?
• Idle Equipment Costs
• What Costs In General Should Be Allocated?
• How Should Unallocated Costs Be Presented?
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36. Should These Costs Be Allocated?
• Idle Equipment Costs?
• Equipment Depreciation?
• General Liability Insurance?
• Vehicle Expenses and Depreciation?
• Other Costs?
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37. Accounting and Reporting
Questions
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38. Budgeting For Contractors
Presented by:
John Reed, CPA, CCIFP
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39. Why Are Our Clients Using This Model?
• Evaluate how much overhead their company
can support
• Used as an interactive tool to plan for cash flow
and profitability
• Used to support a bonding program runoff
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40. Three Key Variables Determine Profitability
• Gross Profit from job backlog
• Timing of work completion
• Overhead
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41. Using the Sample Excel Budget File
• History of the Model.
• The four tabs
– Overall Budget – Shaded cells
– Job Completion
– Job to Date Revenue
– Job to Date Cost
• Shaded cells are where client can enter data
• Add job macro – CTRL+SHIFT+A
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42. Popular Budget Modifications
• Changing the operating expense line items to
what appears on a company’s internal or
external financial statements.
• Some clients have changed the model from
quarters to months. They do that by inserting
additional columns in all the tabs and copy the
formulas to the right.
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43. Questions or Discussion?
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44. Succession Planning
Presented by:
Susan K. Christopher, CPA CCIFP
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45. Learning Objectives
At the end of the session, you will understand:
• The General Strategies
• Tax Considerations
• Concerns of a Bonding Company
• Valuation Issues
• Current Trends/Opportunities
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46. Succession Planning
 primary goal is on long-term sustainability of the
business
 a proper plan allows for smooth transition both inside
and outside of the business
 the best plans strategize to transfer ownership in a
tax efficient manner
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47. Ownership Transfer & Business Succession
• Ownership transfer can occur with or without a
change in management through the use of
voting and nonvoting shares.
• Business succession can be planned with or
without an immediate ownership transfer
• The process of business succession begins by
widening the concentration of management
responsibility and decision making among an
assembled team
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48. Tax Considerations
• 2011 and 2012:
– $5 Million exemption for both Estate and Gift Taxes
– Tax rate is 35%
– Portability can allow for a surviving spouse’s
exemption to be $10 Million.
• 2013 - uncertainty:
– Without Congressional action reverts back to 55% tax
and $1 Million exemption.
– Proposal for 35% and $3.5 Million
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49. Concerns to the Bonding Company
• Financial Impact to the Company
– If sale is involved, will the company directly or
indirectly fund it?
– How will this liability impact the balance sheet?
– How will it impact cash flow?
• Management
– Does the successor play a role now with the bonding
company?
• Personal Guarantees for New Owners
• Removal of Personal Guarantees for Sellers
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50. Additional Factors to Consider
• Identify the buyers
• Identify the terms of the sale
– Timing and control
– Is there real estate that will come out?
• What is the value of the business?
• How are the future leaders being developed?
• How will future debt be secured?
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51. Determining the Value
• Must document and properly value the company
• Different approaches:
– Asset
– Market
– Income
• Discounts and Premiums
– Control (+/-)
– Marketability
– Goodwill (personal or professional)
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52. Discounts vs. Premiums
Value of Control
$10.00 per share Shares
A combined
40% 40% minority interest
minority discount Control Minority
discount Premium or Discount
and a 40% 66 2/3 control
discount for premium Value of minority
lack of shares if freely traded
control $6.00 per share on an active public
equals a market ("publicly
total of 64% 40% discount for traded value" or "stock
discount lack of marketabilty market value"
from value
of control $3.60 per share
shares Value of non-marketable
minority shares
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53. General Tools/Transfer Strategies
• Annual Gift Exclusion
• Grantor Retained Annuity Trust (GRAT)
• Intentionally Defective Grantor Trust (IDGT)
• Installment Sale
• Employee Stock Ownership Plans (ESOP)
• Self-cancelling Installment Notes (SCINs)
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54. Conclusion
• There are numerous tools and planning ideas to
effectively execute a succession plan.
• The tools are just the method used to execute
the plan in the most efficient manner.
• Most important part of the plan is the Succession
Plan itself. The present is enhanced by focusing
on the future.
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55. Contact Us
Les Eiserman, CPA Jill Kling, CPA
leiserman@larsonallen.com jkling@larsonallen.com
407-802-1203 407-802-1210
John Reed, CPA Sue Christopher, CPA
jreed@larsonallen.com schristopher@larsonallen.com
239-226-9903 239-262-3562
Jack Rybicki, CPA Clint Freeman, CPA
jrybicki@larsonallen.com cfreeman@larsonallen.com
©2011 LarsonAllen LLP
813-384-2701 813-384-2710
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56. Emerging Tax Issues
Impacting Construction
Contractors
Presented by:
Clint Freeman, CPA
Jill Kling, CPA
©2011 LarsonAllen LLP
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57. Learning Objectives
• Be familiar with current tax updates effecting the
construction industry
• Be familiar with current IRS targeted areas under
examination
• Be aware of tax depreciation opportunities
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58. 3% Withholding on Government Contracts
• Effects payments for all goods and services under
government contracts
◊ Includes payments to individuals for a service or product provided to
government
• Law applies to all governmental entities with
total budgets of at least $100 million
◊ Federal, state and local
• For payments starting January 1, 2013
• IRS Frequently asked Questions
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59. IRS Hot Construction Topics
• Surety bonds and insurance refunds
– Refunds not showing up on contractor’s books as income or
expense reduction
– IRS checking for all insurance refunds
• Write down of real estate vales for tax purposes
– Real estate not subject to lower of cost or market valuation
– IRS looking for book/tax difference for GAAP impairment
• Joint Committee on Taxation Examinations
– Heavy examination area
– For refunds over $2million under net operating loss carrybacks
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60. Tax Depreciation
• Accelerated Tax Depreciation
◊ Section 179
• 2011 - $500,000 (purchases < $2,000,000)
• 2012 – Reverts back to prior rules
◊ Bonus Depreciation
• 2010 – 50%/100%
• 2011 - 50%
• 2012 – Reverts back to prior rules
Ex 1) 2011 Equipment placed in service $700,000
Tax Depreciation: ($500,000 + $140,000) = $640,000
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– Limitations – Business Income, Thresholds, new vs. used
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61. Repairs and Maintenance
• Capital Expenditures vs. Repairs and Maintenance
– Capital Expenditures:
• Substantially prolong the life of the property
• Materially increase the value of the property
• Adapt property to a new or different use
• Put the property into a useful condition
• Installation costs, additions, modifying a piece of
machinery to have an additional use
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62. Repairs and Maintenance
• Repairs and Maintenance
– Deductible Expenditures that are:
◊ Incidental repairs
◊ Routine maintenance
◊ Materials that keep the asset in operating condition
• Examples of Qualified Expenditures
– Repairs to roofing (including total replacement of existing roof)
– Replacement of flooring, doors, and windows
– Resurfacing of parking lots
– Painting and wall covering
– Components to HVAC systems
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– Lighting, electrical, and plumbing
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63. Repairs and Maintenance
• Situation #1:
– A 10 year old Roof is damaged in a hail storm. Half of the
roof’s shingles need to be replaced. The original shingles
were unsightly. The owner considers replacing the entire
roof with a more standard shingle. Is this a capital
expenditure? Or a repair and maintenance cost?
◊ Answer: Repair and Maintenance expense! Replacing the entire
roof so that the shingles match is not considered an improvement to
the entire building so that the shingles would not be capitalized.
◊ If the owner choose to upgrade the roof with a lower maintenance
material with an expected life of 40 years – Capitalized!
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64. Repairs and Maintenance
• Situation #2
– A Construction Company repaves the parking lot where
heavy equipment is stored every year. After 3 years, the
owner decides to tear out the old asphalt and replace it
with reinforced concrete that should last for 15 years
without the need for annual repaving. Are these capitalized
expenditures or deductible expenses?
◊ Answer: Capitalize! The reinforced concrete installation will
substantially prolong the life of the parking lot.
◊ The annual paving is an R&M expense from Year 1 to 3
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65. Repairs and Maintenance
• Cost Segregation study – Buildings
– Identify assets that can be expensed
– Utilize Section 179/Bonus Depreciation
• Prior Year Capitalization of R&M
– Not necessary to file Amended returns
– Filing Form 3115 will change accounting method
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66. Tax Update
• Set to expire or change after 2011:
– Itemizing Individuals - Sales tax deduction
– Research credit/Work Opportunity Tax Credit
– Residential Energy credit (contractors)
– 100% Bonus/179 Expensing limit to $125,000 (inflation
indexed) on $500,000 of additions
– 50% Bonus in 2012
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67. Tax Update
“American Jobs Act of 2011” September 2011
• Extend 100% Bonus Depreciation to 2012
• Cut Social Security Tax from 6.2% to 3.1% on employees wages the
first $5 million of their payroll
– Business Credit for Fall 2011- 2012 on wages from $5-$50 million
• $4000 credit for hiring new worker out of work for 6 months/$5600
veterans
• Limit tax exempt municipal interest to 28%
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